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The deliberate misclassification of workers hurts almost everyone

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by Journal Of Commerce

For general and sub-contracted trades, the rubber hits the road when tender bids are awarded.The tough get going when the bid winner turns into a sub-contracting concessionaire. Gone are the days of general contractors taking on the bulk of the project work.
Tom Sigurdson
Tom Sigurdson

For general and sub-contracted trades, the rubber hits the road when tender bids are awarded.

The tough get going when the bid winner turns into a sub-contracting concessionaire. Gone are the days of general contractors taking on the bulk of the project work.

Long chains of sub-contracting are the norm and the deceitful trend is to subcontract right down to the individual worker.

While independent contractors have always played a part in the industry, today’s problem is the growing number of workers, who are deliberately misclassified as independent contractors.

Canada Revenue Agency’s (CRA) definition of an independent contractor is clear: an independent contractor plans and decides what work will be done, how much workers will be paid, their hours and quality of work. Just like an employer, the independent can decide on whether helpers will be hired and what equipment and tools will be provided. 

It’s the independent that manages payroll, office expenses and rental costs.

Finally, a true independent will have a share in the profits of the venture.

Deliberately misclassified workers are a problem for everyone, but the concessionaire. Federal, provincial and municipal governments are cheated out of taxes, CPP, EI and premiums for occupational health and safety (OH&S). Owners can be left with inferior products or have a difficult time laying blame and litigating for remediation. 

Honest contractors are denied fairness in a bidding process that encourages absurdly low bids. Workers are intimidated into accepting the lie of self-employment. 

The workers, who choose not to work for an independent, face unemployment.

Like other underground economy transactions in construction, it’s difficult to measure the full extent of deliberate misclassification. We rely on government audits and the reports from employment standards investigations. 

A team of investigators from the B.C. Employment Standards Branch, CRA and HRSDC visited more than 1,500 Lower Mainland residential construction sites in 2000 and 2001. They found that more than 30 per cent of the employees interviewed had been hired as sub-contractors. In addition, 36 per cent of the sub-contractors had no (OH&S) coverage.

The federal Contractor Payment Reporting System (CPRS) set up in 1998 has helped to educate contractors about their duty to report income to the federal government. 

As a result, $1.637 billion in tax assessments were levied for under-reported or unreported construction income from 2000-2008. 

In spite of increased awareness, CRA audits recovered about $126 million in unreported contractor income for 2009. More than $26 million of that was in B.C. 

Clearly, many sub-contractors continue to avoid their responsibilities under Canadian tax law.

Owners are unwitting victims of the trend to misclassify workers as “independents.”

Worker certifications and qualifications become meaningless in the environment, where small contracts are parsed out to the lowest bidders. Shoddy workmanship is often covered up behind drywall and fresh paint.

For honest contractors, the labeling of workers as “independent contractors” becomes an unfair business practice. Ethical businesses watch from the sidelines as unscrupulous contractors low-ball tender bids. 

But, eventually the process becomes insidious and honest contractors throw in the towel and join in the fracas. 

The trend towards a deliberately misclassified worker sub-contracting also has a devastating impact on apprenticeship training. Every time a job is sub-contracted down to the individual worker, there are fewer and fewer opportunities for on-the-job training.

When apprentices can’t complete their experiential training, they drop-out. 

The misclassification has taken a heavy toll on apprenticeship completions.

There is no easy solution to stop the growth of deliberate misclassification, but the problem can be reduced. 

In several U.S. states, residential construction contractors have mandatory licensing. 

For ICI construction, fair wage schedules are a proven method for leveling the playing field. It’s time for the B.C. government to take similar measures.

Tom Sigurdson in the executive director of the British Columbia/Yukon Territory Building and Construction Trades Council. Send comments or questions to editor@journalofcommerce.com.

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