Every year, employers in the U.S. steal an estimated $50 billion in wages from their workers, which makes wage theft the single largest form of illegal business activity according to the Economic Policy Institute (EPI). This egregious crime takes a variety of shapes, including some obvious ones such as paying less than minimum wage or denying overtime pay to qualified workers (misclassifying them as exempt), and more insidious forms such as deducting meal breaks from timesheets, charging workers for breaking a product, or requiring work to be performed off the clock.
The worst thing about wage theft is that it usually hits low-income and “gig economy” workers the hardest.
Case in point: In early November, Uber and Lyft agreed to pay New York drivers $328 million after the state attorney general investigated complaints that the companies were collecting certain taxes and fees from drivers rather than from the passengers who should have been paying them. To settle the case, Uber will pay $290 million, and Lyft will pay $38 to roughly 100,000 current and former drivers in New York State. They also agreed to provide gig workers with a minimum wage of $26 an hour and paid sick leave. “The ride-hailing companies did not admit fault in the settlement,” according to the NY Times.
Companies that misclassify home health aides and construction workers as independent contractors instead of employees, “are exposing those workers to economic costs and depriving them of fundamental labor rights,” the EPI reported this January. For example, a construction worker classified as an independent contractor could lose as much as $16,729 per year in income and job benefits compared with what they would have earned as an employee.
Wage thieves include some of the largest and most well-known employers in U.S. Not surprisingly, Amazon is near the top of the list, paying $18 million in November of 2022 to settle a class-action lawsuit in Oregon, and paid a $61.7 million fine in 2021 after regulators accused the firm of stealing tips from Amazon Flex drivers who use their own vehicles for deliveries, according to The Guardian. Investors are now asking Nike to address allegations of $2.2 million in wages stolen from workers at two supplier factories, Standard & Poor’s reported.
But these headline-grabbing cases are only a small part of the problem. Everyday wage theft doesn’t attract much attention at all, mainly because the vast majority of offenses go unreported (due to fear of retribution), and violators typically make the allegations go away by simply paying a small civil penalty, according to the EPI.
But that’s changing.
- In September, New York passed the Wage Theft Accountability Act, which changed wage theft from a misdemeanor to larceny, according to the office of Governor Kathy Hochul. Larceny is a criminal offense that carries a prison sentence of one to 25 years in New York.
- In Rhode Island, the Payment of Wages Act will make a “knowing and willful” wage and hour violation punishable as a criminal felony effective January of 2024, according to the Society for Human Resource Management. Employers who fail to pay wages of more than $1,500 or misclassify workers as independent contractors in the construction industry may face prison terms of up to three years and/or a fine of up to $5,000.
- The California Labor Commissioner’s Office and Los Angeles District Attorney’s Office in October launched the first criminal prosecution of a garment manufacturing business owner under California’s Penal Code Section 487m (Grand Theft of Wages), which was enacted on January 1, 2022.
- In Connecticut, companies found guilty of wage theft are required to pay workers double the amount of wages wrongly withheld, according to the United Steelworkers
Other Blue states are also likely to move in this direction in 2024.
On a federal level, it might be helpful for ESG investors to know that the U.S. Department of Labor’s Wage & Hour Division also pursues wage theft claims and collects unpaid wages through a program called Workers Owed Wages (WOW). The WOW website allows employees to search an employer’s name and state to see if the agency has collected any back wages they may be due.
Data supplied by the Wage & Hour Division might also be helpful for ESG investors who want to be on the lookout for signs of wage theft in industries where it is most common. The following back wages collected by WOW are from fiscal year 2022:
- Healthcare $32.5 million
- Construction $32.9 million
- Foodservice $27.1 million
- Building Services $9.9 million
- Retail $7.4 million
- Agriculture $5.8 million
“Wage and severance theft is unlawful, and therefore a key ESG risk for investors,” according to a European coalition of 285 trade unions and labor rights groups called Pay Your Workers. The coalition has created a “legally binding and enforceable agreement” it hopes will be signed by garment manufacturers, unions, and employees in the global garment industry called the Pay Your Workers-Respect Labour Rights (PYW-RLR) Agreement.
The topic of wage theft has even made its way into private equity investing, where dealmakers are increasingly aware of the reputational and financial risks it presents to potential buyers and sellers.
The consulting firm Baker Tilly offers a wealth of information about ESG issues and their impact on private equity deals on its website. “Whether it is wage-theft among low-paid workers or allegations of modern slavery in the supply chain, or just a senior leader with a reputation for appalling office conduct, the social risk of bad behavior is now too expensive for a bidder to ignore.”