Law Times

Page 12 January 7, 2013 Law Times • FOCUS WSIB tackles underground economy in construction industry BY JUDY VAN RHIJN For Law Times O n Jan. 1, 2013, new rules for insurance coverage in the construction industry began gathering independent operators and sole proprietors into the Workplace Safety & Insurance Board fold. The rules centre around closing the independent operator loophole that has enabled false reporting and evasion of employee contributions to flourish. With education the current focus, scrutiny of the success of the changes will have to wait until enforcement finally kicks in. While most people would expect the cash economy to be the greatest cause for angst amongst regulators, in the construction industry the exemption of independent operators from insurance requirements has surfaced as the No. 1 concern. Bill 119 makes WSIB coverage mandatory for those independent operators, sole proprietors, some partners in a partnership, and some executive officers who work in construction who have no workers. Construction employers must also calculate, report, and remit the amount of premiums owed based on the insurable earnings paid to all of their workers. Spearheading the campaign for this change has been the Ontario Construction Secretariat that commissioned a series of reports tracking and quantifying the growing problem. In 1987, the secretariat found that 10.8 per cent of employed workers in the construction industry in Ontario were self-employed and didn't have employees. By 2003, the proportion of those who were self-employed and didn't have employees had increased to 20.7 per cent. More than 80 per cent of these workers were unincorporated, an indicator that their status as independent operators was doubtful. Katherine Jacobs, director of research and operations at the secretariat, explains the problem as follows: "A large amount of the underground economy outside of the residential sector was occurring amongst people claiming to operate as their own entity. Often, they are really just styled that way. They are really employees of a legitimate contracting firm." The benefit derived from the false declaration is that the employer can avoid obligations to make WSIB, employment insurance, and Canada Pension Plan contributions as well as requirements for vacation and holiday pay. In addition, employers with a payroll of more than $400,000 are liable to pay the employer health tax. In its 2004 report on the underground economy in Ontario's construction industry, the secretariat advised that in the industrial, commercial, and institutional sector, construction contractors can illegitimately reduce their labour costs by as much as 50 per cent. Apart from the financial cost and the unfair advantage obtained by the practice, the secretariat has noted a huge safety element. By removing themselves from the WSIB system, underground contractors have little incentive to provide safe working conditions for their workers. Profoundly unequal economic power and the boom-and-bust nature of construction employment leave many construction workers with no alternative but to accept work on substandard terms. "If people are acting as employees, it is imperative that they work in a safe environment," says Jacobs. "By requiring all workers to be covered, we can alleviate the problem of employees being forced to work that way." Steve Stieber at Stieber Berlach LLP also highlights the liability issues endemic in the practice. "If you have two individuals, both sole proprietors, and one causes an injury to another, what happens? 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MORE THAN A PHONE BOOK Visit carswell.com or call 1.800.387.5164 for a 30-day no-risk evaluation www.lawtimesnews.com but most will not. For their own protection and the protection of the person who caused the injuries, there should be a requirement for insurance." He also cites damage to property and tools or injury on the job site as likely scenarios that are currently unprotected. "If a carpenter falls in my house, with WSIB coverage he would have somewhere to take that claim. Now the injured worker has to rely on my insurance policy." Bill 119 will address the problem in the residential sector with the notable exception of the residential renovation industry. The new rules exclude individuals with no workers who work exclusively in residential renovation. "That is a huge sector where there are legitimately more independent operators," says Jacobs. Even in the mainstream sectors, enforcement is always going to be difficult. The construction industry is unique in the mobility, specialization, and high degree of self direction of its workforce. These traditions complicate the distinction between an employee and an independent operator and become even more complex due to long chains of subcontracting and dependent contractors. The secretariat found the WSIB's reliance on a clear-cut distinction between workers and employers to be at odds with the reality of the construction labour market. In recent years, the WSIB has increased enforcement efforts with more audits and site inspections and is now partnering with the Canada Revenue Agency to find people who are contributing to one thing and not another. In 2010, the secretariat concluded that new enforcement measures had stemmed the flow of new entrants into the underground economy, although they hadn't had any significant impact on those who already operate there. Stieber is unsure whether extending the normal WSIB coverage will have the desired effect on those people. "It remains to be seen if it's an effective measure. It will impact the underground economy but not knock it out by any means. Some operators will respond. Others I suspect will not." He does see an advantage in the ability of the WSIB to retroactively assess companies for premiums if there's an injury and they ought to have been under its purview. In fact, for the first year of the changes, the WSIB has decided to waive penalties and refrain from investigating or laying charges when employers or individuals are non-compliant with their obligations. "We want to make sure that everyone understands their obligations under the law," says WSIB spokeswoman Christine Arnott. "Failure to comply with the new legislation is an offence. However, for the first year we won't be prosecuting offences related to registration and clearances obligations under Bill 119." LT

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