Working off the Books

In my last article, I wrote that governments at the state and federal levels are toughening up on “independent contractors” — those people who work at our companies and who receive a 1099 at the end of the year, rather than a W-2.

A larger problem is the so-called “underground” or “informal” economy. This is a vast economy estimated by the Internal Revenue Service as being between 4 percent and 60 percent of the economic activity in the United States. That is such a huge range I won’t even comment on it. Anytime someone writes an estimate like that, it says to me that he really has no idea.

The Aspen Institute of Washington, D.C., studies these things and has estimated that the underground economy is around 25 percent of the U.S. economy. This covers everything from illegal-alien employment to criminal activities to paying an employee “under the table.” My purpose is to cover only the employment aspects of this, but just imagine where our government coffers could be if all of that 25 percent were known and taxed.

Paying employees under the table is fraught with danger for the employer. If caught, an employer faces serious penalties and fines and is subject to jail time. The other risks are real, as well.

Most under-the-table employment is completely innocent. For example, the first two nominees for attorney general by former President Clinton withdrew their names from consideration because they had employed nannies or housekeepers and had not paid the requisite employment taxes. I am sure that these two people — both federal judges — would not have thought of themselves as violating the law in paying babysitters, but they had reached the earnings threshold and were subject to employer taxes as a result.

I doubt that many of our readers will be considered for the position of the next attorney general, but there is a risk involved in not paying for child care within the established rules.

A more complicated — and far riskier — area is the possibility of worker injury. The nationwide crisis in medical care complicates this issue.

More often than not, a worker being paid under the table is liable to also be uninsured. If a regular employee were injured, the workers’ compensation system would handle any injury. But what if the carpenter our business needed for a couple of days had been injured? Paying a person under the table means no workers’ compensation coverage; that breaks the protections the law provides for workers and employers.

The workers’ compensation laws were formulated in the early 1900s as a pact among workers, government, and employers. If an employee is injured on the job, generally, the employer is immune from lawsuits by the employee for the injury. The employee’s welfare, in turn, comes first, without concern for the blame factor. It has worked that way for 100 years.

But what if the injured person were not an official employee?

First, your immunity from lawsuit is gone. The “employee” can sue you for negligence or for any number of other things, and a judge and jury will have little sympathy for an employer who broke the law.

Second, a red flag has been waved at the various government departments that work with these issues. The IRS will want its employment taxes; the state will want unemployment compensation and quite possibly a fine for not covering the employee with workers’ compensation; and you may be subjected to an audit to ascertain if there have been any other instances of this — where there’s smoke, there’s fire.

A third complication is that the medical care community may consider you liable and, whether you are or not, you will spend time and effort dealing with it.

So the bottom line is: Don’t employ people under the table, whether or not they have legal right to work in the United States. As a business, make sure all people working in your facility are your employees or are legitimately working as contractors. Even personally, if you are paying someone more than $1,600 in any one-year period, you should pay that person as an employee. I know your babysitter or housekeeper will hate this, but it creates a win-win-win situation that does work for everyone. •

Dave Mount is the owner of Westaff in Burlington.