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January 22, 2013

New coverage rules to tackle underground economy

New mandatory coverage rules by the Workplace Safety and Insurance Board (WSIB) are an important factor in battling the underground economy, says the Ontario Construction Secretariat (OCS).

“It will close a previously existing loophole,” said OCS chief executive officer Sean Strickland. “It will protect workers and it will create more fair competition for all contractors.”

Effective Jan. 1, independent operators, sole proprietors, some partners in a partnership and some executive officers who work in the Ontario industrial, commercial and institutional construction industry are required to have WSIB coverage. The OCS has conducted several studies on the underground construction economy, the most recent in July 2010.

The studies have shown that underground construction activity amounts to between $1.4 billion to $2.4 billion in evaded taxes and WSIB fees.

The OCS says these funds could have gone to injured workers’ medical expenses, or fund public services at hospitals and schools. Previous to the implementation of mandatory coverage, even if an injured worker was not covered by the WSIB, there was a responsibility in the WSIB system to help rehabilitate that worker and pick up lost wages, said Strickland.

“They should pay into the system so if they get hurt, they can get the appropriate care and attention. It’s not quite fair, for in the previous model, if workers weren’t paying into it and they got hurt, they still request service from WSIB.”

OCS research also found that workers who were identified as independent operators, as opposed to employees, provided contractors a competitive advantage ranging from 20 to 50 per cent of labour costs.

“I think all contractors live in a competitive environment and they want to compete fairly at the end of the day. The way that system was set up, it could quite clearly be argued that it was an unfair competitive advantage for those contractors who styled their workers as independent operators.”

Those who oppose mandatory coverage say the new legislation will actually drive more works toward the underground economy.

“I think if people want a way in which they can work illegally, and if they’re so inclined to do so, they will try and find whatever way they can to do that,” said Strickland. “I see it [mandatory coverage] as a positive thing. I can’t see it driving people to illegal behaviour.”

The 2010 OCS report “Underground Economy in Construction — It Costs Us All” says those employers who characterize their workforce as independent operators evade their obligations to provide WSIB coverage and to make contributions to Canada Pension Plan and employment insurance.

The report says independent operators are the basis of more than 80 per cent of the underground economy in Ontario’s construction industry.

“While cash payments are an important contributor to underground practices, especially for evading the Goods and Services Tax (GST), the ‘cash economy’ pales in significance when compared to the ‘independent operator’ problem,” says the report.

The report also says that the share of independent operators in the employed construction labour force in 2009 rose to 22.2 per cent from 19.7 per cent in 2008 and said the trend was moving in the wrong direction.

In 2012, the WSIB estimated that the mandatory coverage legislation will affect an estimated 90,000 independent operators who never had to pay into the WSIB before.

The OCS studies show that the underground economy weakens support for apprenticeship and training as it shifts the costs onto others.

The OCS made deputations to the Tony Dean Expert Advisory Panel advocating a similar change to bring about better safety measures to the Ontario construction industry.

Strickland said there are more changes that can be made, but this is a good first step.

The OCS also recommended to the Panel that there needs to be a stricter definition of the term employer.

“We [need to] tighten up that definition a little bit more so that if you’re working for a contractor you’re deemed to be an employee,” said Strickland.

The OCS is planning on conducting its next study on the underground economy in 2014, which should include 2013 data.

The WSIB has identified 2013 as an education year and then people will be eligible for penalties in 2014. For more information, visit www.beregisteredbeready.ca.

Follow Kelly Lapointe on Twitter @DCNKelly.

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