N.Y.C. ‘Underground’ Construction Economy Costs Workers and Taxpayers

In New York City’s booming construction industry, at least 50,000 workers are misclassified by employers as independent contractors or are working off the books—costing workers lost wages and benefits and local, state and federal governments nearly $500 million in 2005. A new report says that without tougher enforcement of employment and wage laws, the cost could jump to as much as $557 million next year.

Building up New York, Tearing Down Job Quality, released in December by the Fiscal Policy Institute (FPI), estimates nearly a quarter of the city’s 200,000 construction workers are part of the growing “underground economy.”

Says report author and FPI deputy director James Parrot:

Official figures don’t reflect activity of a growing number of unscrupulous employers skirting the law. Taxpayers are forced to pick up the tab for Social Security and other payroll taxes that go unpaid when construction workers are hired off the books. And law-abiding employers are put at a real disadvantage, forced to bear many costs shifted to them from employers breaking the law.

The report says about half the underground workers are in residential construction but that misclassified workers and off-the-books workers also are in commercial projects, including some in infrastructure projects that are completely government-funded.

The FPI study says:

Despite the dangerous working conditions, workers in the underground economy are paid very low wages, are denied the protections of universal social insurance programs (workers’ compensation, unemployment insurance, disability), do not have health coverage or retirement benefits, are not able to join a union and rarely are they entitled to paid sick leave, holidays or vacations. Working in the underground construction economy is like working in the 19th century when it comes to labor rights, protections and employment standards.

The report says even as workers are exploited, the growing underground construction economy cost taxpayers and the state nearly half a billion dollars in 2005.

• Contractors in the underground economy skirt payment of legally required payroll taxes and workers compensation premiums and shift these and other costs onto taxpayers and their competitors who play by the rules. Three categories of costs were estimated for 2005:

• $272 million in unpaid legally mandated payroll taxes for Social Security and Medicare, and social insurance premiums covering workers’ compensation, unemployment insurance and disability insurance.

• $148 million in health care costs shifted to the workers themselves, taxpayers and other employers that provide employee health insurance.

• $70 million in lost personal income taxes because there is no withholding for the underground economy and/or they are paid off the books.

In addition to the report’s recommendations for thorough enforcement of employment and tax laws, it calls for stronger enforcement and expansion the city’s and the state’s prevailing wage laws.

The underground economy shifts many costs to others while construction companies paying prevailing wage internalize these costs, provide their workers with health insurance and retirement security, and compensate their workers at levels that make possible a middle class living standard. Prevailing wage means a more skilled and more productive workforce. The prevailing wage economy offers workers a career, economic security and a path into the middle class. The underground construction economy offers none of that, and it puts workers at a far greater occupational risk and cheats workers, taxpayers and law-abiding employers on a large scale. Click here to read the entire report.

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On December 21, 2007 Local 926 President/Business Manager Sal Zarzana, organized nearly a thousand union carpenters, construction workers, labor leaders and elected officials in Brooklyn to protest the Underground Building Economy in NYC.