"Underground economy" puts strain on legitimate California businesses

Not that long ago, the phrase "underground economy" evoked images of gangsters and drug dealers who operated outside of the mainstream business world out of necessity to keep their activities from drawing the attention of law enforcement. Now, though, while it still likely involves the criminals of yore, the underground economy has swelled to include much more respectable employers and employees (like carpenters, contractors, computer repair services, grocers and countless others) that are operating off the grid for other reasons.

What is the underground economy?

According to the State of California's Economic Development Department, the underground economy consists of those individuals and companies who either deal primarily in cash or use other methods to "conceal their activities and their true tax liability from government licensing, regulatory, and taxing agencies." The majority of the estimated $2 trillion dollars generated annually by the nation's underground economy - approximately $6.5 billion of which comes from California - involves the non-reporting or under-reporting of income or sales profits to avoid:

  • Tax consequences, including both individual tax responsibilities and business ones
  • Safety regulations passed by California Division of Safety and Health (Cal/OSHA) and federal level OSHA, saving money that would otherwise be spent on keeping the workplace in a safe condition
  • Legally mandated workers' compensation and unemployment insurance

Why does it matter?

A common question uttered in the media about the state's underground economy is: "Why does it matter?" This can lead some to believe that illegal activities of other businesses or employers have no bearing on them, leading them to a "live and let live" kind of mentality. The truth is, though, that legitimate businesses bear the brunt of the impact of the illegitimate ones, in the form of higher taxes, increased insurance premiums, lost bids and even decreased property values.

The effects are particularly hard-hitting in the work comp setting. This has led some companies to forego legally mandated workers' compensation insurance, not because they are trying to skirt the regulations or don't care about the security of their employees, but simply because they can't afford it, the premiums having been driven so high by companies acting outside the confines of the law. Sadly for them, that is no excuse for lack of coverage and their failure to procure such insurance only adds to the problem.


The underground economy in California and around the country has an impact on every American. While state agencies like California EDD's "underground economy operations division" and the Attorney General's "underground economy unit" are doing their best to ensure uniform compliance with laws governing workplace safety, tax compliance and mandated workers' compensation insurance coverage, the problem is widespread and will probably thrive as long as there are companies willing to break the law; and there seem to be plenty of those.