The underground economy* in Ontario’s construction industry continues to plague many legitimate contractors. The McGuinty government recently announced measures to aggressively target the underground economy through a new joint enforcement initiative between the Ministry of Labour and Tarion Warranty Corporation to locate unregistered homebuilders. Although this initiative is aimed at the residential sector, Minister Peters has not ruled out the opportunity for a similar approach in the ICI sectors of construction.
The Ontario Construction Secretariat has commissioned several studies on the underground economy and presented findings to government and industry groups. Over the next few months we will be reviewing and updating our estimates of the size of the underground economy in construction and the value of revenue lost to government and government agencies.
One critical component of the underground economy in the ICI sectors is the role of “Independent Operators”. The relationship of self-employment to the underground economy is complex. Many self-employed workers are legitimate. However, for underground workers, self-employment facilitates income concealment and masks an employment relationship as a contract-for-service. Studies have shown a strong correlation between self-employment and income concealment and tax evasion.
According to the Statistics Canada’s Labour Force Survey, self-employment in Ontario’s construction industry has increased from 75,000 workers in 1987 to over 130,000 workers in 2006. Not only are we seeing an increasing number of self-employed workers in construction, but their share of total construction employment is also increasing. Almost 20 years ago, 25% of the construction workforce was self-employed. Today, one-third of construction workers declare themselves to be self-employed.
This is a large number and it is important to distinguish between those self-employed who employ paid help to work along side them and those who are purely “independent operators” – meaning they do not employ anyone to work with them. This graph illustrates that the number of “independent operators” has ballooned from 34,000 to 82,000, whereas those self-employed construction workers who employed paid help increased modestly from 41,000 to 50,000 over the same time period. Furthermore, 75% of these independent operators are unincorporated, further evidence that these “self-employed” workers are truly independent operators.
Self-employment trends suggest that the problems associated with ‘Independent Operators” have become embedded in Ontario’s construction industry. Styling workers as independent operators has become an unfair competitive advantage for many contractors who are not willing to pay their fair share. Ongoing government efforts such as increasing inspections and enforcement are important. However, to have any serious impact on the underground economy we need to rein in the independent operators. OCS and its labour and management partners have previously advocated for closing the independent operator loop-hole by removing the exemption for independent operators through the Workplace Safety and Insurance Act. Although, the government has explored this possibility, there has been no formal commitment to proceed. The competitive survival of the legitimate construction industry depends on an effective solution.
Note: *By underground economy, we mean construction work where there is a deliberate and systematic evasion of responsibilities for reporting taxable income, making EI and CPP contributions, paying GST and sales tax and paying Workers Compensation premiums. Underground work also typically ignores the Employment Standards Act and pays scant if any attention to requirements for health and safety, the use of licensed trades or apprenticeship ratios, where required.
For more information please contact:
Katherine Jacobs
Director of Research and Analysis, Ontario Construction Secretariat
kjacobs@iciconstruction.com
