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Battling the underground economy

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by Daily Commercial News last update:Aug 20, 2008

The Ontario Construction Secretariat recently released a study on the underground economy in the ICI sector of the province’s construction industry. This is the fourth in a five-part series on that study
Battling the underground economy

The Ontario Construction Secretariat recently released a study on the underground economy in the ICI sector of the province’s construction industry. This is the fourth in a five-part series on that study



The present system used to catch underground operators in construction is not working and the industry itself must play a bigger role in policing activities, according to a study released by the Ontario Construction Secretariat.

“In the construction industry, effective enforcement requires both regular site inspections and audits of relevant records,” the study says.

However, “in Ontario, neither the level of site inspections nor the level of auditing is sufficient to deter non-compliance.”

The study, called Attacking the Underground Economy in the ICI Sector of Ontario’s Construction Industry, was commissioned by the secretariat and compiled by John O’Grady of Prism Economics and Analysis and consultant Tim Armstrong.

It discussed the need for an industry role in the ICI sector to augment the enforcement activities of governments and the Workplace Safety and Insurance Board (WSIB) and examined models used elsewhere to combat non-compliance.

The study says the WSIB has acknowledged the need to increase its audit resources and has taken steps in that direction, however, it is important to keep in mind that Ontario’s construction industry is dominated by small firms.

Approximately 50 per cent of construction establishments employ fewer than 20 employees and most of those employ fewer than five workers.

“As a result, in construction, the cost of an audit can be high, relative to the likely return per audit,” the study says.

Meanwhile, the foundation of the underground economy is styling workers as independent operators, something that can not be revealed by audits of records.

“Such audits may give rise to suspicions, but they are unlikely to provide conclusive evidence that the so-called independent operators are actually employees,” the study says.

“The determination of a worker’s status requires an inquiry into the facts surrounding the relationship and the worker’s circumstances, including such factors as incorporation, ownership of equipment and working for multiple contractors.

“Evidence on these factors is unlikely to emerge from an audit. For the most part, an audit will indicate only that the volume of construction work undertaken would normally be associated with an employee workforce of a certain size.”

The study says that considerable information on suspected non-compliant contractors can be derived from comparing administrative data, but local knowledge can often provide far greater insight into patterns of non-compliance.

“If industry’s insight into local conditions in the construction industry is to be marshaled on behalf of restoring a level playing field, then industry itself will need to be involved in enforcement,” the study says, noting that the industry has a history of initiatives, many involving joint labour-management co-operation.

The study recommends that certain inspection and reporting responsibilities should be delegated to a Construction Industry Employment Practices Board (CIEPB), made up of labour and management representatives from the industry, representatives from the provincial and federal governments and the WSIB, and persons nominated to represent public interests.

The board would be funded either through an operating grant provided by the WSIB or through a surcharge on WSIB premiums.

Inspectors from the board would have statutory right of access onto any construction site and would have the right to interview workers and ask for identification, registration forms and certificates of qualification.

In instances where a construction employer is not compliant, the CIEPB inspector could refer the matter to the Ministry of Labour for enforcement.

The study says it is appropriate for the government to delegate powers of inspection, but it should be up to public servants to make appropriate decisions on penalties and prosecutions.

last update:Aug 20, 2008

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