March 22, 2022

B.C. IS LOSING $308 MILLION A YEAR to the underground economy—dishonest contractors who deliberately misclassify workers to evade employment fees and taxes.

That money could pay for the new patient care tower to be built at Lions Gate Hospital.

It could buy 45 new MRI machines.

Or it could fund the entire Ministry of Mental Health and Addictions for almost eight years.

“It’s staggering when you think about the cost to society,” said Dan Jajic, business manager for District Council 38 of the International Union of Painters and Allied Trades. “The underground economy hurts everyone: from the legitimate contractors that are the backbone of the construction industry to the workers who are robbed of health and medical benefits to the everyday British Columbian families forced to pay more and get less.”

The BC Building Trades commissioned Prism Economics and Analysis to assess the size and impact of B.C.’s underground economy. Prism used available data from WorkSafeBC, Statistics Canada and other credible sources to calculate the losses to the industry. The report’s findings are conservative and track just one measure of the scale of the problem. The true cost of the cash economy in construction is incalculable. Prism found that the revenue losses to governments and agencies from the misclassification of workers as independent operators in 2022 will amount to approximately $115.4 million. This increases to $308.2 million when the under-reporting of income by legitimately classified independent operators is included.

Once endemic in the residential construction sector only, misclassifying workers and under-reporting income has now seeped into the commercial sector and is hurting reputable employers who follow the rules, said Jajic. These contractors lose bids and pay necessarily higher WorkSafeBC premiums to make up for the deficit to the system, while their workers miss out on opportunities to earn an honest income.

The report found that dishonest contractors avoid paying up to 20 per cent of labour costs by misclassifying workers. In an industry where construction bids are won and lost by fractions, it’s difficult for legitimate contractors to compete.

“This has had a direct effect on legitimate contractors’ ability to secure work by giving cheating contractors this 20 per cent savings on their labour costs, which in turn suppresses wages for all workers,” Jajic explains.

And there are other consequences. The general public pays higher taxes to compensate for the leakage from the income tax system by workers who conceal some or all of their earnings; and these misguided workers who conceal their earnings lose access to various employment standards and health and safety protections.

“These workers aren’t covered by workers’ compensation and are more vulnerable to injury and unemployment,” said Brynn Bourke, executive director of the BC Building Trades. “In addition, basic employment standards around pay, hours of work, and working conditions are often ignored.”

Consumers who participate in the underground economy are another at-risk group. For example, they can’t remedy a shoddy job without admitting their own part in the illegal exchange.

The underground economy has been allowed to flourish unabated since 2001, which was the last time B.C. assembled a joint compliance team of representatives from the B.C. Ministry of Labour, Human Resources Development Canada, and the Canada Revenue Agency to look at what has grown into an economic epidemic. Back then, the joint compliance team identified over $44.5 million in unpaid taxes, and $40.2 million in unpaid premiums.

The Prism report recommends B.C. reconvene the compliance teams. Former industrial relations officer Dave Ages, who worked for the Ministry of Labour for 17 years and was responsible for the teams back in 2001, applauds the idea.

“It was a great example of proactive enforcement in various fields, including agriculture and construction,” said Ages. “Many employers were brought into compliance through the educational and outreach functions of the JCT.”

Ages said workers also benefited in terms of both recovered wages and in improved working conditions.

The Prism report also recommends WorkSafeBC impose administrative penalties on contractors that misclassify workers as independent operators and require those contractors to pay the premiums they should have paid in both the current and prior years.

Lastly, Prism recommends prime contractors be made responsible for the compliance of their subcontractors and, conversely, liable for their non-compliance.

By Corry Anderson-Fennell