Labor Commissioner Active in Underground Economy Strike Force
Executive Order W-66-93 established a joint enforcement strike force consisting of the Employment Development Department (EDD), the Labor Commissioner's Office, the Department of Consumer Affairs, and the Office of Criminal Justice Planning. Other participating agencies are the Franchise Tax Board, the Board of Equalization, and the Department of Justice.
As a tax enforcement agency, EDD will head the strike force. Estimates place the size of the underground economy in California at $60 billion, with an income tax loss to the state of $3 billion annually. Businesses operating in the underground economy avoid payment of payroll and sales taxes by not reporting activities or by paying for goods and services in cash. Such businesses frequently are unlicensed and also cut corners by violating labor laws requiring payment of minimum wage, paying in cash without proper records or withholding of taxes, or not having workers' compensation insurance. These actions not only cost the state tax revenues, but competitively undercut employers who obey the law. The strike force is modeled after the BCSP program, a partnership between the Labor Commissioner and EDD. BCSP consisted of sweeps of businesses throughout the state to inspect for compliance with labor and unemployment insurance tax laws. Over 17 months, a total of 13,604 inspections occurred in 26 counties within a wide variety of industries. The Labor Commissioner issued 3,738 citations with penalty assessments of over $9.5 million. The sweeps also netted EDD 2,638 tax audit leads. The average tax assessment for these audits was $3,100.
Industries identified by BCSP as having the highest incidence of violations will be the target of the Strike Force on the Underground Economy's efforts. The construction industry will be the strike force's first targeted industry.
With BCSP, the Labor Commissioner and EDD found an 80 percent correlation between businesses that failed to comply with the unemployment insurance tax laws and businesses that failed to provide mandatory workers' compensation insurance. The strike force will use BCSP's successful model of coordinated information sharing and enforcement. The Governor's proposed budget for fiscal year 1994-95 includes funding for 14 additional investigators in the Labor Commissioner's Office to be used in the strike force's activities.