Contracting Workers

One reason formal employment statistics aren't growing as robustly as economists had predicted post Great Recession is that so much of the economy has stayed underground.

Research group Economic Roundtable released a report around Labor Day in which the authors concluded that the number of "informal" employees − those either unreported or misclassified as independent contractors − working in construction in the Golden State has grown 400% since 1972 to a total of 143,900 in 2011 − 16% of the state's construction workforce. Of that number, 104,100 workers were unreported to state regulators and 39,800 were misclassified.

Construction is one of the keystone industries in California, and in many other parts of the country, that were particularly hard hit in the recession which was precipitated by bad housing loans.

After the 2007 recession, the report showed that the number of informal workers increased year-over-year while the number of formal employees dropped.

“They take these jobs out of economic necessity, which happened a lot in the great recession, or they leave the industry,” study author Yvonne Yen Liu said.

The cost to the workers' compensation industry was estimated at $264 million just in 2011 - this is a cost that the rest of legitimate, properly reporting, employers in all industries share in keeping the workers' compensation system afloat.

Probably worse, however, is that this population lacks work injury protection (though maybe, as one might gather from some of my recent posts that may not be such a bad thing...).

And of course misclassified and unreported workers create a loss of tax revenue and a lack of contributions to health care programs like Medicare.

Yen Liu said the study, which draws on 40 years of data from federal and state statistics, illustrates the informal labor issue clearer than ever before.

"Employee? Whatever ... I just want to work."

The study recommends that general contractors, not just subcontractors, be held liable for misclassifying or not reporting employees.

A bill aimed at doing just that, Assembly Bill 1897, passed the Assembly in May and the Senate on Wednesday.

Contractors, of course, oppose the bill, stating that the industry doesn't need more regulation, but tighter enforcement.

Tom Holsman, chief executive officer for the Associated General Contractors of California, said California’s legal and regulatory system make it difficult for construction companies to comply with the law, citing as an example penalties for hiring undocumented workers.

He also says it's too difficult for contractors to determine whether one is an independent contractor or must be classified as an employee because California's legal test used to draw that distinction consists of 25 questions, where in other states it’s usually comprised of between six and 12.

I'm calling balderdash on Holsman's statement. The test, at least for workers' compensation purposes which is the most liberal of standards when it comes to employment relationships, is really, really easy: direction and control of the labor provided.

There are some questions that one can ask to help provide a clearer answer, but any questionable answer is easily resolved by defaulting to a liberal interpretation of employment relation.

The only time there is a question, it seems, is if a contractor is trying to improve his profit margin.

Large contractors that do government work don't seem to have this problem because they get severely penalized for lying and can be banned from government work in the future. Most construction work is done by small contractor firms.

AB 1897 is the legislature's attempt to make private industry do the government's job. My guess is that isn't going to work because the benefit of falsifying employment validation reports is greater than the potential cost.

In addition, AB 1897 doesn't apply to "employers" with work forces of less than 25 (inclusive of contracted labor), and it applies not to just contractors but to any business that might employ contract labor (my neighbor's farm for instance).

AB 1897 isn't needed. The government just needs to do its job enforcing existing laws and regulations. And contractors need to quell their profit expectations.