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Small businesses: Rulebreakers get an edge


She could save money, and there’s a good chance she wouldn’t get caught, but Consuelo Gomez says she won’t hire people who aren’t authorized to work in the U.S. to work for Marty K, her cleaning and landscaping business.

Gomez says she believes that she’s being undercut by competitors that hire workers who are in the U.S. without permission from the government. When potential clients tell her that her competitors can do the same work for a lot less, it makes her suspicious.

“I’ll hear, ‘they’re $2,000 cheaper than you,’ and I say, ‘that’s impossible,’ ” says Gomez, whose business is located in Bellevue, Wash. “I can’t fathom how they do it because we would lose money.”

If Gomez’s hunch is correct, she’s dealing with a little talked about problem that a lot of small business owners say makes survival difficult. Competing with companies that hire immigrants who aren’t authorized to work in the U.S. is tough for a small business that follows the law because of the cost. Often, businesses pay ineligible workers less, and they also save on taxes.

Sixty-eight percent of business owners surveyed last month by the advocacy group Small Business Majority said too many companies gain an unfair advantage by hiring immigrants who aren’t eligible to work in the U.S. In 2008, the Pew Research Hispanic Center estimated that 8.3 million people were working in the U.S. without permission. Current estimates put the total number of people in the U.S. without permission at about 11 million. The issue is in the forefront now as lawmakers propose ideas to reform the country’s immigration laws.

“What small businesses want the most is a level playing field where they can compete fairly,” says John Arensmeyer, CEO of Small Business Majority. “Unless we fix the immigration system, small businesses are going to continue to operate at a disadvantage with companies that aren’t following the law.”

The use of ineligible workers divides small business owners. Many don’t want to speak openly about whether or not they hire people who don’t have permission to be in the U.S. Those who do hire ineligible workers don’t want to say publicly that they’re breaking the law, and that they benefit from paying them less.

“Our members have told us that while they follow the rules - committing time and resources to the hiring process - they remain frustrated with their competition when they cut corners and don’t adhere to the same rules,” said Kate Bonner, manager of House legislative affairs for the National Federation of Independent Business.

The number of businesses that hire ineligible workers is hard to pin down, although a study last year by the Federal Reserve Bank of Atlanta found that 1.6 percent of the 365,000 businesses it examined in Georgia had employees who weren’t authorized to work in the U.S. It also showed that those employers had an advantage. Companies that employed people not legally authorized to work in the U.S. had a 23 percent chance of failing, compared with an average for all companies of 28 percent. The study confirmed what anecdotal evidence has shown: Businesses get a competitive benefit from hiring people who don’t have permission to work in the U.S., says Julie Hotchkiss, one of the study’s three authors.

“If you employ undocumented workers when your competitors aren’t as well, that gives you the biggest boost,” she says.

The study examined records of Social Security numbers at companies to find workers who weren’t eligible. Hotchkiss noted that because the study used company records, it could not count the number of workers who were paid off the books — so the total number of companies hiring unauthorized workers was likely higher.

It’s widely believed that ineligible workers earn far less than people who are eligible to work in the U.S. That’s not always the case. A 2002 study by researchers at University of Illinois at Chicago found that the average hourly wage earned by ineligible workers was $7, higher than the minimum wage of $5.15 at the time. To reach that average amount, many workers had to be earning below $7. But the competitive advantage that comes with hiring people not authorized to work in the U.S. is not just about salary. Companies also pay Social Security and Medicare taxes on each worker. For example, a company with a $500,000 annual payroll is required to pay more than $38,000 in federal taxes. States may collect additional payroll taxes from businesses. Soon, many small business owners will be required to provide affordable health care insurance, or pay a penalty. If a business is paying a significant number of workers off the books, it can save it thousands of dollars a year.


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