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New Report: Outsourcing as Core Business Strategy Can Lead to Depressed Wages and Working Conditions

New Report: Outsourcing as Core Business Strategy Can Lead to Depressed Wages and Working Conditions

Report and Assembly Hearing Shine Light on Efforts to Hold Employers
Accountable for Subcontractors’ Labor Abuses


National Employment Law Project & California Labor Fed
Contact: Emma Stieglitz, emmaS@berlinrosen.com, (646) 200-5307
Steve Smith, SSmith@calaborfed.org, (510) 326-4644


SACRAMENTO, Calif.—Businesses are increasingly relying on outsourcing and multi-layered subcontracting structures to fill jobs, which too often result in lower wages and dangerous working conditions, according to a new report by the National Employment Law Project.

The report, Who’s the Boss: Restoring Accountability for Labor Standards in Outsourced Work, finds that outsourcing is one of the central factors driving down wages and working conditions in the post-recession economy. The practice allows employers to evade labor laws, avoid payroll taxes, push costs onto workers, and shirk their responsibility to provide basic benefits. It also leaves workers in an ambiguous legal status with no clear path to hold their employers accountable for abuses like stolen wages.

The report comes on the same day as an assembly hearing on AB 1897, a bill authored by Assemblymember Roger Hernandez of West Covina, which provides broader protections for workers employed by labor contractors.

“California needs new protections to hold companies accountable when their labor suppliers violate workers’ rights,” Assemblymember Hernandez said. “This bill will protect California’s vulnerable temporary and contracted workers, as well as businesses that follow the law and earn their profits without cheating workers.”

In California, temporary workers face a 50 percent greater risk of being injured on the job than permanent employees. Temp workers who perform manual labor face even greater risks on the job. In 2009, for example, after two recycling workers lost fingers in the same machine, Soex West Textile Recycling told CalOSHA it could not be held responsible because it had no employees. The workers were employed by another entity, which also denied responsibility.

Arold Haro, from Tracy, California, was hired by a temporary firm to package pre-made salads for Taylor Farms, a subcontractor for McDonald’s and Walmart. “When we get hurt on the job or don’t receive our pay, the temp firm and the company point their fingers at each other and we pay the price,” Haro said.

The report charts several different outsourcing structures and examines nine industries dominated by outsourcing and franchising: custodial services; fast food; home care; food service; warehouse and logistics; agriculture; temporary staffing agencies; port trucking; and public contracting. Within each industry, NELP breaks down the number of workers and their demographic characteristics, the percentage of workers hired by subcontractors, their median wage and the reported incidences of stolen wages.

“Workers increasingly serve businesses that do not officially ‘employ’ the worker—a distinction that hampers organizing, erodes labor standards, and dilutes accountability,” said Catherine Ruckelshaus, general counsel with the National Employment Law Project and a co-author of the report. “Under existing law, a company that contracts out can be held responsible if a worker can prove joint-employer status. That requires litigation that is costly, slow, and is easily manipulated by companies that use contractors to shield themselves from liability.”

The findings show that outsourced workers’ wages suffered compared to their non-contracted peers, ranging from a 7 percent dip in janitorial wages, to 30 percent in port trucking, to 40 percent in agriculture. Food service workers’ wages fell by $6 an hour when compared to direct hires.

Outsourcing can also lead to widespread wage theft, as lead companies encourage low-bid contracting and squeeze lower-level businesses competing for work. In the fast-food industry, which employs a workforce of 3.8 million people, 89 percent of workers report wages stolen out of their paychecks. Among the nation’s two million home care workers, 82.7 percent reported not being paid overtime wages, and 90.4 percent reported not being paid for time they worked off the clock.

A recent study of low-wage workers in New York City, Chicago and Los Angeles suggests that wage theft cost the average worker 15 percent of their weekly earnings. That means workers in industries with high rates of outsourcing lose $56.4 million each week as a result of labor violations. Taken on a national scale, these losses add up to a staggering amount of money taken away from working people, local businesses and state funds.

By withholding wages and benefits and shifting costs onto workers, companies that misclassify workers as independent contractors save up to 30 percent of their payroll costs, undermining competitors that treat their workers fairly and depressing standards for entire industries. Misclassifying workers also enables employers to illegally suppress their payroll-tax costs and workers’-compensation and unemployment-insurance premiums, exacting a steep toll on state and federal coffers. A 2009 report by the GAO, for example, estimated that worker misclassification cost federal revenue about $2.72 billion.

“The subcontracted economy exacts a terrible toll on workers whose wages, safety and job security suffer when companies replace permanent jobs with temporary positions,” said California Labor Federation executive secretary-treasurer Art Pulaski. “AB 1897 offers vital protections to ensure companies are held accountable when they exploit temporary and subcontracted workers.”


The National Employment Law Project is a non-partisan, not-for-profit organization that conducts research and advocates on issues affecting low-wage and unemployed workers. For more about NELP, visit www.nelp.org

The California Labor Federation is dedicated to promoting and defending the interests of working people and their families for the betterment of California’s communities.

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