California Targets Underground Economy

Wednesday, January 4, 2012 @ 11:01 AM
posted by admin

Seven California state agencies and local district attorneys are joining forces to battle the underground economy in which businesses avoid buying workers compensation insurance and paying payroll taxes.

The new Labor Enforcement Task Force is the collaborative effort of the Dept. of Industrial Relations, Employment Development Dept., Contractor’s State License Board, State Board of Equalization and Bureau of Automotive repair, Dept. of Insurance, California Attorney General and district attorneys at the county level, the Dept. of Industrial Relations said.

Alan Smith, owner of Alan Smith Pool Plastering in Orange, has been pushing for such an effort since 2010.

In 2010, Smith said that he paid $35 an hour including taxes and workers comp insurance at a time that many competitors paid workers $15 cash and dodging hundreds of millions of dollars in payroll taxes and workers comp insurance.

Smith and the California Spa & Pool Industry Education Council actively supported several bills in the legislature to stem this underground economy ways:

  1. Stop licensed contractors from getting an exemption from buying workers comp insurance because they claim not to have any employees.
  2. Halt companies that pay workers cash in order to avoid payroll taxes and workers comp insurance
  3. Stop unlicensed contractors that work for cash to avoid paying taxes
  4. Stop divorced dads who skip out on their child support payments by working for cash for companies in the above categories.

The Legislature passed one of the bills the industry supported but then-Gov. Arnold Schwarzenegger vetoed it, saying that existing laws were sufficient if properly enforced.

Labor and Workforce Agency Secretary Marty Morgenstern said, “The goal…is to ensure fair and safe working conditions in all workplaces and promote a level playing field for employers through education and enforcement of state laws. Labor law violators endanger workers and have an unfair market advantage over law-abiding businesses.”

Dept. of Industrial Relations Director Christine Baker added, “Legitimate businesses grow California’s economy. They are our economic backbone. This effort is using state resources judiciously in a time of limited funding to allow key agencies to collaborate and direct their best efforts to fight the menace of the underground economy.”

Insurance Commissioner Dave Jones said his office would focus on employers who under report payroll or misclassify employees in order to obtain a lower rate for workers’ compensation insurance.  Previous department investigations led to the arrest of 47 business owners for insurance premium fraud involving approximately $41 million in unpaid premiums.

In addition to that effort, the new tax force will ensure workers receive proper payment of wages and that the state gets all employment taxes, fees and penalties due from employers, Baker said. “By joining forces with other agencies conducting inspections, we can have a greater impact on stopping labor violations and the underground economy. Collaboration will also save time and money by avoiding overlapping inspections and focusing our efforts on the egregious violators.”

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