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Op/ed: The underground economy cheats legitimate firms

By   /   Friday, March 13th, 2015  /   Comments Off on Op/ed: The underground economy cheats legitimate firms

It is time that incentives for business success are aligned with the interests of honest employers and their workers.

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By Pedro Neva

It’s tough to run a successful business in California. It’s tougher when competitors undercut bids to gain an unfair advantage by ignoring rules and licenses, paying cash under the table and not carrying any or enough workers’ compensation insurance.

This kind of cheating occurs daily throughout San Luis Obispo, Santa Barbara and Ventura counties — as it does statewide, the Little Hoover Commission found during its year-long review of California’s thriving underground economy. The ease of this cheating and the widespread lack of consequences is patently unfair to the thousands of hard-working honest business people — and to their employees. And this phenomenon is gradually being allowed to undermine the economies of communities, regions and damage the state’s business climate.

The Central Coast’s communities focus intensely on economic development, crafting long-term strategies for job creation and retention. These strategies are a vital piece of maintaining the region’s stellar quality of life. It is important that these economic development strategies also include a component for weakening the underground economy — with California’s state government providing better-coordinated and more effective enforcement and educational campaigns.

The Little Hoover Commission was established in 1962 to help state government operate more efficiently and economically. In reviewing the state’s response to the underground economy, the commission found a jumble of agencies working on the issue but discovered that no one is in charge. It found the state legislature all too willing to pass new laws to regulate businesses, but seldom the necessary funds to enforce them. For years, the financial resources allocated to policing wage theft, tax fraud, employee misclassification and other characteristics of cheating in the underground economy has been the same or less — even as the size of the state economy and the number of California businesses have expanded drastically.

The commission’s review found in many cases that honest businesses are asked to pay higher fees and surcharges to fund enforcement and restitution for the misdeeds of others. And yet, many businesses told the commission they see little enforcement against their cheating competitors. It became a common refrain for the commission to hear that cheating business owners have little fear of being caught, and if caught, they have little fear of paying significant penalties for the offense. When ordered by a court to pay restitution, it is unlikely the money will be collected. Even then, there is little to stop a business from shutting down and re-opening under a new name to conduct the same process all over again.

Contrast that with an employee seeking unpaid wages, who might wait a year for the legal process to play out and then get a small percentage of what they were owed. In too many cases, employees of cheating businesses must silently put up with wage theft and abuse under the scenario that any job is better than no job.

The commission believes it is time that incentives for business success are aligned with the interests of honest employers and their workers. To that end it has made 15 recommendations in three key areas:

Accountability: Gov. Jerry Brown, in consultation with other leaders with jurisdiction over the underground economy, should appoint a temporary independent leader from inside or outside government to untangle overlaps in enforcement responsibilities and coordinate agencies within their respective silos. This leader should report back within six months with administrative or legislative changes to remove obstacles.

Enforcement: The state must better coordinate enforcement to remove the notion that cheating is an easy and lucrative business model. The state should define who is and who is not an independent contractor to cut down on abuse of this job classification. The state also should provide more resources to local district attorneys to increase their role in tackling the underground economy.

Education: Making it easier to comply with the rules should be a priority. The commission recommends a one-stop source of information that shows how to legally own and operate a business, and also a single portal allowing business owners to interact with state entities.

Thirty years ago the Little Hoover Commission conducted a similar study of the underground economy and then, too, recommended more focused enforcement for the benefit of businesses that play by the rules. Its newest review finds that little has changed in 30 years – except for the underground economy growing larger. This is not an economic development strategy worthy of California.

• Pedro Nava is chairman of the Little Hoover Commission, which released its report on the underground economy on March 9. He formerly represented Santa Barbara and Ventura counties in the general assembly.

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