Unreported employment

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Unreported employment, also known as money under the table, working under the table, off the books, cash-in-the-claw, cash-in-hand, money-in-the-paw, or illicit work is illegal employment that is not reported to the government. The employer or the employee often does so for tax evasion or avoiding and violating other laws such as obtaining unemployment benefits while being employed. [1] The working contract is made without social security costs and does typically not provide health insurance, paid parental leave, paid vacation or pension funds. It is a part of what has been called the underground economy, shadow economy, black market or the non-observed economy.

Contents

Payments are generally in cash, and the employer often does not check the employee's background or credentials, as is sometimes required by law or otherwise expected by the industry's client base, such as a license or professional certification.

While the hiring of the employee may or may not be legal in itself, it is often done when the employer or the employee intentionally fails to obey one or more laws.

In developed nations, unreported employment evades withholding tax and is part of the informal sector. It is hidden from the state for tax, social security, or labor law purposes but is legal in all other aspects. [2] [3]

Common jobs

Common types of employment sectors of unreported jobs include the following:

Reasons

Reasons one may work or pay a worker cash-in-hand include:

Disadvantages

Unreported employment can have harmful effects on government, employers, and employees.

Unreported employment directly affects the government's ability to fund resources (government spending). It causes a tax gap by the reducing tax revenue of a government. [5] [6]

A 2005 University of California, Los Angeles, study showed that the economy in California was weakened by more than two million workers being paid without paying taxes. [7] Indeed, it is estimated that over US$214.6 billion went unreported to the IRS last year alone from this. [8]

Those who are employed under the table, including undocumented immigrants, may be denied rights that legally employed workers have, such as minimum wage, various benefits (particularly unemployment benefits), and fair treatment. [9]

Under-the-table employees who lose their jobs may not be entitled to collect unemployment benefits. They have limited causes of action against their employers for mistreatment, on-the-job work accidents, or lack of payment. Employers have limited cause of actions against employees who commit crimes such as embezzlement, theft, or abuse of employer.

If practices are widespread, legitimate businesses may be undercut by and may have difficulty competing with those who employ staff illegally.

Government revenue agencies look for lifestyles out of line with the income reported. They have tools that aid in assessing unreported taxes, which can result in large fines or jail time for the employer.

Advantages

Many entrepreneurs fail to report their first part-time hired employees. The complexity of employment regulations and large amount of paperwork can be daunting, especially when someone is needed for only a few hours a week. That early underground employment may be a vital step in the growth of a healthy open economy.

Day laborers fill immediate gaps during labor shortages in some segments of the construction and landscape industries. Background checks, identification, required paperwork, and government filings for only a day's work can be prohibitive. That encourages unreported employment of short-term laborers.

A large amount of work for only a day or two is unreported. Although nanny laws make allowances for the homeowner, businesses are typically required to fill out and file several hours' worth of paperwork even for an hour's worth of work.

The amounts are too small for tax collecting agencies to pursue and the paperwork too arduous to file and so legitimate micro-employment among businesses is rare. However, it is an important resource for many small businesses.

In professional fields like architecture, or marketing, unreported work is typically the first step to starting a legitimate business.

Again, paperwork, compliance, and knowledge of labor laws are prohibitive for the small amount of work that is performed. Although illegal, side businesses generate relatively little revenue and so are rarely the target of tax enforcers. Eventually, professional employees have enough work to be able to leave their employer and become independent. Then, paperwork is usually filed and self-employment taxes are reported. The business then becomes a legitimate and beneficial part of the economy.

Those who are unlikely to find employment through the reported economy, including those with past criminal records or current warrants as well as illegal immigrants can be reasonably productive and self-sufficient. That keeps them from engaging in less-desirable activities like theft and drug use.

Self-employment in cottage industries is often unreported at first. A home cook, for example, may sell a few pies to friends and co-workers without filing necessary sales taxes or self-employment taxes. Although that is usually illegal, it may lead to a legitimate and beneficial business and is often how small businesses are started.

In some countries, the tax system attempts to set minimum thresholds on the amounts liable. However, there is still the burden of compliance with the bookkeeping requirements to prove that one is exempt.

Short-term youth employment is often unreported but can be very beneficial. A teenager hired to aid in constructing a shed or barn, for example, learns valuable skills and responsibility.[ citation needed ] Most youth would not be employed for short-term projects if employment had to be reported. Government revenue collectors typically ignore enforcement of such beneficial, unreported employment. Youth-run lemonade stands that have been shut down by police for example have received an enormous amount of bad press and public outcry.

Enforcement

Often, both the employer and employee agree on paying in cash. Frequently, the employer is running an unreported cash-based business. These methods make detection by authorities to be time-consuming and difficult. Most small-scale operations take place without any real enforcement effort. Landscaping is a good example of a cash-based business that is frequently unreported.

In the United States, authorities have focused enforcement resources on large-scale operations like undocumented immigrants who are employed by large companies. Discovery and enforcement of small-scaled unreported employment is typically through a secondary indiscretion like fraud, tax irregularities, and unrelated or partially-related civil/criminal violations of the employer or employee.

Although the federal and/or state government may arrest, prosecute, and imprison an individual for engaging in commerce without the state's approval, the high cost of such enforcement is usually prohibitive and impossible except for the most egregious cases.

Examples

United States

According to a New York Times report in February 2013, the Obama administration had demonstrated a new strategy to curb the employment of undocumented immigrants by focusing on companies that hire them in the first place. By concentrating on the businesses employing the large numbers of unauthorized workers, the number of undocumented immigrants working in the US would drop dramatically. The US government would be doing so in a less confrontational manner than in recent years. [10]

American Apparel incident

In 2009, an U.S. Immigration and Customs Enforcement audit of American Apparel's employment records uncovered discrepancies in the documentation of about 25% of the company's workers, implying mainly that they were undocumented immigrants. American Apparel fired about 1,500 employees that September as a result. ICE did not accuse American Apparel of knowingly employing workers without employment authorization, however, and American Apparel received no fines. [11]

See also

Related Research Articles

<span class="mw-page-title-main">Informal economy</span> Economic activity unregulated by government

An informal economy is the part of any economy that is neither taxed nor monitored by any form of government. Although the informal sector makes up a significant portion of the economies in developing countries, it is sometimes stigmatized as troublesome and unmanageable. However, the informal sector provides critical economic opportunities for the poor and has been expanding rapidly since the 1960s. Integrating the informal economy into the formal sector is an important policy challenge.

<span class="mw-page-title-main">Foreign worker</span> Person working in a country where they do not have citizenship

Foreign workers or guest workers are people who work in a country other than one of which they are a citizen. Some foreign workers use a guest worker program in a country with more preferred job prospects than in their home country. Guest workers are often either sent or invited to work outside their home country or have acquired a job before leaving their home country, whereas migrant workers often leave their home country without a specific job in prospect.

Self-employment is the state of working for oneself rather than an employer. Tax authorities will generally view a person as self-employed if the person chooses to be recognised as such or if the person is generating income for which a tax return needs to be filed. In the real world, the critical issue for tax authorities is not whether a person is engaged in business activity but whether the activity is profitable and therefore potentially taxable. In other words, the trading is likely to be ignored if there is no profit, so occasional and hobby- or enthusiast-based economic activity is generally ignored by tax authorities. Self-employed people are usually classified as a sole proprietor, independent contractor, or as a member of a partnership.

<span class="mw-page-title-main">Immigration Reform and Control Act of 1986</span> Major Attempt to alter US Immigration System

The Immigration Reform and Control Act was passed by the 99th United States Congress and signed into law by U.S. President Ronald Reagan on November 6, 1986.

Illegal immigration, or unauthorized immigration, occurs when foreign nationals, known as aliens, violate US immigration laws by entering the United States unlawfully, or by lawfully entering but then remaining after the expiration of their visas, parole or temporary protected status.

Illegal immigration is the migration of people into a country in violation of that country's immigration laws, or the continuous residence in a country without the legal right to do so. Illegal immigration tends to be financially upward, from poorer to richer countries. Illegal residence in another country creates the risk of detention, deportation, and other imposed sanctions.

<span class="mw-page-title-main">Employment authorization document</span> Document issued by the United States Citizenship and Immigration Services

A Form I-766 employment authorization document or EAD card, known popularly as a work permit, is a document issued by the United States Citizenship and Immigration Services (USCIS) that provides temporary employment authorization to noncitizens in the United States.

The Security Through Regularized Immigration and a Vibrant Economy Act of 2007 or STRIVE Act of 2007 is proposed United States legislation designed to address the problem of illegal immigration, introduced into the United States House of Representatives. Its supporters claim it would toughen border security, increase enforcement of and criminal penalties for illegal immigration, and establish an employment verification system to identify illegal aliens working in the United States. It would also establish new programs for both illegal aliens and new immigrant workers to achieve legal citizenship. Critics allege that the bill would turn law enforcement agencies into social welfare agencies as it would not allow CBP to detain illegal immigrants that are eligible for Z-visas and would grant amnesty to millions of illegal aliens with very few restrictions.

<span class="mw-page-title-main">E-Verify</span> Website to determine US work eligibility

E-Verify is a United States Department of Homeland Security (DHS) website that allows businesses to determine the eligibility of their employees, both U.S. and foreign citizens, to work in the United States. The site was originally established in 1996 as the Basic Pilot Program to prevent companies from hiring people who had violated immigration laws and entered the United States illegally. In August 2007, the DHS started requiring all federal contractors and vendors to use E-Verify. The Internet-based program is free and maintained by the United States government. While federal law does not mandate use of E-Verify for non-federal employees, some states have mandated use of E-Verify or similar programs, while others have discouraged the program.

Hoffman Plastic Compounds, Inc. v. National Labor Relations Board, 535 U.S. 137 (2002), is a United States labor law decision in which the Supreme Court of the United States denied an award of back pay to an undocumented worker, José Castro, who had been laid off for participating in a union organizing campaign at Hoffman Plastics Compounds plant, along with several other employees. The case was originally filed against Hoffman by Dionisio Gonzalez, an organizer with the United Steelworkers.

<span class="mw-page-title-main">Black market</span> Market in which goods or services are traded illegally

A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is not compliant with an institutional set of rules. If the rule defines the set of goods and services whose production and distribution is prohibited or restricted by law, non-compliance with the rule constitutes a black-market trade since the transaction itself is illegal. Such transactions include the illegal drug trade, prostitution, illegal currency transactions, and human trafficking.

There are thought to be over half a million undocumented immigrants residing in New York City. They come from many parts of the world, especially Latin America, Asia, Eastern Europe, and the Caribbean. About 70% of them have paid work, in catering, construction, retail, driving, cleaning, and many other trades; at least in catering, their wages tend to be lower than those of comparable workers.

To measure the impact that illegal immigrants is hard to accurately display for a plethora of reasons. Not only are we using rough estimations on the number of illegal immigrants in our country but also having to decipher who many resources they are using and if their children are also using the resources that are handed out. Some research shows that illegal immigrants increase the size of the U.S. economy/contribute to economic growth, enhance the welfare of natives, contribute more in tax revenue than they collect, reduce American firms' incentives to offshore jobs and import foreign-produced goods, and benefit consumers by reducing the prices of goods and services. On the other hand, there is data that shows that illegal immigrants are using programs that the government provides.

Chamber of Commerce v. Whiting, 563 U.S. 582 (2011), is a decision by the Supreme Court of the United States that upheld an Arizona state law suspending or revoking business licenses of businesses that hire illegal aliens.

Alabama HB 56, titled the Beason-Hammon Alabama Taxpayer and Citizen Protection Act is an anti-illegal immigration bill, signed into law in the U.S. state of Alabama in June 2011.

The Georgia Security and Immigration Compliance Act requires that all public employers, contractors and subcontractors register and comply with the federal work authorization program operated by the United States Department of Homeland Security to verify new employee work eligibility.

<span class="mw-page-title-main">Wage theft</span> Denial of wages or employee benefits rightfully owed to an employee

Wage theft is the failing to pay wages or provide employee benefits owed to an employee by contract or law. It can be conducted by employers in various ways, among them failing to pay overtime; violating minimum-wage laws; the misclassification of employees as independent contractors; illegal deductions in pay; forcing employees to work "off the clock"; not paying annual leave or holiday entitlements; or simply not paying an employee at all.

<span class="mw-page-title-main">Tax evasion in the United States</span>

Under the federal law of the United States of America, tax evasion or tax fraud is the purposeful illegal attempt of a taxpayer to evade assessment or payment of a tax imposed by Federal law. Conviction of tax evasion may result in fines and imprisonment. Compared to other countries, Americans are more likely to pay their taxes on time and law-abidingly.

<span class="mw-page-title-main">Border Security, Economic Opportunity, and Immigration Modernization Act of 2013</span> Proposed immigration reform bill

The Border Security, Economic Opportunity, and Immigration Modernization Act of 2013 was a proposed immigration reform bill introduced by Sen. Charles Schumer (D-NY) in the United States Senate. The bill was co-sponsored by the other seven members of the "Gang of Eight", a bipartisan group of U.S. Senators who wrote and negotiated the bill. It was introduced in the Senate on April 16, 2013, during the 113th United States Congress.

Eliud Montoya, a naturalized American citizen, was murdered on August 19, 2017. Law enforcement authorities describe the murder as a contract killing undertaken by a fellow employee. The suspect, an illegal immigrant to the United States who worked at a tree care company, is alleged to have been motivated by evidence Montoya was preparing to present to the government to back up a complaint Montoya had filed with the Equal Employment Opportunity Commission alleging that this employee had skimmed millions of dollars from the wages of illegal immigrants working for the tree care company.

References

  1. ↑ Feige, Edgar L. (2016). "The Meaning and Measurement of Unobserved Economies: What do we really know about the "Shadow Economy"?". Journal of Tax Administration (30/1).
  2. ↑ Feige, Edgar L. (December 11, 2003). "Defining And Estimating Underground And Informal Economies: The New Institutional Economics Approach". World Development . 18 (7): 989–1002. doi:10.1016/0305-750x(90)90081-8. S2CID   7899012.
  3. ↑ Colin C. Williams (2005). A Commodified World?: Mapping the limits of capitalism. Zed Books. pp. 73–74. ISBN   9781842773550.
  4. ↑ Robins, Daniel (7 August 2023). "Invisible Migration and "Perverse" Capital: Exploring the Experiences of Migrant Delivery Riders". International Migration Review. doi: 10.1177/01979183231191746 . ISSN   0197-9183.
  5. ↑ Feige, Edgar L. & Cebula, Richard (January 2011). "America's Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S." Mpra Paper. Retrieved 2012-03-05.
  6. ↑ Feige, Edgar L. (September 2009). "New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"". Mpra Paper. Retrieved 2012-03-05.
  7. ↑ Abate, Tom (24 June 2011). "Weak outlook for state seen / Many are working under the table, UCLA group says". The San Francisco Chronicle.
  8. ↑ McDermott, Jennifer (3 September 2017). "Side hustles and tax evasion: The telling statistics". finder.com.
  9. ↑ Porter, Eduardo (19 June 2006). "Here Illegally, Working Hard and Paying Taxes". The New York Times.
  10. ↑ Preston, Julia (3 July 2009). "US Shifts Strategy on Illicit Work by Immigrants". The New York Times. Retrieved 8 February 2013.
  11. ↑ Preston, Julia (September 29, 2009). "Immigration Crackdown With Firings, Not Raids". The New York Times.
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