Sinking Underground...

Study Documents 400 Percent Leap in Wage Theft Since 1972

A new report by the Economic Roundtable shows that 1 in 6 California workers aren’t paid properly - and that the number of workers not reported on company payrolls or misclassified as independent contractors (thus avoiding the need to pay taxes on them) has jumped by an alarming 400 percent since 1972.

The widespread negative impacts of this downward turn include hundreds of millions of dollars in lost state and federal tax revenues, a decline of middle class construction jobs and the inability to attract and retain skilled workers. 

Analyzing data over 40 years, the Los Angeles-based research firm charts how a significant share of construction employment has slid into the “informal economy,” also known as the “underground economy." The comprehensive report is titled: Sinking Underground: the Growing Informal Economy in California Construction.

The construction industry is a leading indicator of future trends in the overall economy, and the study shows that the impacts of unlawful payroll practices go beyond construction.

“The flagrant violator contractors don’t just steal from employees. They steal jobs from legitimate high road contractors, and their employees’ families,” said Bruce Wick, Director of Risk Management at California Professional Association of Specialty Contractors.

“All parties suffer, except the bad actor contractor, and the project owner who gets an unfairly low bid price. These wrongs must be made right, and this study helps point the way.”

Other key findings from the study include:

  • 16% - or about 144,000 workers of California construction workers - are victims of payroll fraud.
  • A quarter of employees in the specialty trades (drywall, concrete, etc.) work off-the-books or are misclassified workers.
  • For every dollar earned by a construction worker employed lawfully, an unreported worker makes 52 cents, while a misclassified worker makes 62 cents. The total informal wage gap was $1.2 billion in 2011.
  • In just 2011, more than $774 million was lost in state and federal taxes by cheating contractors.
  • Contractors who abide by tax and employment laws not only lose work to cheating contractors who can underbid them, but they also end up paying higher worker's compensation rates to make up for the cheaters.

In what could be one of the most telling findings of the report, payroll fraud victims are twice as likely to be paid off-the-books than misclassified as independent contractors, meaning the problem centers on fraud - not confusion.

Julie Su, California Labor Commissioner, said “Safeguarding working people and providing a level playing field for honest employers to prosper is essential for the vitality of California’s economy.

“A just day's pay for a hard day's work should be a reality in every workplace.  Information from this report identifying abuses of the construction industry is a valuable tool for protecting workers as well as employers who play by the rules,” Su said.

The report, was underwritten by the United Brotherhood of Carpenters.

"Construction workers are being abused and law-abiding employers are losing work to criminals. We know it's happening and we wanted to secure objective evidence to quantify the effects to the economy and American, middle-class workers," said Douglas McCarron, President of the UBC.

"The solution is for labor and tax laws to be vigorously enforced, and for developers, public agencies and project owners to insist that subcontractors hired to work on their projects uphold the laws and play by rules," McCarron added.

   
If payroll fraud victims are paid what they were legally required to be paid, they would collectively earn an additional $1.2 billion a year.

- Sinking Underground Report Finding


What Can Be Done About It?

The report also includes a list of recommendations: 

  • Improve enforcement of labor and tax laws and coordination between enforcement agencies. 
  • Use modern technology and broader reporting of payments to contractors to better detect law-breakers.
  • Educate the public and construction industry stakeholders.
  • Pay construction workers a living wage.
  • Adopt responsible contractor bidding policies.
  • Enact comprehensive immigration reform.

Federal legislation introduced to curb payroll fraud is currently sitting before Congress:

•  S 1687/HR 4611: The Payroll Fraud Prevention Act: The bill would amend the Fair Labor Standards Act by establishing a penalty for every worker that is not properly classified as an employee.  The bill also requires workers classified as independent contractors to be notified of such. 

•  S 1706/HR 4503: The Fair Playing Field Act: The bill amends the Internal Revenue Code by phasing out safe-harbor rules that actually allow many employers to intentionally misclassify employees as independent contractors.  The bill also lifts a prohibition on the IRS to issue clarifying regulations that would help employers to properly classify workers as either employees or independent contractors.

It's not just a California problem

The study may be based in California, but it illustrates the payroll fraud epidemic that is sweeping North America. Hundreds of millions of dollars are lost, every year, throughout the country because of deceptive contractor payroll practices. Your state is no exception and it's money that ultimately is being taken from your pocket to subsidize the lost revenue to your schools, municipality, county, state and country.

Get Involved

Contact your government representatives and tell them you insist on enforcement of payroll fraud laws already on the books, and passage of the federal bills currently before Congress.

Access the report at the Economic Roundtable's web site: economicrt.org,

or download it now by clicking here.