Working for Cash: America’s Wage Problem
Caption: Press conference by Los Angeles Alliance for a New Economy on wage theft.
Credit: Los Angeles Alliance for a New Economy (LAANE)
The United States is, among advanced nations, practically the only one in which the payment of legal wages remains an option at the discretion of the employer. The theft of wages, either outright or through the manipulation of hours and records, has become so severe in some industries as to constitute the norm rather than the exception.
This situation reflects the crisis of a modern neoliberal economy wherein mild efforts at wage law enforcement cannot surmount structural barriers and the hard demands of markets. It is conceivable that the problem has reached a point beyond remedy, not least because the overwhelming pressure of circumstances forces workers to become complicit in the violation. Most workers are covered by the federal Fair Labor Standards Act and often by the requirements of a particular state’s labor laws. The main problem for both the enforcing agencies and the public is that nearly all cases originate in complaints by workers, rather than from any effort at prevention or early detection by the government. The best indication of the importance of wage theft in the scheme of things is revealed in the relative emphasis placed on staffing and auditing in the Internal Revenue Service (IRS) versus the Wage and Hour Division (WHD) of the U.S. Department of Labor. The IRS has a nationwide staff of approximately 2,600 field investigators, while the entire WHD has about a thousand to cover the same number of American wage earners. Moreover, the IRS intends to boost its investigative staff by an additional 7,239 enforcement staff over two years, (through the Inflation Reduction Act of 2022) compared to the WHD’s plan to bolster its staffing by a hundred. The average American will make contact with the IRS at some time, but neither workers nor employers can ever expect a visit from a WHD investigator, whether federal or state. The difference of course is that taxes fund the government, while the loss of wages affects only workers.
[While] the general trend of violations is upward . . . the best remedy, in terms of staffing and agency funding, heads in the opposite direction.
The study of wage theft is plagued by problems similar to the analysis of crime in general, with some peculiar to the field. It is axiomatic that criminal felonies are detected at a small fraction of their true commission, and the same holds true for wage offenses. For that matter, there is a strong tendency to cover the needs of complainants, to the detriment of others in similar or identical situations in the subject firm who have not complained, or who did not participate in the investigation. The enforcement rule of thumb is that nine of ten wage violations are never detected, and that of the remainder, about half are resolved in favor of the workers, with the true extent of violations, even within the investigated firm, seldom known. Even where wage theft is documented due to a successful investigation of violations, the varied nature of government recordkeeping across agencies and the non-recording of settlements and voluntary repayment render the available data unreliable.
Merely paying a worker without standard deductions constitutes a wage violation; given this, the average day laborer is victimized every time a job is performed.
For example, a straight failure to pay wages discovered by the federal WHD will be remedied by demand for payment of the federal minimum, rather than the actual promised wage amount. With the average industrial wage in April of 2023 at $33.36 an hour, and the federal minimum at $7.25 an hour, a typical worker could expect, and statistics reflect, less than a quarter of the actual unpaid wages. For that matter, the federal method of computing overtime by the “additional halftime” method rather than true time-and-a-half provides that overtime will be arrived at by a method which reduces the base upon which overtime due is calculated as more hours are worked in a particular workweek. Another problem arises when employers either keep no records or falsify existing records to reflect fewer hours than were actually worked. These circumstances are especially true in the most problematic industries, such as garment work, construction, and farm labor. In these cases, the investigator must reconstruct payrolls according to employee statements and other evidence, a method which tends toward conservative assessments that can pass internal review and be acceptable to the employer, whose refusal to pay generally ends the hope of receiving back wages.
Two facts are uncontestable: that the general trend of violations is upward, and that the best remedy, in terms of staffing and agency funding, heads in the opposite direction.
Investigating Wage Theft
In 1988, I began work as an investigator with the Newark, New Jersey, office of the WHD of the Department of Labor. This work involves the discovery and resolution of wage cases across the broad spectrum of federal law, from minimum wage and child labor to prevailing wage cases and much more, most falling under the Fair Labor Standards Act. Then-President Reagan was in the process of getting government off the backs of the American public, and I was part of the burden he eliminated, by forbidding advancement to the extent that the job became untenable. I then accepted a job with a construction union trust. My employers hired me to detect and resolve wage violations in an industry whose union operators were under stress because their competition bid and worked under no rule, whether of a collective bargaining agreement or ordinary wage standards. Five investigators were assigned to cover Los Angeles County for a single trade, and we by no means had a handle on the problem. Where the union was expected to pay a $40-an-hour package to its workers, the nonunion firms paid half as much and, moreover, cheated on overtime to an appalling extent. I found violations very easily, through interviews with workers on job sites, or via reviews of the certified payrolls submitted to contracting agencies. I routinely sent complaint packages to the state or federal wage offices for resolution, only to find that they were overwhelmed, especially in the area of construction violations. Even where I succeeded, a firm would simply change its name, emerging within days to pursue new work.
Contractor status is the perfect shield for wage violations in that it removes the worker from the status of an employee altogether.
Over the years, I changed jobs, working for three other construction trade associations, with the same situation in each. When I entered the field, union market share in California construction was approximately 25 percent. Two decades later, it was at 15 percent; today the union foothold is perhaps half that, with sectors such as residential work almost completely without union presence. In the days of its strength, unionized construction acted upon the nonunion market in a positive way by keeping wages high and setting an example, if not a hard standard, for honesty in employer relations, especially in proper and timely wage payment. The diminished union presence rendered fairness a costly, and in most cases, unrewarded virtue.
Later, I took work for public agencies who cared enough to monitor wage payment on their own public works projects. Despite hard rules, mandatory payroll submissions, and transparent bidding, public contracting was shot through with wage violations. Enforcement did little to stem the tide because such remedies as were available occurred after the award of contracts and the commencement of work. The one bright element was the rise in negotiated project labor agreements, but these were limited in scope, functioning essentially as a sort of lifeboat for union firms in a perilous sea of cheaters.
The Impact on Immigrant Workers
The second major change occurring over the course of my career was the set of impacts resulting from the influx of immigrant workers. America’s immigration policies vary over time, but one constant seems to be the creation of a vast underclass of underpaid workers to compete with those already present. The availability of workers unable to work legally has always meant those workers would accept whatever conditions were imposed upon them as a matter of survival. Beginning in the 1980s, I began to see scatterings of Mexican and Central American workers soliciting for work in the parking lots of paint stores and big-box hardware outlets in southern California. By the end of the century, this trickle became a torrent; by the first decade of the new millennium, these locations were a virtual cafeteria for wage complaints that formed the focus of my career. Most days of my work week began with a trip to one or another of these hiring lots. The sites were an immigrant soup, mainly Hispanic, but including Armenian, Chinese, Russian, and even Irish applicants. The overwhelming majority worked in construction and maintenance. Their problems were typical: failure to receive promised wages and the lack of overtime. These straightforward complaints should have been easy to fix, but much of the time, the workers could not identify the firm or even the persons for whom they had worked; hiring consisted of jumping into the back of a pickup truck. The lack of knowledge reduced the chances of receiving back wages considerably. Merely paying a worker without standard deductions constitutes a wage violation; given this, the average day laborer is victimized every time a job is performed.
A significant change occurred in the 1990s that widened the scope of violations. As the Mexican economy experienced recession and severe unemployment in the aftermath of the Peso Crisis of 1994 [1] (caused by the adoption of neoliberal standards in the form of the “Washington Consensus” reforms), a different type of worker appeared in the hiring lots. Where once the low-skilled workers had been the vast majority, now they were joined by Mexican immigrants with high-level skills, desperate for employment. Predictably, these new immigrants were forced to accept any wage or condition imposed, and workers already present were subjected to increased competition for jobs. Thus, conditions imposed upon Mexico turned into a generalized wage problem for the United States.
. . . [T]he practice [of wages in cash] took hold among restaurant kitchen help, delivery drivers, waiters, factory hands, cooks, machine operators, and almost anyone who did service or repair work in a residential setting.
Another important change also began near the end of the last century. Independent contracting, which had mainly been the province of long-haul truckers and a few professionals, spread outward and then exploded, especially among computer-industry workers. Contractor status is the perfect shield for wage violations in that it removes the worker from the status of an employee altogether. Given the coercive nature of employee relations in America, it was perhaps inevitable that this cure-all status would eventually be asserted by many employers, even in the most inapplicable situations. One example will suffice: I investigated a complaint by a computer programmer who claimed he had not been paid a final check. The employer, a multinational firm, is specialized in updating small business computers. They would send a worker out to do the job and pay according to a schedule of fixed fees. All workers were classed as independents although they worked only for the subject firm and provided no tools or equipment. The firm had another problem in that its workers were due considerable overtime, which was not paid because they were deemed contractors. Upon this issue hung the fate of both workers and the firm because denial of the contractor status would destroy the firm’s business model, along with the need for the alleged contractors.
In this case, the flaws in both the system and its remedies may be seen: The employer retains the right to determine conditions of employment, legal or not. Correction occurs only after the fact and only upon resolution of an actionable complaint. Quite often, the correction itself requires actions that have the effect of punishing workers. Frequently, the solution for unpaid overtime was to eliminate overtime altogether, to lower wages so that overtime would not be so much of a burden, or to establish a genuine contractor setup, which forces workers to work for lower returns than had been received as employees.
The assignment of the questionable contractor status rapidly spread to include the ubiquitous parcel delivery drivers employed by private carriers, bartenders, taxi drivers, and even the already-burdened construction workers. On many construction projects, it became common to see entire building crews working as independents, on a take-it-or-leave basis. In California, the issue has been legislated, litigated, voted upon by the public, and now returns again to the courts, in what seems like an endless struggle to clarify the basic rules for employment, which form the foundation of all wage standards.
Thus, we have seen three decades pass with the decline of trade unions, the abuse of immigrant labor, and the denial of employee status, all contributing to the difficulty in maintaining fairness in what ought to be the simple matter of working for wages. These three factors came together to write the final scene of the tragedy.
Around 2010, things hit the low point. I do not know whether there was a hard shift or I had simply missed the transition, but it seemed to me that everyone I spoke to, from back-kitchen restaurant help to tile setters, was being paid in cash, off the books; which is not simply cash payment, a thing which is legal as long as standard deductions are made and a pay stub furnished. This was payment in American currency, and nothing more. The phenomenon, commonplace among day laborers, had seeped upward and sideways into practically every manual job in industry.
I was used to seeing this among construction workers, but the practice took hold among restaurant kitchen help, delivery drivers, waiters, factory hands, cooks, machine operators, and almost anyone who did service or repair work in a residential setting. While interviewing workers, the commonest thing I heard was the Spanish-language term for cash-pay—en efectivo. The next commonest thing was, “it’s okay.” They were being paid, or underpaid, in cash, but they did not want to complain. This was not because they lacked faith in the investigation process, or because they were afraid of retaliation, although these factors remained. The simple fact was they had for the most part decided to become complicit in cash-pay schemes because they had abandoned hope for anything better. In a world where legal wages, to say nothing of overtime, would have to be fought for on every job, with all the risk and trouble entailed, they simply took the better route, accepted a handful of cash, and kept quiet.
Cash-Pay May Not Be the Answer
On both the side of the employer and the worker, cash-pay bears risks and benefits. In the past, it occurred because of the greed of employers who wanted to avoid the costs of wage taxes and fringe benefits. For the worker who lost out on Social Security and health coverage, there was at least the elimination of taxes. Of course, detection was always a possibility. In the past, relatively few firms, and fewer reputable ones, took the risk. Not very many workers submitted to the scheme, except those on the fringes of the employable population.
The world is a different place now. What were once vices are now habits. I do not have to visit the hiring lot to see this. Over the past few years, I have found it practically impossible to engage any firm to do work without encountering illegal cash-pay. I could not hire a house cleaner who would accept anything but payment in green money. Although I warned painting companies, air conditioning service firms, window installers, tree trimmers, and plumbers not to send me cash-paid workers, all of them did. Their workers were not recent immigrants, but long-resident practitioners of skills and trades, for whom the employer has become a mere intermediary who lops off a percentage of the take in exchange for a reference to the customer. If you ask, the employers will tell you that the burden of tax and benefits, including worker compensation insurance, is too high. As a matter of fact, they are telling the truth. Our lack of national health care, a genuine national retirement program, or really any comprehensive approach to societal needs sets the load on the back of honest firms and their fortunate workers—a tandem that is shrinking fast in California, hence the recourse to cash-pay. The violation is no longer committed by those seeking gain, having balanced risk against opportunity. Cash-pay has become a mechanism for survival, adopted by employers and increasingly accepted by their workers, especially when the alternative is no job at all. The bottom of the workplace has reached up and pulled everything above downward, with a force that is practically irresistible. At the top of the heap, we have firms trying to push everyone into independent contractor status; from the basement to the middle, we have attempts to force cash-pay on workers. The modern employer works hard to diminish both legal relationship and responsibility for workers, and workers accept it because they have no real alternative.
Over the past few years, I have found it practically impossible to engage any firm to do work without encountering illegal cash-pay.
Not long ago, I had a tree stump removed from my backyard. I called a company, asking them to take on the job, and provided my usual warning against illegally paid workers. On the appointed day, a young guy came out, driving his own pickup truck, which contained the firm’s machinery. This fellow, dressed in chinos, tee-shirt, and running shoes, proceeded to grind away at the stump and roots, a job of three hours in stifling heat. On a break, I asked him how he was paid. He replied, fifty dollars, in the green. I called the firm and was told “he’s just a nice kid who needs some summer cash.” Indeed. Apparently, many of the company’s workers were nice people who needed a bit of cash, and that was all they got.
It is now common for union construction firms to have their workers employed on weekends, either to complete jobs, or to commence hidden “side” work, on a cash-pay basis.
Trade unionists are wont to claim that the solution to this is to organize more workers into unions, where such violations cannot occur. Unfortunately, the unions themselves have been sucked into the vortex. It is now common for union construction firms to have their workers employed on weekends, either to complete jobs or to commence hidden “side” work, on a cashpay basis. My brother, a union plumber, readily accepted such work; my stepson does as well. If not paid en efectivo, the worker is simply given a check for a particular amount, designated as a “tool refund,” “travel expenses,” or “for gasoline.” While working for the public agency that runs the subways for the County of Los Angeles, I found payrolls (union and otherwise) sprinkled with such additional payments, which were used to pay overtime at straight-time rates rather than time-and-a-half.
My last formal employment was with a large California county which had, for various political reasons, decided to enact its own higher minimum wage standard. My job was to develop policy and communicate requirements to the public. At the same time, various cities in Los Angeles County passed similar laws. Those of us concerned with this met to discuss strategies. I suggested that the officials from two of the larger cities engage with their stakeholders, principally high-end restaurants, to prepare them for the changes. In the end, these two big, very liberal, and ostensibly labor-friendly cities retreated from enforcement altogether, leaving their ordinances as dead letters. The reason was that the owners of restaurants announced that they had no problem paying a dollar more per hour, but the requirement that workers actually appear on the payroll would be impossible to meet. They claimed very few employees, perhaps half of those who worked in their kitchens and sculleries. The rest were essentially living ghosts, receiving cash-pay off the books. A representative of a restaurant owners association told me, “There’s no way we can survive if we have to pay everybody according to the law.” As for my own agency, their minimum wage was also not favored with any degree of enforcement and has essentially disappeared.
In design and operation, our government assumes that . . . employers will voluntarily do the right thing, despite overwhelming evidence to the contrary.
A hidden consequence of these cash arrangements is that the government at all levels is being starved of tax revenue. Apart from that, workers and their families suffer from lack of health insurance. A longer-term effect is that funds for worker compensation insurance are also diminished, putting a larger burden upon firms that do pay. Finally, the workers themselves end up with little if anything contributed to Social Security or other retirement funds. Cash-pay is a gift that keeps on taking, for years beyond the initial event.
In sum, we find ourselves now at the endgame of a crisis caused by historically weak oversight of employment practices, declines in organized labor’s presence and influence, manipulation of immigrant worker vulnerability, abnegation of the traditional relationship of employers to workers, and normalization of illegal cash-pay. This is not our parents’ world of work, and their solutions are unlikely to correct the problems.
The connecting factor among these failures lies in the power relations between private industry and a free-market-oriented government whose incursions into employment relations are few, belated, and largely ineffective in terms of remedy. In design and operation, our government assumes that, in the area of wages, employers will voluntarily do the right thing, despite overwhelming evidence to the contrary. I am not in the least confident that we will see the sort of systemic changes that alone can bring order and fairness to the American workplace. Under our current system, any action can only be ameliorative. Even so, and given this reality, I recommend the following:
• Agencies that pursue wage violations via complaint-driven processes must shift to a preventive mode by requiring proof of correct wage payment in the same manner and with the same frequency as for employer taxes. Firms should be inspected frequently, at random, to ensure compliance.
• Workers should be considered employees without specific approval of alternate status by a state or federal agency.
• The payment of cash-off-the-books ought to be made a violation of criminal law where the practice involves multiple employees or repeat offenses.
The federal government must take real steps to reduce or eliminate the insecurity and imperilment of immigrant workers. Current immigration policy is the result of indecision, hypocrisy, and prejudice, underlain with a cynical tendency to take advantage of immigration turmoil for political gain. An honest, humane, and realistic policy would go a long way to eliminating wage cheating and reduce the downward effect that such violations against immigrants have upon all workers’ pay and conditions.
More than anything, my career demonstrates the extent and durability of America’s wage problem. For 35 years, I have attacked an insoluble problem with a weak set of tools, a costly supplement to the official bodies engaged in the same pursuit. It has been tough, interesting, and occasionally rewarding, but I wish that it had never been necessary.
Note
1. For background on this subject, see Joan Monras, “Immigration and Wage Dynamics: Evidence from the Mexican Peso Crisis,” Journal of Political Economy 128, no. 8 (August 2020); for a contemporaneous overview of the issue, see “Devaluation and Mexico to US Migration,” Migration Dialogue 2, no. 2 (February 1995), https://migration.ucdavis.edu/mn/more.php?id=553.
Author Biography
Michael J. McGrorty has spent thirty-five years enforcing wage standards for the U.S. Department of Labor, various public agencies, and labor-management trusts. He has taught labor relations in the California State University system.
