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Combating the Underground Economy

  • Issued: December 16, 2010
  • Content last reviewed: December 2010

In 2004, the Ontario government first committed to targeting the underground economy in the construction industry. To fulfil this commitment, many ministries and agencies have worked together to identify underground activity and address the many aspects of non-compliance that go along with it. In spite of these efforts, the underground economy remains a serious challenge. It is a major source of revenue loss to both government and the workers’ compensation system, it threatens the competitiveness of legitimate businesses, it compromises the health and safety of workers and the public, and it undermines employment standards and apprenticeship programs.

A number of specific initiatives to combat the underground economy in construction are currently underway or being planned. Some key participants in these activities include the Ministries of Labour; Revenue; Training, Colleges and Universities; Municipal Affairs and Housing; Government Services; the Canada Revenue Agency; the Workplace Safety and Insurance Board; Tarion Warranty Corporation; and the Electrical Safety Authority. A concern expressed to the Panel was that the government’s efforts to reduce the underground economy, although promising, are proceeding without a central point of oversight, and without co-ordination.

A common element of the current initiatives is the sharing of information among regulators about the compliance of employers with laws related to taxation, occupational health and safety, business registration, employment standards, workers’ compensation and trades’ qualifications. Such information sharing is critical to the identification and deterrence of underground operators, but there are challenges related to data compatibility, protection of privacy and co-ordinating efforts.

In 2007, the Ontario government passed the Regulatory Modernization Act (RMA) to make it easier for regulators to share and publish compliance-related information; to collaborate on enforcement activities; and, for officers and inspectors enforcing provincial legislation to share field observations (give one another a “heads up”). The RMA generally applies to provincial legislation that has been prescribed in the Designations Regulation. The Panel believes that regulators should identify additional opportunities to share information, carry out multi-ministry/agency enforcement activities, and make better use of the “heads up” provision.

The Panel heard of the importance of legitimate employers becoming further engaged in combating underground business practices. In the Incentives section of this report, the Panel recommends financial rewards for employers who qualify suppliers on the basis of their health and safety performance. If such rewards were also tied to doing business with suppliers who operate legitimate companies, it would be seen as an important contributor to reducing underground activity.

The Panel’s recommendations focus on establishing dedicated leadership of the government’s current multi-agency strategy, better intelligence gathering and sharing, and targeted interventions designed to disrupt illegal and unsafe activities.

Recommendation 18

The government should make a single provincial entity responsible for overseeing and co ordinating a province-wide strategy to address the underground economy. This strategy could include links to federal and municipal initiatives.

Dedicated leadership and the co-ordination of a province-wide strategy to address the underground economy would maximize the effectiveness of individual initiatives currently underway, as well as their collective impact. The transition from local pilot projects to province-wide activities would be easier, as would the building of new partnerships for future initiatives, within Ontario and across jurisdictions and other levels of government.

Under a province-wide strategy, regulators would use the experience gained from current multi-ministry/agency compliance initiatives to collectively develop and carry out new ones. In the short term, these initiatives would continue to focus on the underground economy in the construction sector. In the longer term, enforcement campaigns would also target other sectors. Stakeholders have reported underground activity, including the presence of undocumented workers, in other industries, for example, restaurant, transportation, building cleaning services, farming and the garment trade.

From the Panel’s perspective, another important means of fighting the underground economy lies in influencing consumer behaviour. The Panel recommends periodic, province-wide campaigns to raise public awareness of the negative impact of the underground economy in the home renovation industry and the personal liability risks of hiring an underground contractor. The government could approach local homebuilders’ associations, home renovators’ councils and the building supply industry to help promote the message. Municipalities could be engaged to provide applicants for building permits, especially homeowners, an information package about underground contractors, and about general health and safety obligations.

Recommendation 19

The entity overseeing a province-wide strategy on the underground economy should consult regulators and the Ministry of Economic Development and Trade on expansion of the Designations Regulation under the Regulatory Modernization Act, 2007 in order to enhance the capacity of regulators to detect and combat underground activity.

Implementing this recommendation would involve a collective review by regulatory ministries to identify relevant statutes, provisions of statutes, or regulations that could be designated under the RMA. The Panel supports maximizing the potential of the RMA and proposes that government consider designating selected provisions of the Workplace Safety and Insurance Act, 1997 for the purposes of the “information sharing” and “multiple authorizations” provisions.

Recommendation 20

The Ministry of Labour, in collaboration with other regulators and levels of government, should take steps to acquire information and data that health and safety inspectors would use to identify and reduce underground economic activity.

The Panel supports making more information about construction projects and contractors available to the MOL, other regulators and the public. Specific steps the MOL could take include, for example, making amendments to the Regulation for Construction Projects that would require a constructor to:

  • post the Notice of Project (NOP) in a conspicuous place at the project;
  • file the registration form (Form 1000) describing subcontractors at a project electronically with the MOL, and keep it up to date;
  • in a place visible to the general public, if the project is a home renovation, post the name and WSIB registration number of the constructor, and the hotline number (1-877-202-0008) to report concerns to the MOL.

Requiring that the NOP be posted would ensure that specific information about the constructor (for example, master business licence number; WSIB account number) is visible to all parties on site, including enforcement staff of other regulators likely to be at the project from time to time, such as municipal building inspectors or Electrical Safety Authority staff. This, in turn, makes it easier to ensure that a constructor is complying with requirements to notify the MOL of a project, and is operating a legitimate business.

Mandatory electronic filing of registration information (Form 1000) with the MOL would permit inspectors to verify company registrations under other statutes, such as the WSIA, and then alert other regulators to violations that could be linked to underground practices or that otherwise compromise health and safety. (Full implementation would depend upon the MOL having the capacity to maintain an appropriate database.) Engaging the public would increase the likelihood of detecting unregistered and unsafe residential construction work, and reinforce efforts to change societal attitudes about workplace accidents and underground business practices.

The Panel recognizes that to effectively enforce the proposed amendments to the Regulation for Construction Projects, MOL inspectors need to be able to do more than issue orders. Therefore, the Panel recommends that inspectors have the ability to issue tickets to a constructor for non-compliance with requirements to post and/or submit the NOP to the MOL; registration requirements; and requirements to post other information at a project, as prescribed.

The ability of MOL inspectors to enforce occupational health and safety requirements on construction projects and to detect underground practices may also be strengthened by giving them access to information recorded on building permits issued by municipal authorities. Inspectors have advised the Panel that underground operators often do obtain a building permit but fail to submit the required notice of a project to the MOL. The MOL and Ministry of Municipal Affairs and Housing are currently developing a pilot project under which a few large municipalities would share such information with the MOL.

Following completion of the pilot project, if an evaluation reveals that building permit data are of significant value to MOL inspectors, and that information-sharing agreements with municipalities are not an effective means of giving inspectors this data, the Panel would support amendments to the Building Code Act as a way to ensure consistent, province-wide access to building permit information for the MOL.

Recommendation 21

The Ministry of Labour should target workplaces and sectors operating in the underground economy for proactive inspections after normal working hours.

The Panel heard much about underground work being conducted on evenings and weekends to avoid detection by inspectors. The MOL’s current policies and procedures to enforce the OHSA should include proactive inspections on evenings and weekends. This would increase the probability of detecting employers operating in the underground economy, and is also likely to be one of the few ways to directly improve working conditions for vulnerable workers, especially those who are undocumented or refugees, and generally known to work in the underground economy. Identifying specific workplaces may be a challenge, but could be achieved, at least in part, through active outreach to organizations that support vulnerable subgroups of the general workforce.

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