To Rebuild a Fair Economy, We Must Tackle the Underground Economy

With so many people out of work and jobs few and far between, those of us still earning a paycheck feel pretty lucky. But nobody feels very secure. We all know that in this economy, we could easily face cutbacks and we'd be in the unemployment line with millions of other laid off workers.

So imagine what times are like in California's underground economy. That's what we call the sectors that operate under the radar of enforcement agencies. Where employers pay in cash, don't carry workers' compensation, and treat workers like they are disposable.

While our traditional economy is sputtering, the underground economy continues to thrive. Decades of weak law enforcement and inadequate penalties has convinced many companies that they can violate labor laws without any consequences. In certain low-wage industries, violating labor law is part of the business model. Workers in those industries are generally the ones with the fewest options, and in these times, the ones most desperate to keep their jobs.

So it’s no wonder that wage theft is rampant. Wage theft includes a range of labor law violations, including failure to pay minimum wage, overtime and meal periods, tip-stealing, off-the-clock work and more. A UCLA study released in 2010 found that wage theft costs Los Angeles County workers $26 million a week. According to the study, nearly 30 percent of low-wage workers were not paid the minimum wage and 75 percent of those entitled to overtime did not receive it. The workers most likely to be victims are the ones who can least afford it: day laborers, car wash and garment workers, temporary employees. According to a 2009 report by the National Employment Law Project, more than two-thirds of low-wage workers reported some type of pay-related law violation.

It is hard enough for workers to come forward and risk their jobs to file a complaint. Most workers face retaliation for speaking out, and the employer almost never makes good on the money owed. Some of these unscrupulous employers simply disappear, or close down shop and re-appear under new names. Workers often have no idea how to locate an employer, and state enforcement agencies cannot collect. The reality is, if you steal money from a person on the street you go to jail, but if you steal from your workers, you most likely get away with it.

One of the most insidious forms of wage theft is the misclassification of workers as independent contractors — which means they are not entitled to minimum wage or overtime to begin with. Misclassification is a way of evading all employer obligations: no workers' compensation, no taxes, no workplace protections. The US Department of Labor estimates that 30 percent of firms now misclassify workers

For a misclassified worker, there is truly no safety net. No unemployment insurance if you get laid off, no Family Leave if a loved one is sick, no disability benefits if you are unable to work. And there’s no way to change that. Independent contractors have no right to organize or join a union to try to improve their working conditions.

Wage theft and worker misclassification don’t just harm the worker who can no longer provide for their family. They create unfair competition for employers who follow the law, putting the good guys out of businesses and creating a race to the bottom. Both wage theft and misclassification erode the traditional employer and employee relationship and undermine decades of worker protections that unions fought for. We cannot rebuild our traditional economy without finally confronting the underground one. 

That’s why the California Labor Federation is sponsoring two bills to do just that. AB 469 (Swanson) would help combat wage theft by giving workers and enforcement agencies key information at the time of hire. The worker would know his or her wage rate and method of payment, along with the employers’ physical address and telephone number. That enables workers to monitor for wage violations and find their employer if there is a dispute. (Currently, employers do not have to provide workers with a physical address or telephone number.) It would also increase penalties on em-ployers who fail to pay a final judgment, and makes it easier for workers to collect back wages after a final order.

SB 459 (Corbett) would crackdown on misclassification with a new penalty structure: $5,000-$15,000 per violation for willful misclassification and $10,000-$25,000 for a pattern and practice. It would also improve enforcement efforts and hold consultants liable if they promote misclassification schemes. Click here to send a message to Gov. Brown today, urging him to sign this important bill.

Together these bills are about fighting abuses in the underground economy. Until we ensure some minimal level of protection from wage theft, we will never rebuild a vibrant economy with security for all workers and their families.