The Underground Economy

The underground economy refers to people and businesses that hide their activities or income, so they don’t have to pay taxes or follow licensing, regulations, and tax laws. This  includes things like paying workers in cash, not reporting income, or hiring workers off-the-books. These actions are not fair to honest businesses and take away important protections for workers.

It’s hard to know the exact size of the underground economy, but it impacts everyone including residents, business owners, workers, and consumers.

California’s economy depends on the success of its businesses. To succeed, businesses need to compete fairly. California has laws and regulations that businesses must follow, and when some business owners don’t follow them, they have an unfair advantage.

Impacts of the Underground Economy:

  • Weakens Important State Programs
    When taxes are not paid, there is less money for programs like Unemployment Insurance, Disability Insurance, Paid Family Leave and more.
  • Creates a Disadvantage for Business Owners
    Businesses in the underground economy often illegally reduce their costs by not paying for insurance, payroll taxes, licenses, employee benefits, or the required safety equipment. This gives them an unfair advantage and can lead to honest businesses paying higher taxes and expenses.
  • Places Workers at Risk
    Workers may face unsafe working conditions or not get paid what they are owed. Their benefits can also be denied or delayed because their wages are not properly reported.
  • Affects Consumers
    Consumers can be at risk when they use services from unlicensed businesses. Licensing helps make sure businesses have the skill and knowledge to protect the public.

Underground Economy Operations (UEO)

The EDD UEO was created in 1993. The mission of the UEO is to reduce unfair business competition and protect the rights of workers by:

  • Enforcing tax, labor, and licensing laws.
  • Finding businesses that are not following the rules. This includes unreported cash pay, wages reported on Forms 1099, and unpaid payroll tax deductions.
  • Educating employers and the public about payroll tax laws and the consequences of being part of the underground economy.
  • Stopping unfair business competition.
  • Helping workers get proper pay, benefits, and protections.
  • Making sure businesses are properly licensed and that they follow the state’s consumer protection laws.
  • Reducing the tax gap by increasing compliance with tax laws to maximize the state’s General and Special Funds revenues.

The EDD UEO participates in two primary task forces:

Joint Enforcement Strike Force (JESF)

On October 26, 1993, the Governor signed Executive Order W-66-93, which created the JESF. The Governor then signed Senate Bill 1490, which made the Executive Order official state law as Section 329 of the California Unemployment Insurance Code starting January 1, 1995.

JESF investigates when there is reason to believe that businesses are breaking the following laws:

  • California Unemployment Insurance Code
  • California Labor Code
  • Business and Professions Code
  • California Insurance Code

The EDD is the lead agency of the JESF and the EDD Director or their representative serves as the JESF chair. Members include, but are not limited to:

Labor Enforcement Task Force (LETF)

LETF is led by the California Department of Industrial Relations. The EDD and other state and local agencies work together to ensure employees are paid properly and have safe working conditions. They also help honest, law-abiding businesses to have the opportunity for healthy competition.

Members of the LETF include the:

If you have information that a business is not paying payroll taxes, you can:

You can choose to remain anonymous when making a report. Due to privacy laws, EDD can never share information about the business or our investigation results.

Each year by June 30th, the JESF sends a report to the Governor and Legislature on their activities and accomplishments.