Underground Economy Causes Significant Harm in California

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By ROBERT A. JONES

California’s effort to root out the underground economy where workers often are exploited and businesses evade taxes and other requirements is a battle against a force that costs the state $6.5 billion annually.


In the underground economy, workers often work long hours for less than minimum wage and go without lunch or rest breaks, and law-abiding businesses are put at a competitive disadvantage because they have higher overhead than those operating illegally.


To level the playing field and protect workers, Gov. Arnold Schwarzenegger and state legislators created the Economic and Employment Enforcement Coalition in 2004. Made up of investigators from the Labor and Workforce Development Agency’s Employment Development Department and Department of Industrial Relations along with the U.S. Department of Labor and the Contractor’s State License Board, the EEEC is focusing on seven industries with historically high rates of labor, tax and licensing violations. On the target list are agriculture, construction, car wash, garment manufacturing, janitorial services, horse racing tracks and restaurants.


Workers employed by unscrupulous businesses in these industries are destined to remain poor because they are not being adequately compensated for their labor. Without fair wages or payments being made into the Social Security system, they will never be able to work their way out of poverty, and that places a burden on the rest of society. In addition, businesses that follow the rules for the overall good, as well as their own, will be put out of business because they’ll lose jobs to lower-bidding illegal competitors who don’t have the same overhead.



Complaints and denials

When they are uncovered and held accountable for their illegal operations, the cheaters often complain that the state is putting them out of business and destroying job opportunities for poor, unskilled workers. Sometimes they go to the media and claim they’re being treated unfairly, or simply deny they are operating illegally.


But it’s legitimate businesses, workers and the rest of us that have a problem with illegal operators. While tax-paying businesses rightfully complain that they can’t compete with those who pay little or no payroll tax or don’t carry workers’ compensation, the fact is that we are all subsidizing these illegal operators.


Recently, special enforcement teams conducted two days of sweeps in garment factories in Los Angeles and Orange counties that resulted in 100 citations totaling more than $600,000 in fines.


Earlier sweeps in the car-wash industry found violations that added up to more than $1 million in fines for illegal operations.


But enforcement isn’t the only tool being used in this economic battle.


The EEEC is also educating businesses on how to achieve compliance at seminars being held up and down the state. The seminars are designed to help workers and employers understand their rights and responsibilities.


Since it kicked into action in July 2005, this multi-agency coalition of investigators has chalked up some remarkable statistics.


With 66 employees and a $6.5 million budget, the coalition has inspected nearly 3,000 businesses, issued more than 9,000 citations, identified $109 million in hidden wages for workers and uncovered $17 million in unpaid unemployment taxes.


Not a bad return on investment.



Robert A. Jones is deputy secretary of policy and enforcement for the California Labor and Workforce Development Agency.

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