Under-the-Table Employees are Skating on Thin Ice!

Employees are expensive. Employer payroll taxes and worker's compensation insurance add significantly to the cost, over and above the wage rate paid to the employee. Complying with labor laws and filing the required payroll tax returns take time and resources. Many business owners get around this by classifying people as "independent contractors" or even by paying them cash and not reporting the cost, known as paying "under the table".

The people they hire often go along with this because they don't get payroll taxes withheld and often get paid a premium if the employer doesn't have to report the wages and pay the additional costs. So what's the downside?

The downside for the "under-the-table" worker is that they are not covered by unemployment insurance, disability insurance or worker's compensation. In addition, their wages don't go into their Social Security base. Plus it's illegal to not report income. Those are risks many are willing to take, or they just don't realize that this is the case, until they come face-to-face with the consequences.

A friend's daughter just ran up against this the hard way. Working under the table in a high-risk recreational industry, she was severely injured and is currently in the hospital undergoing treatment. Thankfully, she has medical insurance, and is doing well, but she is not going to be able to work for quite a while, and has no coverage for disability or worker's compensation. And her injuries are likely to cause her ongoing problems for years to come. The costs of this accident to the worker are going to be too high to dismiss as a risk of working under the table, and a claim will most likely be made to worker's comp.

The owner of the business will probably be getting some heat from the employment agencies and worker's comp authorities. Because of the high injury rate in this industry, the worker's comp rates are among the highest in the state, so it's a common practice to not report workers. Businesses who comply with the employment laws are often forced out of business by the costs, so it's understandable. But an incident like this can put the owner out of business anyway, by the time taxes, penalties and costs are paid. In addition, the businesses who don't pay the costs associated with complying with the law are unfair competition for those companies who do comply.

A sound business model needs to incorporate ALL the costs of doing business. Paying someone extra to dodge the employment costs may seem fair, but the incident described above make it clear that this is not fair to the employee, and can ultimately be the undoing of the business.