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California Issues Fines Against Underground Pallet Companies
Underground Economy: California officials crack down on pallet companies that operate under the radar to avoid taxes and workplace laws. Q&A interview with California’s top labor enforcement official.

By Chaille Brindley
Date Posted: 4/1/2008

   Looking to crack down on businesses that don’t play by the rules, California Governor Arnold Schwarzenegger has targeted industries that tend to be magnets for the underground economy, including pallets. Earlier this month investigators for California’s Economic Employment Enforcement Coalition (EEEC) issued 49 citations for safety and labor violations with fines totaling more than $567,000.

   As part of a recent sweep of Bay Area pallet companies, investigators found numerous violations of state law and unsafe workplace conditions. This included: failure to pay minimum wage; failure to have workers’ compensation insurance and not providing itemized wage statements; disabled safety latches on circular saws and other power tools; failure to supply safety equipment such as safety glasses or earplugs, and safety training; and poor working conditions.

   Investigators found ungrounded electrical equipment, workers ankle-deep in mud, no toilets on site, and illegal on-site dormitory-style rooms with no heat, plumbing or electricity.

   Launched in July of 2005 by Governor Arnold Schwarzenegger, the EEEC is a multi-agency task force designed to root out California’s underground economy by enforcing California labor laws and educating business owners and workers about those laws and regulations.

   Robert Jones, the Labor and Workforce Development Agency’s deputy secretary for policy and enforcement recently talked with Pallet Enterprise about the EEEC’s efforts against underground pallet companies in California.


Pallet Enterprise: What is behind the latest worksite enforcement actions that recently took place in California?

Bob Jones: The Economic and Employment Enforcement Coalition (EEEC) is a joint coalition of state agencies whose primary function is to go out and attack the underground economy – to go out and find employers that are operating without complying with employment and tax laws in California. Those are the companies that make it impossible for those businesses that do comply to compete fairly and make a profit.

   That taskforce is comprised of people who spend three weeks out of every month in the field going out and sweeping various industries and targeted employers. Those industries include garment, farm labor, car wash, restaurants, construction, and now pallets. We constantly look for industries where we think there are a high proportion of illegal operations. This year we have added pallets because it requires little overhead, is easy to operate under the radar and uses a relatively unskilled workforce. The pallet industry will be targeted for at least the next couple of years until we can get a handle on getting some proportion of that industry in compliance.

   Our experience from the first sweeps in the Bay area is that almost every pallet recycler we found was operating illegally except for a few notable exceptions. Generally, you get a vacant lot, set up a generator, and hire a bunch of guys off the street. Your entire overhead is based on that one generator, some small saws, one horizontal bandsaw and some nail guns. These operations can be very transitory, unlicensed and an extreme fire hazard. It is easy for these companies to come into compliance.


Pallet Enterprise: What is the economic impact of these underground companies?

Jones: We are investigating unscrupulous businesses like these for their mistreatment of workers and creation of dangerous working conditions. By targeting enforcement against illegal operators, we help level the playing field and restore competitive advantage to law abiding businesses and their employees. Businesses engaged in the underground economy deprive the state and legitimate businesses of millions of dollars each year, and in many cases, pass the cost on to the consumer.


Pallet Enterprise: Did you come across illegal immigrants in your sweeps?

Jones: We have specific statutes in California that limit the state agencies from looking to see if the employees encountered at the worksites are legally present. Our job is just to enforce the tax and labor laws. Of course, there are people who are here illegally. But we don’t look at that.

   One of the reasons we held off for a year is because the time we first looked into this is when ICE decided to sweep the nation. That has passed. And we are now out doing sweeps. We will collect wages due to employees regardless if they are here legally and will get the money due them even if we have to send it to them in a foreign country.

   We don’t have much trouble being confused with ICE. We put employees at the back of the plants. As workers try to jump over the wall, we tell them who we are. They all generally come back in and tell us how bad things are. We get a lot of good information and hear about their relatives working down the street and what kind of situation they have. We did find some illegal housing. That is not a common thing in California outside of agriculture.


Pallet Enterprise: Other than the San Francisco Bay area, in what other areas have you conducted sweeps.

Jones: The EEEC did some in southern California. We did a trial in San Bernadino county first.

   We have inspected about 30 employers so far. We know where these illegal operators are. We use surveillance on these operations before we conduct sweeps. The EEEC will geographically do sweeps all over the state although it won’t be that many companies. The Division of Labor Standard Enforcement has field agents that will visit even more operations. I have already told the head of that department if you see a stack of pallets and don’t have anything else to do, you might just want to stop in because the chances are very high that it is an illegal operation. We will see quite a bit of activity in this industry based on random inspections or those generated by complaints or tips.

   Most of the enforcement will be directed at health and safety and wage violations.    


Pallet Enterprise: Is the EEEC planning more raids?

Jones: We will do more sweeps over the next twelve months. But we don’t announce ahead of time where we are going to target.


Pallet Enterprise: If it is so easy to up and move these operations, how do you make sure that your efforts have back end enforcement? You could come back a month later, and the operation has gone.

Jones: As far as we are concerned that is fine if they are operating illegally. We closed them down. The first indication that a company is in operation outside the legal area is that they won’t have worker compensation coverage. That is the first thing that we look for. If they don’t have worker’s compensation coverage, we shut them down on the spot.

   In the Oakland area, we shut down everybody that we inspected that day. The penalties for that are severe if you reopen after you have been shut down. The district attorneys for the state of California are paid out of a fund from the legally insured employers of this state. We have ongoing criminal prosecutions of any employer that works without worker’s compensation coverage.


Pallet Enterprise: What do you look for to identify compliance with state laws?

Jones: We don’t look for local business licenses. That is done by the cities and counties. We look for worker’s compensation coverage, and to make sure they are paying employees in accordance with California labor law. We will tag out and shut down equipment if it is dangerous. A lot of them are being run off of 220 generators. Those are never safe because they are not grounded.

   Employers have to pay minimum wage, meet safety requirements, have worker’s compensation coverage and an accident/illness prevention program. We have itemized wage deductions requirements. Employers have to provide a 30-minute uninterrupted lunch break for those during an eight hour work day. Those things have to be recorded on time cards. Wage statements need to be given to employees that indicate deductions.

   The companies that are operating legally have been very helpful in identifying illegal competitors.


Pallet Enterprise: Is there a way that legal companies can contact you to provide tips on the whereabouts of illegal competitors?

Jones: Yes, we direct those people to our Web site (http://www.dir.ca.gov/dlse/dlse-bofe.html).


Pallet Enterprise: Is the EEEC pretty innovative or do other states have something similar that targets the underground economy?

Jones: We think it is innovative. It has been running for about two and a half years. It is something that Governor Schwarzenegger’s administration put in place as soon as they came in. There was an earlier effort years ago called TIP, but that was discontinued under a Democratic administration. New York state has some operations in the underground economy. But I have not been able to find anything like the EEEC in other states. 

   The tax agencies in some states are more active than others because they are generally the ones that attack the underground economy. Aside from not having worker’s compensation coverage, we have a tax fraud division that is very active and works as part of EEEC. They will go after the employers for tax fraud.


Pallet Enterprise: Is worker’s compensation insurance required by state and/or federal law?

Jones: State law. The requirements vary somewhat but are pretty uniform across the country. The big thing that changes is the cost, which varies by industry and history.


Pallet Enterprise: How do you know to identify illegal versus legal operations?

Jones: There are some easy ways to do it. You drive by and see a company and look them up in a database and see that they don’t have worker’s compensation insurance. Another thing you look for is a company that is not reporting any employees or very few compared to the actual number on hand. You can look to see that there are no power lines coming into the facility, and you know they are working off generators.

   The fortunate thing about pallets is that they tend to get stacked pretty high, so it is not hard to miss those stacks.

   Generally, we have targeted recyclers and not new pallet companies. We did hit some companies with as many as 20 employees. One company had been operating illegally in the same location for 15 years. The building they were operating in was pallets that were stacked up 20 years ago and beams put over the roof. The walls of the building were starting to deteriorate over time.

   Employee complaints are another way that we know who to target.


Pallet Enterprise: I wouldn’t think the pallet industry has a huge problem with paying below minimum wage since it is such hard work. Most of the infractions that you found were related to safety or workmen’s comp coverage… right?

Jones: I don’t know what it is in other states. But what we found is that pallet repairs usually run about 50 cents per pallet, and they were doing about 200 per day. That certainly puts them within minimum wage. California is different than almost every other state. Overtime is due at the end of eight hours. If they are working ten hours, no matter how much they are paid piece rate, they are not being paid in accordance with our overtime requirement.


Pallet Enterprise: Do you have a problem with illegal operations shutting down as you go to sweep nearby locations?

Jones: It happens. But we don’t just have one team out in an area. We have multiple teams. They all get hit pretty much simultaneously. The employees don’t run that much. The supervisors tend to know what is going on. They tend to cooperate. The owners very often are not there. Or if they are there, nobody owns up to it. Many times they are relatives. It can be hard to determine who the owner is. In some industries, they change ownership to evade detection. A couple of these looked to me to be co-ops.


Pallet Enterprise: Can the customers be held accountable for working with suppliers involved in the underground economy?

Jones: No, pallet customers are not held liable. There are some industries in California where there is some vertical integration liability. That is pretty much just the garment industry. There are some special statutes where there is successor liability. There is also some liability presumption in janitorial and other low paying industries for the amount of money allowed to cover subcontractor costs.

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