Outsourcing as Core Business Strategy Can Lead to Depressed Wages and Working Conditions, New Report Says

Report Shines Light on Efforts to Hold Employers Accountable for Subcontractors’ Labor Abuses

WASHINGTON, D.C.—Businesses are increasingly relying on outsourcing and multi-layered subcontracting structures to fill jobs, which too often results in lower wages and dangerous working conditions, according to a new report by the National Employment Law Project.

The report, Who’s the Boss: Restoring Accountability for Labor Standards in Outsourced Work, finds that outsourcing is one of the central factors driving down wages and working conditions in the post-recession economy. The practice allows employers to evade labor laws, avoid payroll taxes, push costs onto workers, and shirk their responsibility to provide basic benefits. It also leaves workers in an ambiguous legal status with no clear path to hold their employers accountable for abuses like stolen wages.

“Workers increasingly serve businesses that do not officially ‘employ’ the worker—a distinction that hampers organizing, erodes labor standards, and dilutes accountability,” said Catherine Ruckelshaus, general counsel with the National Employment Law Project and a co-author of the report. “Under existing law, a company that contracts out can be held responsible if a worker can prove joint-employer status. That requires litigation that is costly, slow, and is easily manipulated by companies that use contractors to shield themselves from liability.”

The report charts several different outsourcing structures and examines nine industries dominated by outsourcing and franchising: custodial services; fast food; home care; food service; warehouse and logistics; agriculture; temporary staffing agencies; port trucking; and public contracting. Within each industry, NELP breaks down the number of workers and their demographic characteristics, the percentage of workers hired by subcontractors, their median wage and the reported incidences of stolen wages.

The findings show that outsourced workers’ wages suffered compared to their non-contracted peers, ranging from a 7 percent dip in janitorial wages, to 30 percent in port trucking, to 40 percent in agriculture. Food-service workers’ wages fell by $6 an hour when compared with direct hires.

Outsourcing can also lead to wage theft as lead companies encourage low-bid contracting and squeeze lower-level businesses competing for work. In the fast-food industry, which employs a workforce of 3.8 million people, 89 percent of workers report wages stolen out of their paychecks. Among the nation’s two million home care workers, 82.7 percent reported not being paid overtime wages, and 90.4 percent reported not being paid for time they worked off the clock.

A recent study of low-wage workers in New York City, Chicago and Los Angeles suggests that wage theft cost the average worker 15 percent of their weekly earnings. That means workers in industries with high rates of outsourcing lose $56.4 million each week as a result of labor violations. Taken on a national scale, these losses add up to a staggering amount of money taken away from working people, local businesses and state funds.

By withholding wages and benefits and shifting costs onto workers, companies that misclassify workers as independent contractors save up to 30 percent of their payroll costs, undermining competitors that treat their workers fairly and depressing standards for entire industries. Misclassifying workers also enables employers to illegally suppress their payroll-tax costs and workers’-compensation and unemployment-insurance premiums, exacting a steep toll on state and federal coffers. A 2009 report by the GAO, for example, estimated that worker misclassification cost federal revenue about $2.72 billion.

“Outsourcing is becoming an integral part of the way that businesses operate in America, and many workers are paying the price,” said Sarah Leberstein, staff attorney with the National Employment Law Project and a co-author of the report. “We need to build accountability into these new structures to ensure that workers have recourse for violations of core labor standards, for example, if they are denied wages or forced to work in unsafe conditions.”

The National Employment Law Project will host a summit in Washington, D.C. on May 12 and 13 about outsourcing to spotlight problems, highlight innovative enforcement approaches, share organizing strategies, advance legislative campaigns, and explore business models and policies that can reverse the trend toward poor job quality. In addition leading experts and activists shaping employment policy at the state and national levels, one notable speaker will be David Weil, the U.S. Department of Labor’s new wage and hour administrator. Nominated last September, Weil was finally confirmed by the Senate at the end of April, and this will be his first conference in his new role.

Emma Stieglitz
emmas@berlinrosen.com
(646) 200-5307