Underground Economy

New report sheds light on cost of shadow economy in B.C.

Underground economic activity is costing at least $308 million a year in the construction sector alone

Dishonest construction contractors who underreport income or deliberately misclassify their workers as independent to evade tax and employment fees and independent operators who don’t report income are costing the B.C. economy at least $308 million a year.

“That’s $308 million that isn’t going into schools and hospitals, it isn’t going into supporting injured workers, and it isn’t supporting public services. Instead, it’s going directly into the pockets of unscrupulous contractors and robbing legitimate contractors of an honest income,” said Brynn Bourke, executive director of the BC Building Trades (BCBT).

BCBT commissioned Prism Economics and Analysis, a leading public policy firm, to collect and analyze publicly available data from WorkSafeBC, Statistics Canada and BuildForce Canada. Statistics Canada has identified the B.C. construction sector leading the country in underground economic activity. The Prism report finds some of the losses at $308 million in unpaid income tax, unpaid Employment Insurance and Canada Pension Plan contributions and unpaid workers compensation premiums.

“Legitimate, responsible contractors and the wider taxpaying public have to make up the difference,” says Bourke. “Meanwhile the workers who are misclassified lose out on what they should be entitled to under the Employment Standards Act, such as overtime, holidays, sick leave and vacation pay.”

Bourke notes that $308 million could pay for the new patient care tower at Lions Gate Hospital, or buy 45 new MRI machines, or fund the entire Ministry of Mental Health and Addictions for almost eight years.

While the underground or “shadow” economy includes small-scale repair and renovation work that is unreported and paid for in cash, the bigger and more prevalent problem is the misclassification of workers. Unscrupulous contractors who misclassify workers as independent contractors enjoy an illegitimate savings on labour costs of about 20 per cent, which disadvantages the honest contractors who follow the rules.

“The misclassification of workers in B.C. is rampant and it has far-reaching consequences for every citizen of this province,” says Dan Jajic, business manager of the International Union of Painters and Allied Trades District Council 38 (IUPAT DC38).

IUPAT DC38 represents painters, glaziers, drywall finishers and wall and ceiling installers. It’s a sector that sees lots of underground economic activity, says Jajic, who hears horror stories from workers who used to be part of it.

“The effect on workers who are exploited through misclassification can be devastating: no workers compensation if injured, no Employment Insurance if laid off and no Canada Pension Plan on retirement. It’s just wrong.”

The magnitude of the problem cannot be underestimated.

The BC Building Trades, its member unions and contractors are calling on government to re-constitute joint compliance teams comprising officers from the Ministry of Labour, WorkSafeBC, the Employment Standards Branch and the Canada Revenue Agency to carry out spot checks and finally enforce our tax and employment regulations. These teams were disbanded 20 years ago amid cutbacks. Such teams have previously helped root out underground economic activity in the construction industry.

2022 Underground Economy Report