[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
PROVIDING FAIRNESS TO WORKERS WHO HAVE BEEN MISCLASSIFIED
AS INDEPENDENT CONTRACTORS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON WORKFORCE PROTECTIONS
COMMITTEE ON
EDUCATION AND LABOR
U.S. House of Representatives
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, MARCH 27, 2007
__________
Serial No. 110-16
__________
Printed for the use of the Committee on Education and Labor
Available on the Internet:
http://www.gpoaccess.gov/congress/house/education/index.html
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COMMITTEE ON EDUCATION AND LABOR
GEORGE MILLER, California, Chairman
Dale E. Kildee, Michigan, Vice Howard P. ``Buck'' McKeon,
Chairman California,
Donald M. Payne, New Jersey Ranking Minority Member
Robert E. Andrews, New Jersey Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia Peter Hoekstra, Michigan
Lynn C. Woolsey, California Michael N. Castle, Delaware
Ruben Hinojosa, Texas Mark E. Souder, Indiana
Carolyn McCarthy, New York Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts Judy Biggert, Illinois
Dennis J. Kucinich, Ohio Todd Russell Platts, Pennsylvania
David Wu, Oregon Ric Keller, Florida
Rush D. Holt, New Jersey Joe Wilson, South Carolina
Susan A. Davis, California John Kline, Minnesota
Danny K. Davis, Illinois Bob Inglis, South Carolina
Raul M. Grijalva, Arizona Cathy McMorris Rodgers, Washington
Timothy H. Bishop, New York Kenny Marchant, Texas
Linda T. Sanchez, California Tom Price, Georgia
John P. Sarbanes, Maryland Luis G. Fortuno, Puerto Rico
Joe Sestak, Pennsylvania Charles W. Boustany, Jr.,
David Loebsack, Iowa Louisiana
Mazie Hirono, Hawaii Virginia Foxx, North Carolina
Jason Altmire, Pennsylvania John R. ``Randy'' Kuhl, Jr., New
John A. Yarmuth, Kentucky York
Phil Hare, Illinois Rob Bishop, Utah
Yvette D. Clarke, New York David Davis, Tennessee
Joe Courtney, Connecticut Timothy Walberg, Michigan
Carol Shea-Porter, New Hampshire
Mark Zuckerman, Staff Director
Vic Klatt, Minority Staff Director
------
SUBCOMMITTEE ON WORKFORCE PROTECTIONS
LYNN C. WOOLSEY, California, Chairwoman
Donald M. Payne, New Jersey Joe Wilson, South Carolina,
Timothy H. Bishop, New York Ranking Minority Member
Carol Shea-Porter, New Hampshire Tom Price, Georgia
Phil Hare, Illinois John Kline, Minnesota
C O N T E N T S
----------
Page
Hearing held on March 27, 2007................................... 1
Statement of Members:
Wilson, Hon. Joe, ranking minority member, Subcommittee on
Workforce Protections...................................... 2
Prepared statement of.................................... 4
Woolsey, Hon. Lynn C., Chairwoman, Subcommittee on Workforce
Protections................................................ 1
Article from the Chicago Sun Times, ``State Agencies
Investigating `Significant Problem': Some Employees
Unaware Until the Bills Come''......................... 33
Statement of Witnesses:
Flynn, John J., president, International Union of Bricklayers
and Allied Craftworkers.................................... 5
Prepared statement of.................................... 8
Letter dated April 9, 2007............................... 34
Horn, Cliff, president, A. Horn, Inc......................... 9
Prepared statement of.................................... 11
Ruckelshaus, Catherine K., litigation director, National
Employment Law Project..................................... 15
Prepared statement of.................................... 17
Shavell, Rich, CPA, president, Shavell & Co.................. 11
Prepared statement of.................................... 13
PROVIDING FAIRNESS TO WORKERS
WHO HAVE BEEN MISCLASSIFIED
AS INDEPENDENT CONTRACTORS
----------
Tuesday, March 27, 2007
U.S. House of Representatives
Subcommittee on Workforce Protections
Committee on Education and Labor
Washington, DC
----------
The subcommittee met, pursuant to call, at 10:34 a.m., in
Room 2175, Rayburn House Office Building, Hon. Lynn Woolsey
[chairwoman of the subcommittee] presiding.
Present: Representatives Woolsey, Bishop, Hare, Wilson,
Price, Kline, McKeon, and Holt.
Staff present: Aaron Albright, Press Secretary; Tylease
Alli, Hearing Clerk; Jordan Barab, Health/Safety Professional;
Lynn Dondis, Senior Labor Policy Advisor; Michael Gaffin, Staff
Assistant, Labor; Jeffrey Hancuff, Staff Assistant, Labor;
Brian Kennedy, General Counsel; Thomas Kiley, Communications
Director; Alex Nock, Deputy Staff Director; Joe Novotny, Chief
Clerk; Megan O'Reilly, Labor Policy Advisor; Michele Varnhagen,
Labor Policy Director; Andrew Weltman, Legal Intern, Labor;
Mark Zuckerman, Staff Director; Steve Forde, Communications
Director; Rob Gregg, Legislative Assistant; Jim Paretti,
Workforce Policy Counsel; Molly McLaughlin Salmi, Deputy
Director of Workforce Policy; and Linda Stevens, Chief Clerk/
Assistant to the General Counsel.
Chairwoman Woolsey [presiding]. Good morning. The
Subcommittee on Workforce Protections hearing on ``Providing
Fairness to Workers Who Have Been Misclassified as Independent
Contractors'' will come to order.
Pursuant to Committee Rule 12A, any member may submit an
opening statement in writing, which will be made part of the
permanent record.
I now recognize myself, and I will be followed by Ranking
Member Joe Wilson, for an opening statement.
I want to say good morning to all of you. Thank you for the
bright shirts. That will keep us awake.
And welcome to the witnesses. Thank you for being on time
and in your place so we can get going.
This is the first subcommittee hearing in this 110th
Congress of the Workforce Protections Subcommittee, and today
we are going to be examining the misclassification of workers
as independent contractors.
We know, of course, that there are true independent
contractors in the business world. So don't think for a minute
we don't understand that. But the thrust of this hearing will
be on workers who are misclassified, who are really, truly
employees within the law.
So our witnesses are principally from the building trade
today. They are going to tell us what is happening in that
industry. But it is clear that there is a problem about
misclassification in many, many other sectors of employment. So
we are not saying it is here and only here. We are just going
to learn from you and go from there.
And, of course, we all know that this practice affects the
most vulnerable workers among us, many of whom are part of the
underground economy, where there is no documentation of the
workers' relationship with the employer and where workers
actually are paid in cash. This practice hurts every one;
workers who are not afforded protection of labor laws, honest
contractors who can't compete with contractors who misclassify
their workers in order to have lower costs and all of society
because state and federal government lose billions of dollars
in revenue each year if employees are misclassified.
As our economy changes, and it is, and employers are
increasingly seeking ways to lower their costs,
misclassification can become a prevalent trend, and we want to
stop that.
I am especially concerned that misclassifying workers as
independent contractors would keep those workers from essential
employee benefits. One of these benefits is Workers
Compensation and the U.S. Department of Labor has stated that
the number one factor for employers in misclassifying workers
is the desire to avoid paying Workers Comp premiums and to
otherwise avoid workplace injury and disability disputes. And
we all know what that does to workers. They are cut out from
their Workers Comp if they are indeed in need.
In my own state of California, the problem is widespread.
The California State Department of Insurance has reported that
of 800,000 employers in the state, 30 percent do not carry
Workers Comp. Well, that is a state issue, of course, but if
employees are misclassified, that just adds to that.
So there is a national problem with implications for
federal laws and our federal coffers, and we must solve this
problem.
And, again, I welcome you, all of you, and I am looking
forward to your testimony and learning exactly what it is you
have to tell us.
I now yield to the ranking member for his opening
statement.
Mr. Wilson. Madam Chairwoman, ladies and gentlemen, and
particularly those of you in the orange shirts, I have a son
who is a freshman at Clemson University, and so I feel like I
am at a Clemson student meeting. The orange is very much
Clemson orange. And you can see it.
And so I want to extend a warm welcome to visit South
Carolina any time, and if you wear that shirt people will be
very happy--about half of them will be very happy. The others
are Gamecocks, so just understand.
Good morning.
Let me first commend my colleague, the gentlelady from
California, on assuming the chairmanship of this subcommittee.
Our committee has already had a full agenda this year, and I
welcome this meeting of the Workforce Protection Subcommittee
this morning.
Our subcommittee has jurisdiction over a broad range of
issues that affect more than 100 million workers in this
country every day, from hours of pay to over time to leave
requirements to trade and immigration policy. I also know this
subcommittee will follow the lead of the full committee, both
under the new chairman, Miller, and under the prior leadership
of Chairman McKeon, Boehner and Goodling in making sure that
our first principle is we may sometimes agree, but we need not
be disagreeable.
With respect to the hearing before us today, I expect there
are many areas in which we agree and areas in which we
disagree. I look forward to hearing from our distinguished
witnesses and in particular welcome a discussion of the current
state of law as it relates to the classification of workers as
employees or independent contractors.
I expect that each of our witnesses will explain the
current system as complicated and as an administrative burden
that does not serve employers, employees or the federal
government very well. If a team of lawyers is necessary to
determine whether a worker is an employee or an independent
contractor, an employer working in good faith is saddled with
the time, energy and expense of trying to classify them
correctly, often with no guarantees that down the road they
won't be found to have gotten it wrong.
If an employee is misclassified, the federal government
faces revenues lost to unemployment and other taxes that should
have been paid to the Treasury. But perhaps most important, if
the system is such that it is complicated if not impossible to
know how anyone should be classified, it is the workers who
suffer. The employee who is misclassified as a contractor may
not get the benefits to which he or she is entitled. A
contractor who is misclassified as an employee faces increased
costs and loss of flexibility that may be the lifeblood of his
or her business.
In short, it benefits all parties, workers, employers,
contractors and others, to ensure that our laws are as clear
and as straightforward as they can be, and they are evenly
enforced and fairly enforced. Indeed, as I have traveled around
the district I represent and spoken to business owners,
particularly small business owners, that is a common thread I
hear, that most businesses want to follow the law and want to
do what is expected of them. Sometimes it seems we as
policymakers make it harder than it needs to be for that to
happen, something I hope we will consider going forward.
As we get into the details, I expect we may hear arguments
for different ways to go about that, but that, frankly, is what
the legislative process and particularly the committee process
is for.
So with that said, I hope and trust today we begin the
start of a thoughtful examination of this important issue and,
in particular, the close scrutiny of what if any changes
Congress should consider or adopt with respect to these
important workplace laws.
I welcome our witnesses today and yield back the remainder
of my time.
[The statement of Mr. Wilson follows:]
Prepared Statement of Hon. Joe Wilson, Ranking Minority Member,
Subcommittee on Workforce Protections
Good morning. Let me first commend my colleague, the Gentlelady
from California, on assuming the chairmanship of this Subcommittee. Our
Committee has already had a very full agenda this year, and I welcome
this meeting of the Workforce Protections Subcommittee this morning.
Our Subcommittee has jurisdiction over a broad range of issues that
directly affect more than 100 million workers in this country every
day--from hours of pay, to overtime, to leave requirements, to trade
and immigration policy.
I also know that this Subcommittee will follow the lead of the full
Committee both under new Chairman Miller and under the prior leadership
of Chairmen McKeon, Boehner, and Goodling, in making sure our first
principle is that we may sometimes disagree, but we need not be
disagreeable.
With respect to the hearing before us today, I expect that there
may be areas in which we agree, and areas in which we disagree. I look
forward to hearing from our distinguished witnesses, and in particular
welcome a discussion of the current state of the law as relates to the
classification of workers as employees or independent contractors.
I expect that each of our witnesses will explain that the current
system is complicated and an administrative burden that does not serve
employers, employees, or the federal government very well. If a team of
lawyers is necessary to determine whether a worker is an ``employee''
or an ``independent contractor,'' an employer working in good faith is
saddled with the time, energy, and expense of trying to classify them
correctly--often with no guarantee that down the road they won't be
found to have gotten it wrong. If an employee is misclassified, the
federal government faces revenue lost on employment and other taxes
that should have been paid to the Treasury. But perhaps most important,
if the system is such that it is complicated if not impossible to know
how someone should be classified, it is workers who suffer--the
employee who is misclassified as a contractor may not get the benefits
to which he or she is entitled; a contractor who is misclassified as an
employee faces increased costs and a loss of flexibility that may be
the lifeblood of his or her business.
In short, it benefits all parties--workers, employers, contractors,
and others--to ensure that our laws are as clear and as straightforward
as they can be, and they are enforced evenly and fairly. Indeed, as
I've traveled around my district and spoken to business owners,
particularly small business owners, that's a common thread I hear: that
most businesses want to follow the law, and want to do what is expected
of them. Sometimes, it seems, we as policymakers make it harder than it
needs to be for that to happen--something I hope we will consider going
forward.
As we get into the details, I expect we may hear arguments for
different ways to go about that--but that, frankly, is what the
legislative process--and particularly the committee process--is for.
So with that said, I hope and trust that today we begin the start
of a thoughtful examination of this important issue, and in particular,
the close scrutiny of what, if any, changes Congress should consider or
adopt with respect to these important workplace laws.
I welcome our witnesses today, and yield back the remainder of my
time.
______
Chairwoman Woolsey. I thank the ranking member.
I now would like to ask without objection all members will
have 14 days to submit additional materials or questions for
the hearing record. Are there any objections?
And now it is going to be my honor to introduce our
witnesses. I would like to introduce our very, very
distinguished panel this morning and I would like to welcome
you all.
First of all, and I am going to introduce you right down
the line here and then I will talk to you a little bit about
the timing and lighting and then we will get on with it. You
will go one at a time. And then we will ask our questions.
First I would like to introduce John Flynn, the president
of the International Union of Bricklayers and Allied
Craftworkers. He has worked in the trade as a journeyman,
foreman and superintendent. President Flynn is on the executive
council of the AFL-CIO and serves on numerous labor boards. He
is a graduate of the Harvard Trade Union Program.
Cliff Horn. Mr. Horn is president of A. Horn, Inc., a
masonry contracting firm in Barrington, Illinois. He has worked
in the masonry and construction industry for over 20 years as a
bricklayer and a foreman. Mr. Horn holds a BA degree in
business finance from DePaul University in Chicago, Illinois.
Mr. Horn.
Mr. Shavell. Richard Shavell will be testifying on behalf
of the Associated Builders and Contractors, ABC. Mr. Shavell is
the president of Shavell & Company, an accounting and
consulting firm located in Boca Raton, Florida. He is also
chair of ABC's national tax advisory group. Mr. Shavell is a
graduate of Drexel University.
Ms. Ruckelshaus. Catherine Ruckelshaus is the litigation
director at the National Employment Law Project. Her primary
areas of expertise are wage and hour law, the rights of
immigrant and non-standard workers, work and family and the
employment rights of Work Fair participants. Ms. Ruckelshaus is
a graduate of Princeton University and Stanford Law School.
I welcome you all.
Before we get started, if you have never testified here
before, here is how this committee works.
The lighting system: You will have 5 minutes. We run on the
5-minute rule. Everyone, including the members, all the
members, are limited to 5 minutes of presentation or
questioning. As a matter of fact, if the members spend their
whole 5 minutes pontificating, then you don't have to answer
anything.
So the green light is illuminated when you begin to speak.
When you see the yellow light, it means you have 1 minute
remaining, and that is a good time to start wrapping up. And
when you see the red light, it means your time has expired, and
you need to conclude your testimony. You don't have to stop in
mid-sentence, believe me, but you know that means you have
already spoken for 5 minutes.
So please be certain as you testify to turn on and speak
into your microphone.
Now we are going to hear from our witnesses, beginning with
Mr. Flynn.
STATEMENT OF JOHN FLYNN, PRESIDENT, INTERNATIONAL UNION OF
BRICKLAYERS AND ALLIED CRAFTWORKERS
Mr. Flynn. Good morning, Madam Chair. My name is John
Flynn. I am president of the International Union of Bricklayers
and Allied Craftworkers. We are usually referred to as the BAC.
On behalf of the nearly 100,000 members at BAC, I want to
thank you and the committee for convening these hearings on the
employee misclassification crisis.
This morning I would like to briefly speak about what
misclassification of employees as independent contractors means
to the U.S. government, to BAC's members and to American
workers in general.
The misclassification of employees as independent
contractors has become such a rampant problem, so great in its
scope that it can no longer be thought of as just a labor
issue. To the contrary, Madam Chair, it is a crisis. It is a
crisis of national, universal urgency because it depresses wage
markets, threatens the finances of our government and, most
importantly, it undermines the fundamental dignity of workers
and degrades the fabric of our society.
But the most insidious element of the misclassification
crisis is this: the vast majority of Americans have no idea
that it exists. Ask the average American the difference between
an employee and an independent contractor, and you would
probably get a blank look. For that matter, ask the average
member of Congress how much tax revenue is stolen from the
federal government by deliberate misclassification of employees
as independent contractors, I doubt they would know that it is
well over $3.3 billion per year. And that is an estimate that
is nearly a decade old.
But even that dated estimate is roughly 20 times the annual
budget of the agency that is supposed to prevent
misclassification, the Department of Labor's Wage and Hour
Division. That is a significant loss to our government. And
that doesn't even begin to account for the untold billions of
dollars that have been lost to our Social Security system due
to employee misclassification.
How much of the alleged Social Security crisis is really
due to the misclassification crisis, we just don't know,
because the government hasn't been asking the question.
Madam Chair, the first step in solving the crisis is making
sure that the American people and their representatives know
just how grave it is.
At this point, I think it might be helpful to outline just
what employee misclassification is and what it costs to all of
us. When an employer takes a worker and treats that worker as
an independent contractor rather than as an employee, despite
the fact that the employer controls and directs how the worker
performs his or her work and exercises financial control over
the economic aspects of the worker's job, then the employer is
misclassifying the worker.
In so doing, the employer is evading tax obligations and
Workers Compensation insurance. As I remarked earlier, the
federal government is denied well over $3 billion every year in
tax revenue because employees are misclassified as
subcontractors.
Social Security loses out on a similarly large amount and
the state and local government shoulder a huge financial burden
as a result of misclassification. And the Workers Compensation
and Unemployment Insurance systems are starved of vital funds
when employers misclassify workers as independent contractors.
Furthermore, by misclassifying employees as independent
contractors, unscrupulous employers avoid legislation intended
to ensure that workers are dealt with in a fair and equitable
manner. These employers deny their workers the opportunity to
obtain the benefits regularly available to employees, such as
unemployment insurance.
Employers who misclassify their employees as independent
contractors don't pay for their employees' health insurance,
and that contributes to the public health crisis and the
Medicaid crunch. And, finally, when misclassified employees
seek to organize to fight for their rights and they are told
they can't do so because they supposedly aren't employees under
the National Labor Relations Act.
In short, Madam Chair, employee misclassification is the
perfect tool for permanently disenfranchising working
Americans. It creates an inescapable circle of low wage work
and a bottomless pool for desperate workers. For all of these
reasons, BAC has made addressing the misclassification crisis
our top legislative priority in 2007 and beyond the legislative
arena our union has been very aggressive in developing programs
to help end the practice of fraudulent misclassification.
We are engaged in a number of efforts to combat
misclassification throughout various states, but today I would
like to focus on Illinois because we found that this is a state
with some of the country's most serious and best organized
fraudulent misclassification schemes.
As part of our effort to collect data on the scope of the
crisis, we reviewed a University of Missouri study on the----
Chairwoman Woolsey. Mr. Flynn, are you about ready to tie
this up? You are beyond your 5 minutes.
Mr. Flynn. Oh, okay.
Chairwoman Woolsey. Can you bring it to a conclusion? And
then maybe somebody can ask you a question.
Mr. Flynn. Okay. Let me just finish a little bit here.
Chairwoman Woolsey. Okay.
Mr. Flynn. The study* was sponsored in part by the National
Alliance for Fair Contracting and the data contained in the
study in that report confirmed the practical realities that our
members are experiencing throughout Illinois and the country as
a whole.
---------------------------------------------------------------------------
*The report, ``The Economic Costs of Employee Misclassification in
the State of Illinois,'' is available on the National Alliance for Fair
Contracting website at the following URL: http://
www.faircontracting.org/NAFCnewsite/prevailingwage/pdf/Illinois--
Misclassification--Study.pdf
---------------------------------------------------------------------------
Several of our union organizers went undercover to see just
how the misclassification worked--and one of them, Joe Provola,
is here in the gallery--and I would like to tell you what they
learned.
They discovered a network of accountants and insurance
brokers, a network whose primary business is to aid and abet
the fraudulent misclassification of workers. They found that
this network would teach employers about how easily they could
cheat the system. Accountants would actually coach employers
how to use misclassification to exploit undocumented
immigrants.
And the most amazing part of it all was how easy it was to
get this network to give up their tricks. It was as if they had
no fear of being caught, of being exposed as a conspiracy to
evade labor and tax laws.
Chairwoman Woolsey. Okay, Mr. Flynn. Now, what we are going
to do is ask you to finish that when we are in our question-
and-answer period.
Mr. Flynn. Okay.
Chairwoman Woolsey. I promise you, you will get to finish
that thought.
Mr. Flynn. I guess really what we want to ask is that the
committee look into this.
Chairwoman Woolsey. Oh, we are not through. You are going
to get to say a lot more things on this this morning.
Mr. Flynn. Okay.
[The statement of Mr. Flynn follows:]
Prepared Statement of John J. Flynn, President, International Union of
Bricklayers and Allied Craftworkers
Good morning, Madam Chair. My name is John J. Flynn, and I am
President of the International Union of Bricklayers and Allied
Craftworkers, or BAC. On behalf of the nearly 100,000 members of BAC, I
want to thank you and the Committee for convening these hearings on the
worker misclassification crisis. This morning, I would like to briefly
speak about what misclassification of employees as independent
contractors means to government, to BAC's members, and to American
workers in general.
The Hidden Dangers of the Misclassification Crisis
The misclassification of employees as independent contractors has
become such a rampant problem, so great in its scope, that it can no
longer be thought of as just a ``labor issue.'' To the contrary, Madam
Chair, it is a crisis. It is a crisis of national, universal urgency,
because it depresses wage markets, threatens the finances of our
government and--most importantly--it undermines the fundamental dignity
of workers and degrades the fabric of our society.
But the most insidious element of the misclassification crisis is
this: the vast majority of Americans have no idea that it exists. Ask
the average American the difference between an employee and an
independent contractor, and you'll probably get a blank look. Ask the
average American--for that matter, ask the average Member of Congress--
how much tax revenue is stolen from the federal government by
deliberate misclassification of employees as independent contractors,
and I doubt that they'll know that it's well over 3.3 billion dollars
per year. Over 3 billion dollars--and that's an estimate that's nearly
a decade old. But even that dated estimate--3.3 billion dollars--is
roughly 20 times the annual budget of the agency that's supposed to
prevent misclassification, the Department of Labor's Wage & Hour
Division. That's a significant loss to our government. And that doesn't
even to begin to account for the untold billions of dollars that have
been lost to our Social Security system due to employee
misclassification. How much of the alleged Social Security crisis is
really due to the misclassification crisis? We just don't know, because
the government hasn't been asking the question. Madam Chair, the first
step in solving this crisis is making sure that the American people and
their representatives know just how grave it is.
The Devastating Effects of Misclassification on Workers and Government
Now at this point, I think it might be helpful to outline just what
employee misclassification is, and what it costs all of us. When an
employer takes a worker, and treats that worker as an independent
contractor rather than an employee--despite the fact that the employer
controls and directs how the worker performs his or her work, and
exercises financial control over the economic aspects of the worker's
job--then the employer is misclassifying the worker. In so doing, the
employer is evading tax obligations and worker compensation insurance
obligations. As I remarked earlier, the federal government is denied
well over 3 billion dollars every year in tax revenue because employees
are misclassified as subcontractors. Social Security loses out on a
similarly large amount. State and local governments shoulder a huge
financial burden as a result of misclassification. And the nation's
workers' compensation and unemployment insurance systems are starved of
vital funds when employers misclassify workers as independent
contractors.
Furthermore, by misclassifying employees as independent
contractors, unscrupulous employers avoid labor and employment laws,
prevailing wage laws, and other legislation intended to ensure that
workers are dealt with in a fair and equitable manner. These employers
deny their workers the opportunity to obtain the benefits regularly
available to employees, such as unemployment insurance. Employers who
misclassify their employees as independent contractors don't pay for
their employees' health insurance--and that contributes to the public
health crisis and the Medicaid crunch. And finally, when misclassified
employees seek to organize to fight for their rights, they're told that
they can't do so--because they supposedly aren't ``employees'' under
the National Labor Relations Act. In short, Madam Chair, employee
misclassification is the perfect tool for permanently disenfranchising
working Americans. It creates an inescapable circle of low-wage work,
and a bottomless pool of desperate workers.
BAC's Efforts to Combat the Misclassification Crisis
For all of these reasons, BAC has made combating the
misclassification crisis our top legislative priority in 2007. And
beyond the legislative arena, our union has been very aggressive in
developing programs to help end the practices of fraudulent
misclassification. We are engaged in a number of efforts to address
misclassification throughout the various states, but today I'd like to
focus on Illinois, because we've found this is a state with the some of
the country's most serious and best organized fraudulent
misclassification schemes.
As part of our effort to collect data on the scope of the crisis in
Illinois, we reviewed a University of Missouri-Kansas City study of the
economic costs of misclassification in the State of Illinois. The study
was sponsored in part by the National Alliance for Fair Contracting.
The report confirmed the practical realities that our members were
experiencing in Illinois, particularly in the Chicago area. From the
worker point of view, there are several key findings:
The state's unemployment insurance system ``lost an
average of $39.2 Million every year from 2001 to 2005 in unpaid
unemployment insurance taxes.''
The incidence of misclassification has risen in Illinois
from 5.5% of employees in 2001 to 8.5% in 2005. This represents a 55%
increase in the misclassification rate from 2001-2005.
Finally, the number of workers misclassified statewide
averages nearly 370,000 per year--and that number is growing.
Now this report--like a similar report that was just issued by
Cornell University which detailed the devastating effects of
misclassification in New York--didn't tell us anything our members
didn't already know. Because the construction industry is so sensitive
to prices, our members are all too aware that they are losing jobs to
companies that cheat. And so we felt that we needed to augment our
research with a practical understanding of the crisis. Several of our
union's organizers went undercover to see just how misclassification
worked--one of them, Joe Probola, is here in the gallery today. What he
and his fellow organizers learned was shocking.
They discovered a network of accountants and insurance brokers--a
network whose primary business is to aid and abet the fraudulent
misclassification of workers. They found that this network would teach
employers about how easily they could cheat the system. Accountants
would actually coach employers how to use misclassification to exploit
undocumented immigrants. And the most amazing part of it all was how
easy it was to get this network to give up their tricks. It was as if
they had no fear of being caught, of being exposed as part of a
conspiracy to evade labor and tax laws. Madam Chair, our organizers'
story is chilling--because it illustrates how commonplace
misclassification has become. And that's why we're here today--asking
this committee to fight for the basic right to be recognized as an
employee, with all of the rights of an employee.
And that is exactly what we asked of Illinois public officials when
we started reaching out to them with the facts that we had learned.
Perhaps the most striking thing that our representatives discovered in
speaking with the officials was how so many of them lacked an initial
understanding of how pervasive and how dangerous misclassification had
become. But with time, we've been able to work with Illinois officials,
including the state Attorney General, to develop a plan to fight
misclassification. We're hoping that today is the first step in the
federal government's fight.
With that, Madam Chair, I want to thank you for providing us the
opportunity to appear here today. We're glad that this Committee is
taking the misclassification crisis seriously, and I can assure you
that as you confront the crisis, you will have the unswerving support
of BAC, and of all the union building and construction trades.
______
Chairwoman Woolsey. Mr. Horn?
STATEMENT OF CLIFF HORN, PRESIDENT, A. HORN, INC.
Mr. Horn. Good morning, and thank you, Chairwoman Woolsey,
Ranking Member Wilson and members of the subcommittee for
inviting me today to discuss the deliberate misclassification
of workers as independent contractors and the effect on our
nation.
My name is Cliff Horn, president of A. Horn, Incorporated.
We are a commercial mason contractor working in the Chicagoland
area, and I am testifying today on behalf of the Mason
Contractors Association of America, a national trade
association representing mason contractors across the country
and whose membership accounts for $2 billion in masonry sales
annually.
My father arrived in the United States in 1957 not knowing
a word of English with just $26, a suitcase and a dream of a
better life. He worked his first day in America as a
construction laborer. After 14 years of employment as a union
tradesman, my dad and mom started their own masonry contracting
business, A. Horn, Incorporated.
After 19 years in the business, they employed 15 people and
achieved annual sales revenues of $3 million. In 1990, I
started with A. Horn as an apprentice mason. After I completed
my apprenticeship in 1994, I became president in 1998. By 2001,
sales had increased to $10 million and our sales projections
for 2007 are $15 million. Currently we have 75 employees.
Obviously, a growing business needs profitable contracting.
However, for contracting bidding to be fair, the playing field
has to be even. When a contractor misclassifies his employees
as independent contractors, he gets a competitive advantage
over the contractors who are playing by the rules and
classifying their employees properly.
Misclassification of workers has impacted business and the
construction industry at the local, state and federal level. By
misclassifying employees as independent contractors,
unscrupulous employers are able to avoid paying taxes and
insurance. Businesses that misclassify employees as independent
contractors expect to reduce their labor costs by between 15
and 20 percent. This places contractors like myself at a
competitive disadvantage in an industry with 20 percent gross
margins.
The American construction industry is being threatened by
the misuse and abuse of independent contractors. Independent
contractors typically have no formalized training, no quality
control and no access to continuing education. There are
legitimate independent contractors in the construction industry
and it is not my intention to undermine those sole
proprietorships and small businesses. The problem we are here
to address today is the intentional misclassification of
individuals who are in fact employees but are classified as
independent contractors by unscrupulous employers.
Furthermore, there is a serious question of operators'
liability coverage in case of a claim or public health scare.
Who is responsible? If business owners are taking shortcuts
with payroll taxes and liability insurance, would shortcuts in
construction methods and design specifications be out of the
question? Most likely not.
As some contractors are skirting around Workers Comp, then
the firms who properly classify employees are forced to carry
the burden. If Workers Compensation is unavailable to a worker,
then typically our health care system has to absorb the cost.
The masonry industry made the American dream real for my
family and for myself. However, I am worried that some
contractors are undercutting the industry by misclassifying
workers. This is leading to a race to the bottom, which will
ultimately hurt the industry and in the end leave all
contractors at a competitive disadvantage.
I strongly encourage Congress to take action to clearly
define who is and who is not an independent contractor.
Thank you.
[The statement of Mr. Horn follows:]
Prepared Statement of Cliff Horn, President, A. Horn, Inc.
Good morning, and thank you Chairwoman Woolsey, Ranking Member
Wilson and members of the subcommittee for inviting me today to discuss
the deliberate misclassification of workers as independent contractors,
and the effects on our nation. My name is Cliff Horn, President of A.
Horn Inc. we are a commercial mason contractor, working in the Chicago-
land area. I am testifying today on behalf of the Mason Contractors
Association of America, a national trade association representing Mason
Contractors across the country and whose membership accounts for $2
billion in masonry sales annually.
My father arrived in the US in 1957 not knowing a word of English
with just $26, a suitcase and a dream of a better life. He worked his
first day in America as a construction laborer. After 14 years of
employment as a union tradesman, my dad and mom started their own
masonry contracting business, A. Horn Inc. After 19 years the business
employed 15 people and had achieved annual sales revenues of 3 million.
In 1990 I started with A Horn Inc. as an apprentice mason. After I
completed my apprenticeship in 1994, I became president in 1998. By
2001, sales had increased to $10 million and our sales projections for
2007 are $15 million. Currently we have 75 employees.
Obviously, growing businesses need profitable contracts. However,
for contracting bidding to be fair, the playing field has to be even.
When a contractor misclassifies his employees as independent
contractors, he gets a competitive disadvantage over the contractors
who are playing by the rules and classifying their employees properly.
The misclassification of workers has impacted my business and it is
impacted the construction industry at the local, state and federal
level.
By misclassifying employees as independent contractors,
unscrupulous employers are able to avoid paying taxes and insurance.
Businesses that misclassify employees as independent contractors can
expect to reduce their labor costs by between 15 and 30 percent. This
places contractors like myself at a competitive disadvantage in an
industry with 20% gross margins.
The American construction industry is being threatened by the
misuse and abuse of independent contractors. Independent Contractors
typically have no formalized training, no quality control, and no
access to continuing education. There are legitimate independent
contractors in the construction industry and it is not my intention to
undermine those sole proprietorships and small businesses. The problem
which we are here to address today is the intentional misclassification
of individuals who are in fact employees but are classified as
``independent contractors'' by unscrupulous employers. Furthermore,
there is the serious question of operations liability coverage in case
of a claim, or public health scare. If business owners are taking
shortcuts with payroll taxes and liability insurance, would shortcuts
in construction methods and design specifications be out of the
question? If some contractors are skirting around worker's
compensation, then the firms who properly classify employees are forced
to carry the burden. If workers compensation is unavailable to a
worker, then our health care system absorbs the cost.
The Masonry Industry made the American Dream real for my family.
However, I am worried that some contractors are undercutting the
industry by misclassifying workers. This is leading to a race to the
bottom which will ultimately hurt the industry in the end and leave all
contractors at a competitive disadvantage.
I strongly urge Congress to take action to clearly define who is
and who is not an independent contractor. Thank you for your time.
______
Chairwoman Woolsey. Thank you.
Mr. Shavell?
STATEMENT OF RICH SHAVELL, PRESIDENT, SHAVELL & CO.
Mr. Shavell. Good morning, Madam Chair and honorable
members of this subcommittee. My name is Rich Shavell, and I am
president of Shavell & Company.
Today I represent the Associated Builders and Contractors,
which is a national trade association representing more than
24,000 merit shop contractors, subcontractors and related firms
from across the country. ABC appreciates the opportunity to
address the committee on the issue of independent contractors.
Now, while congressional action may be necessary to clarify
the entire independent contractor regime, we caution this
committee and Congress to carefully consider the impact of any
such action to ensure that good, honest, hardworking businesses
and their workers are not overrun with increased and costly
regulatory requirements.
I intend to address three topics.
First, all parties desire a level playing field. All
parties must function under a confusion framework of rules that
inadequately addresses the classification of workers. It is
critical to distinguish between wrongful classification and
misclassification. In construction, wrongful classification, as
you heard, by a competitor, can result in a competitive
disadvantage to other contractors.
Contrast this with misclassification, which easily can
occur because current laws and rules are extremely complex.
Intentional misclassification by businesses is wrong. We
endorse a level playing field for all businesses and workers.
For those workers who are faced with improper
misclassification, we believe they should be accorded every
opportunity to have their financial situation corrected.
Employment agencies that do not properly pay workers should
face severe enforcement. Under current--and I will focus on tax
laws--subjective 20-factor common law test leads to disputes
between the IRS and businesses. Even if misclassification is
unintentional, the ramifications can be dramatic to both the
worker; the business owner in the form of back taxes, interest,
applicable penalties and even the possible disqualification of
retirement plans. Adding further confusion, in addition to the
IRS methodology, a business owner may confront other
methodologies for differing governmental purposes.
Secondly, independent contractors are integral to the
construction industry and are often the perfect answer to a
pressing need for special skills and experience needed on
short-term projects. The independent contractor has the freedom
to choose his or her work schedule, while the small business
owner maintains the flexibility to adjust work demands with
current business activity.
And the third topic is what are the potential resolutions
to this issue. There are four such resolutions commonly
discussed. The first is the increased reporting requirement.
Within the context of the federal tax gap, it has been proposed
to Congress that increased information reporting may provide
part of the solution.
A second resolution is to elevate enforcement. IRS
indicates that for every dollar invested in enforcement, $4 in
increased revenue to treasury is returned.
Thirdly is to clarify and simplify the 20-factor and the
other subjective tests and to educate businesses and workers.
And, lastly, you may even hear eliminate the availability
of independent contractor status.
ABC supports the three initial resolutions listed with the
understanding we remain concerned that any action taken by
Congress should ensure businesses and their workers are not
overrun with costly regulatory requirements. However, the
mechanics of the fourth resolution, that is to eliminate
independent contractors from our economy, is fraught with
technical problems and these technical issues may be the reason
you don't hear, for example, the IRS constructively discussing
the option of eliminating independent contractor status.
This would not be a viable alternative in the construction
industry for several reasons. The fundamental concern, of
course, is that cash flow would be impaired for the independent
contractor that is properly reporting under that methodology.
So for significant technical and practical reasons, ABC cannot
advocate that independent contractor status is eliminated and
no credible consideration can be given to such option.
I thank you for the opportunity to testify today on behalf
of ABC. I look forward to your questions. Thank you.
[The statement of Mr. Shavell follows:]
Prepared Statement of Rich Shavell, CPA, President, Shavell & Co.
Good morning Madam Chair and honorable members of this
subcommittee. My name is Rich Shavell and I am President of Shavell &
Company, P.A. We are an accounting and consulting firm that specializes
in construction with offices in Florida. I serve as Chair of the Tax
Advisory Group for The Associated Builders and Contractors, Inc. (ABC).
ABC is a national trade association representing more than 24,000
merit shop contractors, subcontractors, materials suppliers, and
related firms from across the country and from all specialties in the
construction industry. Our diverse membership is bound by a shared
commitment to the merit shop philosophy in the construction industry.
This philosophy is based on the principles of full and open competition
unfettered by the government, nondiscrimination based on labor
affiliation, and the award of construction contracts to the lowest
responsible bidder through open and competitive bidding. It is an honor
to be their voice before you today.
ABC appreciates the opportunity to address the Committee on the
issue of independent contractors.
While Congressional action may be necessary to clarify the entire
independent contractor regime, we caution this Committee and Congress
to carefully consider the impact of any such action to ensure that
good-honest hard working businesses and their workers are not overrun
with increased and costly regulatory requirements.
I intend to address three topics:
First, ABC supports a level playing field for all
businesses and ABC supports efforts to ensure that workers who are
misclassified receive appropriate relief;
Secondly, Independent Contractors are integral to our
industry and our country's dynamic economy; and
Lastly, what potential resolutions are available to
address worker misclassification.
1. All Parties Desire a Level Playing Field
While the construction industry provides significant opportunities
for independent contractors, all parties must function under a
confusing framework of rules that inadequately address the
classification of workers as either employees or independent
contractors. Initially, it is critical to distinguish between wrongful
classification and misclassification. In construction, wrongful
classification by a competitor can result in a competitive disadvantage
to other contractors. Contrast this with misclassification, which can
easily occur because current law and rules are extremely complex.\1\
Those companies not paying employee taxes or worker' compensation
by wrongful classification can undercut the competition by offering
lower bids. ABC in no way condones intentional misclassification by
businesses that shirk their duties to society and their workers. We
endorse a level playing field for all businesses and workers. For those
workers who are faced with improper misclassification we believe they
should be accorded every opportunity to have their financial situation
corrected. Also employment agencies that do not properly pay workers
should face severe enforcement.
Under current tax law, taxpayers use a 20-factor common law test
that can be controversial and cumbersome because it is so subjective,
leading to disputes between the IRS and businesses. Even if
misclassification is unintentional the ramifications can be dramatic to
both the worker and business owner in the form of back taxes, interest,
applicable penalties, and even the possible disqualification of
retirement plans.
Adding further confusion is that in addition to the IRS methodology
for determining status a business owner may confront other
methodologies for differing purposes.\2\ For example, the Common Law
``Right to Control'' test which is often used by courts to determine
employee status in various types of cases, including employment
discrimination and benefit cases, tax cases, and tort liability cases.
And, the Department of Labor uses a model of analysis known as the
``economic realities test'' to determine coverage under, and compliance
with, the minimum wage and overtime requirements of the Fair Labor
Standards Act. Further many states have similar but not identical
methods for state purposes.
Independent Contractors are Integral to the Construction Industry
Independent contractors are often the perfect answer to a pressing
need for special skills and experience needed on short-term projects.
The flexibility an independent contractor provides to a small, fledging
operation as well as larger enterprises creates numerous advantages for
all parties involved. The independent contractor has freedom to choose
his or her work schedule, while the small business owner maintains the
flexibility to adjust work demands with current business activity, and
the consumer enjoys the benefit of a reasonably priced, quality
product. Lawful utilization of independent contractors provides a good
source of labor for projects where the contractor does not need to
exercise the type of control that would necessitate the hiring of an
employee.\3\
Potential Resolutions
Four resolutions are commonly discussed:
1. Increase Reporting Requirements--Within the context of ``The
Federal Tax Gap'' it has been proposed to Congress that increased
information reporting may provide part of the solution.\4\ IRS
statistics indicate that when reporting requirements such as Forms 1099
are required, compliance increases from approximately 57% to 96%.\5\
Eliminating the exemption from 1099 reporting for corporations would
facilitate elevated reporting for independent contractors. By
approaching the issue this way, less emphasis is placed on unclear
classification rules while emphasis is shifted to the relatively clear
laws of filing annual information returns.
2. Elevate Enforcement--IRS indicates that for every dollar
invested in enforcement four dollars in increased revenue to Treasury
is returned. Further, the Commissioner of the IRS has stated, ``This
4:1 return on investment does not consider the indirect effect of
increased enforcement activities in deterring taxpayers who are
considering engaging in non-compliant behavior.'' \6\ Departments of
Labor--both Federal and the States--can also elevate enforcement on
this issue.
3. Clarify and simplify the 20-factor subjective test and educate
businesses and workers.\7\
4. Eliminate availability of independent contractor status.
ABC supports the three initial listed with the understanding that
we remain concerned that any action taken by Congress should be
measured against the impact on good-honest hard working businesses and
their workers to ensure they are not overrun with increased and costly
regulatory requirements.
However, the mechanics of eliminating independent contractors from
our economy is wrought with technical problems that are not clearly
explained by constituencies who have concerns with the legal
availability of independent contractors. These technical issues may be
the reason you don't hear the IRS constructively discussing the option
of eliminating independent contractor status.
Further, this would not be a viable alternative in the construction
industry. Consider one fundamental concern for the contractor who is
properly functioning as an independent contractor: Cash flow would be
impaired for the independent contractor who exceeds FICA limits since
each ``employer'' would withhold up to the limit.\8\ For significant
technical and practical reasons, ABC cannot advocate that independent
contractor status is eliminated and no credible consideration can be
given to such option.
I thank you for the opportunity to testify today on behalf of ABC.
I look forward to your questions.
endnotes
\1\ Consider that the instructions for the three pages Form SS-8
(Rev. 11-2006), Determination of Worker Status for Purposes of Federal
Employment Taxes and Income Withholding, that the IRS requires to
secure a determination letter on the status of a worker, reflects 22
hours for recordkeeping and two hours to complete.
\2\ There are many non-federal income factors that may be relevant
to independent contractor vs. employee status: Workers compensation
benefits; Federal and state civil rights laws; Fair Labor Standards
Act; National Labor Relations Act; Occupational Safety and Health Act;
Americans with Disabilities Act; and State income/unemployment taxes
\3\ Many ABC members started their own businesses by initially
working as an independent contractor. It is not unusual for these
individuals to work as employees during regular hours and as
independent contractors during off-hours and weekends. There is no
better way to become established as a small business than to begin as
an independent contractor. Because of the cyclical nature of the
industry, many businesses cannot afford to keep certain specialized
trade craftspeople as employees. Sometimes, skilled craftspeople are
needed several times throughout the year, but not enough to warrant
full-time or even part-time employment. Having to place two or three
extra employees on the payroll just to finish a short-term project
places a significant and unnecessary burden on companies.
\4\ The Causes and Solutions to the Federal Tax Gap: Hearing Before
the Senate Committee on the Budget, 109th Cong. (2006) written
statement of Nina E. Olson, National Taxpayer Advocate available at:
http://budget.senate.gov/republican/hearingarchive/testimonies/2006/
NinaOlsenTestimony.pdf.
\5\ IRS Updates Tax Gap Estimates, IR-2006-28 (Feb. 14, 2006).
\6\ Written testimony of Commissioner of Internal Revenue Service,
Mark Everson, before The Senate Committee on the Budget (Feb. 14, 2007)
\7\ ABC previously testified on July 26, 1995 before the House
Small Business Committee in support of increased education and
clarification of the 20-factor independent contractor test.
\8\ The end result will be increased construction costs. Also
consider: a). It would force the independent contractor to adopt a
massive record keeping structure that they may not be equipped to
handle. At times the independent contractor may be the employer when
performing small projects, then switch to an ``employee'' status when
working as a sub. The resulting tax payment requirements would be
difficult to monitor; b). Monitoring the unemployment rates in some
states would be very difficult and rules would have to be established
to help determine which ``employer'' would be responsible for the
unemployed worker; c) Companies in some states may be forced to take on
additional exposure in the area of workers compensation for which they
may not be familiar and for which duplicative or exorbitant safety
program costs may be the result; d) The new ``employer'' would have to
take on all of the financial risks of a project rather than mitigating
some of that risk by using the independent contractor for a lump sum
job. Bidding jobs would thereby become more complex.
______
Chairwoman Woolsey. Thank you.
Ms. Ruckelshaus?
STATEMENT OF CATHERINE K. RUCKELSHAUS, LITIGATION DIRECTOR,
NATIONAL EMPLOYMENT LAW PROJECT
Ms. Ruckelshaus. Chairwoman Woolsey and members of the
committee, my name is Cathy Ruckelshaus, and I am from the
National Employment Law Project. I thank you for the
opportunity to testify this morning on the problem of the
misclassification of employees as independent contractors.
My organization, the National Employment Law Project, is a
nonprofit that specializes in access to and keeping good jobs
for all workers. In our basic labor standards enforcement work,
in increasing instances we are seeing employers 1099 their
employees or paying them in cash and off the books when
employers should be issuing W-2s and treating their workers as
employees.
This harms workers and their families. It depletes state
and federal government coffers, it undercuts law abiding
businesses and it hurts our economy overall. I will address
each in turn.
For 20 years, I have worked with communities of low income
workers in dozens of job categories to ensure that they get the
basics: minimum wage and overtime premium pay, safe and healthy
worksites and fair treatment on the job. This is more than a
full-time job.
More and more, independent contractor abuses appear in
these workplaces, creating grim jobs and causing enforcement
snags. I will give you two recent examples.
Faty Ansoumana, an immigrant from Senegal, worked as a
delivery worker in Gristede's store in midtown Manhattan. He
worked as many as 7 days a week, 10 to 12 hours a day, and his
weekly salary struggled to reach $90.
He and his fellow delivery workers were all hired through
two middleman labor brokers who in turn stationed the workers
at grocery and pharmacy chain stores throughout New York City.
The workers all reported directly to the stores and provided
deliveries during the stores' delivery hours and under the
stores' supervision. Many delivery workers were required to bag
groceries and do other non-delivery work, including stocking
shelves.
When we challenged these abysmal conditions, the first
thing the store said was the workers are not our employees. We
turned to the individual labor brokers and they said the
workers are each an independent contractor, and so they don't
have rights to minimum wage and overtime pay.
We were able to recover $6 million for the over 1,000
delivery workers in the lawsuit, but only after overcoming the
claims that no one was responsible for the working conditions
and that the workers were not employees covered by labor
employment laws.
My second example is a variation on a theme. Janitors from
Central and South America were recruited by a large building
services cleaning company, Coverall, Inc., to clean office
buildings in Massachusetts and other states. The janitors were
sold franchise agreements permitting them to clean certain
offices for Coverall. They paid tens of thousands of dollars
for these franchise agreements. They were told were to clean,
when to clean and what materials to use and they could not set
their own prices.
When one janitor quit when she couldn't make ends meet, she
applied for unemployment benefits in Massachusetts. She was
told she was an independent contractor and not eligible. She
challenged the decision and the Massachusetts highest court
found in her favor.
I could go on, but you get the idea. The problem is so
broad, it is probably happening to somebody you know. It
happens at jobs at all income levels, and I get calls from
workers all over the United States with these questions.
The Department of Labor's 2000 study estimated that 30
percent of employers misclassified their employees. At my
office at NELF, we have worked on independent contractor
problems in construction, day labor, janitorial, home health
care, child care, agriculture, poultry and meat processing,
high tech, delivery and trucking.
This hurts workers because if it is successful, workers
lose out on minimum wage and overtime, health and safety and
Workers Compensation rights, protections against sex harassment
and discrimination, unemployment insurance, the right to
organize and bargain collectively and Social Security and
Medicaid payments. This is a profound impact.
Federal and state governments suffer hefty loss of revenues
due to independent contractor misclassification. The GAO
estimated that those tax revenues at the federal level were
$4.7 billion. This is a staggering impact. It harms law-abiding
employers in our economy because employers who misclassify
stand to save upwards of 30 percent of their payroll costs,
allowing them to underbid their competitors.
I have some policy suggestions for enhancing Department of
Labor's enforcement ability, but I will save those for the
question-and-answer because I see my time is up. Thank you.
[The statement of Ms. Ruckelshaus follows:]
Prepared Statement of Catherine K. Ruckelshaus, Litigation Director,
National Employment Law Project
Madam Chairwoman and members of the Committee: thank you for this
opportunity to testify today on the important subject of independent
contractor misclassification and its impacts on workers and their
families, law abiding employers, and our economy.
My name is Cathy Ruckelshaus, and I am the Litigation Director for
the National Employment Law Project (NELP), a non-profit advocacy
organization that specializes in access to and keeping good jobs for
low-income workers. In the twenty years I have spent working with and
on behalf of low-wage workers around the country, I have been struck by
the success some businesses have had in devising ways to evade
responsibility for fair pay, health and safety, and other workplace
standards. Calling employees independent contractors (``1099-ing''
them, so-called because of the IRS Form 1099 issued to independent
contractors) is a top choice of these employers.
I and my colleagues at NELP have worked to ensure that all workers
receive the basic workplace protections guaranteed in our nation's
labor and employment laws; this work has given us the opportunity to
learn up close about job conditions in garment, agricultural,
construction and day labor, janitorial, retail, hospitality, home
health care, poultry and meat-packing, high-tech, delivery, and other
services. We have seen low, often sub-minimum wage pay, lack of health
and safety protections and work benefits, and rampant discrimination
and mistreatment of workers in these jobs.
NELP focuses on simply enforcing workplace laws on the books. In
addition to bringing job standards actions against employers, NELP has
partnered with labor and immigrant community groups in the states to
promote good models for closing independent contractor loopholes. This
background in direct workplace laws enforcement and crafting state
practices informs my testimony today.
Today, I will describe independent contractor misclassification and
its impacts on workers, on state and federal government coffers, and on
law-abiding employers. I will illustrate its effects in all sectors of
our economy, including the so-called ``underground economy'' where
workers labor in the shadows. I will conclude with some ideas for
policy reforms to contend with this unchecked and growing practice.
I. What is Independent Contractor Misclassification and How Common is
It?
With increasing frequency, employers misclassify employees as
``independent contractors,'' either by giving their employees an IRS
Form 1099 instead of a Form W-2, or by paying them off-the-books.
Businesses also insert subcontractors, including temporary help firms
and labor brokers, between them and their workers, creating another
layer of potentially-responsible entities and creating confusion among
workers. Here are some reasons why 1099-ing is on the rise:
Firms argue they are off-the-hook for any rule protecting
an ``employee,'' including the most basic rights to minimum wage and
overtime premium pay, health and safety protections, job-protected
family and medical leave, anti-discrimination laws, and the right to
bargain collectively and join a union. Workers also lose out on safety-
net benefits like unemployment insurance, workers compensation, and
Social Security and Medicare.
Misclassifying employers stand to save upwards of 30% of
their payroll costs, including employer-side FICA and FUTA tax
obligations, workers compensation and state taxes paid for
``employees.''
Businesses that 1099 and pay off-the-books can underbid
competitors in labor-intensive sectors like construction and building
services, and this creates an unfair marketplace.
The United States Government Accountability Office (GAO) concluded
in its July 2006 report, ``employers have economic incentives to
misclassify employees as independent contractors because employers are
not obligated to make certain financial expenditures for independent
contractors that they make for employees, such as paying certain taxes
(Social Security, Medicare, and unemployment taxes), providing workers'
compensation insurance, paying minimum wage and overtime wages, or
including independent contractors in employee benefit plans.'' \1\
Genuine independent contractors constitute a small proportion of
the American workforce, because by definition, an ``independent
contractor'' operates a business. True independent contractors have
specialized skill, invest capital in their business, and perform a
service that is not part of the receiving firm's overall business.\2\
Most workers in labor-intensive and low-paying jobs are not operating a
business of their own. As the U.S. Department of Labor's Commission on
the Future of Worker-Management Relations (the ``Dunlop Commission'')
concluded, ``[t]he law should confer independent contractor status only
on those for whom it is appropriate--entrepreneurs who bear the risk of
loss, serve multiple clients, hold themselves out to the public as an
independent business, and so forth. The law should not provide
incentives for misclassification of employees as independent
contractors, which costs federal and state treasuries large sums in
uncollected social security, unemployment, personal income, and other
taxes.'' \3\
The problem is so pervasive that states have begun mandating
studies of the problem and lead the way in reforms; in the last five
years, at least nine states have collected data on the problem. In
addition:
Many states create a presumption of employee status so
that workers providing labor or services for a fee are ``employees''
covered by labor and employment laws. This is already law in over ten
states' workers' compensation acts\4\ and in Massachusetts' wage
act.\5\
A few states have created inter-agency task forces to
share data and enforcement resources when targeting 1099 abuses.\6\
Several states create ``statutory employees'' in certain
industries (construction, trucking) where independent contractor
schemes prevail.\7\ Similarly, states have created job-specific
protective laws that target persistent abuses to encourage compliance,
regardless of the label (independent contractor or employee) attached
to the worker. At least five states have farm labor contracting laws
(CA, FL, IA, OR and WA).\8\ Three states have laws regulating
employment in the garment industry (CA, NJ and NY).\9\ One state has
specialized laws regulating the meat packing industry (NE).\10\ Six
states have laws that regulate day labor (AZ, FL, GA, IL, NM and
TX).\11\
A. Misclassification is Found in Every Job Sector
Calling employees ``independent contractors'' is a broad problem
and affects a wide range of jobs. It could be happening to someone you
know. A 2000 study commissioned by the US Department of Labor found
that up to 30% of firms misclassify their employees as independent
contractors.\12\ Many states have studied the problem and find high
rates of misclassification, especially in construction, where as many
as 4 in 10 construction workers were found to be misclassified.\13\
Most government-commissioned studies do not capture the so-called
``underground economy,'' where workers are paid off-the-books,
sometimes in cash. These workers are de facto misclassified independent
contractors, because the employers do not withhold and report taxes or
comply with other basic workplace rules. Many of these jobs are filled
by immigrant and lower-wage workers.\14\
In my practice, I have met workers who were misclassified. Here are
a couple of examples:
Faty Ansoumana, an immigrant from Senegal, worked as a
delivery worker at a Gristede's grocery store in midtown Manhattan. He
worked as many as seven days a week, 10-12 hours a day and his weekly
salary averaged only $90. He and his fellow delivery workers, who had
similar pay and hours, were all hired through two middlemen labor
agents, who in turn stationed the workers at grocery and pharmacy chain
stores throughout the City. The workers all reported directly to the
stores and provided deliveries pursuant to the stores' set delivery
hours and under the stores' supervision. Many delivery workers were
required to bag groceries and to do other non-delivery work, including
stocking shelves. When NELP challenged the abysmally low pay, the
stores said the workers were not their employees, and the labor brokers
said the deliverymen were independent contractors. We were able to
recover $6 million for the over 1,000 workers in the lawsuit, but only
after overcoming the stores' claims that they were not responsible.
Janitors from Central and South America and Korea were
recruited by a large building services cleaning company, Coverall,
Inc., to clean office buildings in MA and other states. The janitors
were ``sold'' franchise agreements for tens of thousands of dollars,
permitting them to clean certain offices assigned by Coverall. The
janitors were told where to clean, what materials to use, and were not
permitted to set their own prices for the cleaning services. When one
janitor quit when she couldn't make ends meet, she applied for
unemployment benefits in MA and was told she was an ``independent
contractor'' and not eligible. She challenged that decision and
Massachusetts' Supreme Judicial Court ruled in her favor. NELP wrote an
amicus brief in Coverall and provided assistance.\15\
Independent contractor misclassification occurs with an alarming
frequency in: construction,\16\ day labor,\17\ janitorial and building
services,\18\ home health care,\19\ child care,\20\ agriculture,\21\
poultry and meat processing,\22\ high-tech,\23\ delivery,\24\
trucking,\25\ home-based work,\26\ and the public\27\ sectors. I could
relate stories to you of independent contractor abuses in each of these
job categories.
II. What is The Impact on Workers and Their Families?
Just because an employer calls a worker an ``independent
contractor'' does not make it legally true. But, these labels carry
some punch and deter workers from claiming rights under workplace laws.
Because misclassified independent contractors face substantial barriers
to protection under labor and employment rules, workers and their
families suffer. The same occupations with high rates of independent
contractor misclassification are among the jobs with the highest
numbers of workplace violations. This is because of the labor standards
loopholes created by improper use of 1099-ing. The result is our
``growth-sector'' jobs are not bringing people out of poverty and
workers across the socio-economic spectrum are impacted.
Workers could lose out on: (1) minimum wage and overtime rules; (2)
the right to a safe and healthy workplace and workers' compensation
coverage if injured on the job; (3) protections against sex harassment
and discrimination; (4) unemployment insurance if they are separated
from work and other ``safety net'' benefits; (5) any health benefits or
pensions provided to ``employees;'' (6) the right to organize a union
and to bargain collectively for better working conditions, and (7)
Social Security and Medicaid payments credited to employee's accounts.
Recent government studies find as many as 50--100% of garment,
nursing home, and poultry employers in violation of the basic minimum
wage and overtime protections of the Fair Labor Standards Act.\28\
Community group surveys in the day labor, restaurant and domestic
service industries find similar sweatshop conditions.\29\ Immigrant
workers predominate in many of these jobs, creating more barriers to
enforcing labor standards where complaints trigger agency action.\30\
Immigrant and other workers fear retaliation and other reprisals,
chilling them from coming forward to lodge complaints of unfair
workplace conditions. Without overt agency action to ferret out the
violations, many 1099 abuses go unnoticed.
Low wages and unsafe conditions persist in these jobs.\31\ The
Bureau of Labor Statistics found that 2.2 million hourly workers were
paid at or below the federal minimum wage in 2002.\32\ The federal
minimum wage at its current level of $5.15/ hour nets an earner a
little over $10,700 annually, hardly enough to make ends meet. The
employer-backed Employer Policy Foundation estimated that workers would
receive an additional $19 billion annually if employers obeyed
workplace laws.\33\ A 2000 U.S. DOL-commissioned study of employer tax
evasion in the unemployment insurance system found lost unemployment
insurance benefits to 80,000 workers annually from employer
misclassification of workers as independent contractors.\34\ These
studies, while showing important losses, are in dire need of updating
with new data and information.
III. What is the Impact on Federal and State Government Receipts?
Federal and state governments suffer hefty loss of revenues due to
independent contractor misclassification, in the form of unpaid and
uncollectible income taxes, payroll taxes, and unemployment insurance
and workers' compensation premiums. The GAO estimated that
misclassification of employees as independent contractors reduces
federal income tax revenues up to $4.7 billion.\35\ Coopers & Lybrand
(now PriceWaterhouse Coopers) estimated in 1994 that proper
classification of employees would increase tax receipts by $34.7
billion over the period 1996-2004.\36\
A recent analysis of workers' compensation and unemployment
compensation data in New York state found that noncompliance with
payroll tax laws means as many as twenty per cent of workers'
compensation premiums--$500 million to $1 billion--go unpaid each
year.\37\ A recent study of the Massachusetts construction industry
found that misclassification of employees resulted in annual losses of
up to $278 million in uncollected income taxes, unemployment insurance
taxes, and worker's compensation premiums.\38\
IV. What Are Some Federal Policy Reform Possibilities?
Much progress can be made to combat independent contractor
misclassification by beefing up enforcement of existing labor and
employment laws to close independent contractor loopholes. This can be
achieved by making the DOL more effective. Another area ripe for reform
is in the tax area; but because this Committee has jurisdiction over
worker protection rules, I will focus on those areas of potential
reform.\39\
A. Make the U.S. DOL More Effective
Workplace enforcement of labor standards for all workers should be
at a level designed to send a message that America will not tolerate
non-payment and underpayment of wages. This means more emphasis on
enforcement: more personnel, and more focus on industries that are
known violators of wage and hour laws, so that at a minimum, low-wage
workers get the wages that they are entitled to under current law. This
focus on enforcement includes ensuring employers do not evade the basic
job laws by misclassifying employees as independent contractors.
Enforcement by DOL generally is down. In the face of wholesale
violations in particular industries, resources dedicated to enforcement
have been falling for many years. For example, from 1975--2004, the
budget for U.S. Wage and Hour investigators decreased by 14% (to a
total of 788 individuals nationwide) and enforcement actions decreased
by 36%, while the number of workers covered by statutes enforced by the
Wage and Hour Division grew by 55%.\40\ At present, there is
approximately one federal Wage and Hour investigator for every 110,000
workers covered by FLSA.\41\ By 2007, the U.S. Department of Labor's
(U.S. DOL) budget dedicated to enforcing wage and hour laws will be 6.1
percent less than before President Bush took office.\42\
Some particular DOL-based reform suggestions are:
Direct DOL to be more strategic with existing resources,
including conducting proactive audits of problem industries with
persistent violations and sharing audit data with the unemployment
insurance arm of DOL;
Require that DOL share information on independent
contractor problems and coordinate with the IRS, as suggested by the
2006 GAO Report; \43\
Mandate ``hot goods'' seizure of goods produced under
substandard conditions and where misclassification has occurred;
Create an Office of Community Outreach charged with
working with community and organizing groups to identify 1099-related
problems and witnesses for enforcement targets and to educate workers
about their rights;
Require data collection on wage claim levels and
violations, by industry, and on independent contractor
misclassifications;
Enhance DOL's Wage & Hour Enforcement Budget, and earmark
it for more targeted industry audits and investigations where
independent contractor abuses prevail.
A critical component of any US DOL reform package is to ensure that
there is a firewall between immigration and labor law enforcement. All
workers should have meaningful access to systems of labor law
enforcement: Because labor and employment laws are complaint-driven and
because many of the industries with independent contractor abuses are
dominated by immigrant workers, workers must feel free to come forward
to complain. This means preserving historic boundaries between labor
law enforcement and enforcement of immigration law. In 1998, US DOL
entered into a Memorandum of Understanding (MOU) with the then-INS
establishing that the labor agency will not report the undocumented
status of workers if discovered during an investigation triggered by a
complaint made by an employee when there is a labor dispute, nor will
it inquire into a worker's immigration status while conducting a
complaint-driven investigation.\44\ This policy must be enforced, and
strengthened with clear directives to field staff at the enforcement
agencies.
endnotes
\1\ Employment Arrangements: Improved Outreach Could Help Ensure
Proper Worker Classification, GAO-06-656 (July 2006), at p. 25.
\2\ See, Employment Arrangements: Improved Outreach Could Help
Ensure Proper Worker Classification, GAO-06-656 (July 2006), at p. 43.
Examples are a plumber called in by an office manager to fix a leaky
sink in the corporate bathroom, or a computer technician on a retainer
with a shipping and receiving company to trouble-shoot software
glitches.
\3\ U.S. DEP'T OF LABOR, Commission on the Future of Worker-
Management Relations, (1995), available at http://www.dol.gov/--sec/
media/reports/dunlop/dunlop.htm#Table.
\4\ See definition of ``worker'' in the WA state workers'
compensation act as an example: http://apps.leg.wa.gov/RCW/
default.aspx?cite=51.08.180. At least 10 states (AZ, CA, CO, CT, DE,
HI, NH, ND, WI, WA) have a general presumption of employee status in
their workers' compensation acts (regardless of what job the injured
worker has).
\5\ http://www.mass.gov/legis/laws/mgl/149-148b.htm.
\6\ See, NELP, Combating Independent Contractor Misclassification
in the States: Models for Successful Reform (December 2005). http://
www.nelp.org/docUploads/COMBAT-
ING%20INDEPENDENT%20CONTRACTOR%20MISCLASSIFICATION%2Epdf
\7\ Id.
\8\ See, NELP, Subcontracted Workers: The Outsourcing of Rights and
Responsibilities (March 2004). http://www.nelp.org/docUploads/
subcontracted%20work%20policy%20up- date%5F072704%5F065405%2Epdf
\9\ CAL. LAB. CODE Sec. 2675 et. seq.; N.J. REV. STAT. Sec. 34:6-
144; N.Y. LAB. LAW Sec. 340 et. seq.
\10\ NEB.REV.STAT. Sec. 81-404.
\11\ ARIZ. REV. STAT. Sec. 23-551 et. seq.; FLA STAT. ANN.
Sec. 448.20 et. seq.; GA. CODE ANN. Sec. 34-10-1 et. seq.; 820 ILL.
COMP. STAT. 820/175 et. seq.; N.M. Stat. Ann. 50-15-1 et. seq.; TEX.
LAB. CODE Ann. Sec. 92.001 et. seq.
\12\ Lalith de Silva et al., ``Independent Contractors: Prevalence
and Implications for Unemployment Insurance Programs'' i-iv, prepared
for U.S. Department of Labor, Employment and Training Division by
Planmatics, Inc. (Feb. 2000), available at http://wdr.doleta.gov/
owsdrr/00-5/00-5.pdf.
\13\ See Fiscal Policy Institute, ``New York State Workers
Compensation: How Big is the Shortfall?'' (January 2007); Michael
Kelsay, James Sturgeon, Kelly Pinkham, ``The Economic Costs of Employee
Misclassification in the State of Illinois'' (Dept of Economics:
University of Missouri-Kansas City: December 2006); Peter Fisher et al,
``Nonstandard Jobs, Substandard Benefits'', Iowa Policy Project (July
2005); Francois Carre, J.W. McCormack, ``The Social and Economic Cost
of Employee Misclassification in Construction (Labor and Worklife
Program, Harvard Law School and Harvard School of Public Health:
December 2004); State of New Jersey, Commission of Investigation,
``Contract Labor: The Making of an Underground Economy'' (September
1997).
\14\ Francois Carre, J.W. McCormack, ``The Social and Economic Cost
of Employee Misclassification in Construction (Labor and Worklife
Program, Harvard Law School and Harvard School of Public Health:
December 2004), at p. 8.
\15\ Coverall North America, Inc. vs. Commissioner of the Division
of Unemployment Assistance, SJC-09682, 447 Mass. 852 (2006).
\16\ Francois Carre, J.W. McCormack, et al., ``The Social and
Economic Cost of Employee Misclassification in Construction'' 2, Labor
& Worklife Program, Harvard Law School and Harvard School of Public
Health, Dec. 2004, available at http://www.faircontracting.org/
NAFCnewsite/prevailingwage/pdf/Work--Misclass--Stud--1.pdf
\17\ Abel Valenzuela and Nik Theodore, On the Corner: Day Labor in
the United States (January 2006).
\18\ See Coverall North America, Inc. vs. Commissioner of the
Division of Unemployment Assistance, SJC-09682, 447 Mass. 852 (2006);
Vega v. Contract Cleaning Maintenance, 10 Wage & Hour Cases 2d (BNA)
274 (N.D. IL 2004).
\19\ See Bonnette v. Cal. Health & Welfare Agcy., 704 F.2d 1465
(9th Cir. 1983).
\20\ See, e.g., IL Executive Order conferring bargaining status on
child day care workers otherwise called independent contractors: http:/
/www.gov.il.gov./gov/execorder.cfm?eorder=34.
\21\ Sec'y of Labor v. Lauritzen, 835 F.2d 1529 (7th Cir. 1988).
\22\ Employment Arrangements: Improved Outreach Could Help Ensure
Proper Worker Classification, GAO-06-656 (July 2006), at p. 30.
\23\ Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir. 1996).
\24\ Ansoumana et al v. Gristedes et al, 255 F.Supp.2d 184
(S.D.N.Y. 2003).
\25\ New York Times, ``Teamsters Hope to Lure FedEx Drivers,'' May
30, 2006 (cataloguing cases).
\26\ Employment Arrangements: Improved Outreach Could Help Ensure
Proper Worker Classification, GAO-06-656 (July 2006), at p. 31.
\27\ Phillip Mattera, ``Your Tax Dollars at Work * * * Offshore,''
Good Jobs First (July 2004) http://www.goodjobsfirst.org/publications/
Offshoring--release.cfm
\28\ (Poultry--100% noncompliance) U.S DEP'T OF LABOR, FY 2000
POULTRY PROCESSING COMPLIANCE REPORT (2000); (garment--50%
noncompliance), BUREAU OF NATIONAL AFFAIRS, U.S. DEP'T OF LABOR, LABOR
DEPARTMENT: CLOSE TO HALF OF GARMENT CONTRACTORS VIOLATING FAIR LABOR
STANDARDS ACT, DAILY LABOR REPORTER 87 (May 6,1996); David Weil,
Compliance With the Minimum Wage: Can Government Make a Difference?
VERSION (May 2004), available at http://www.soc.duke.edu/sloan--2004/
Papers/Weil--Minimum%20Wage%20paper--May04.pdf; (agriculture--
``unacceptable'' levels of noncompliance) U.S. DEP'T OF LABOR,
COMPLIANCE HIGHLIGHTS 1,3 (1999); (nursing homes--60% noncompliance),
EMPLOYMENT STANDARDS ADMINISTRATION, U.S. DEP'T OF LABOR, NURSING HOME
2000 COMPLIANCE FACT SHEET, available at http://www.dol.gov/esa/
healthcare/surveys/nursing2000.htm.
\29\ More than half of New York City restaurants were violating
overtime or minimum wage laws in 2005. Restaurant Opportunities Center
of New York and the New York City Restaurant Industry Coalition, Behind
the Kitchen Door: Pervasive Inequality in New York City's Thriving
Restaurant Industry (New York, 2005), available at http://
www.rocny.org/documents/ROC-NYExecSummary.pdf; Domestic Workers United
and DataCenter, Home is Where the Work is: Inside New York's Domestic
Work Industry, (2003-3004); Abel Valenzuela and Nik Theodore, On the
Corner: Day Labor in the United States (reporting half of day laborers
surveyed experienced wage theft, and many suffer harassment from
merchants and arrests by police)(January 2006).
\30\ David Weil and Amanda Pyles, Why Complain? Complaints,
Compliance, and the Problem of Enforcement in the U.S. Workplace, Comp.
27 Labor Law & Pol'y Journal 59, 60 (2006). U.S. GENERAL ACCOUNTING
OFFICE, Worker Protection: Labor's Efforts to Enforce Protections for
Day Laborers Could Benefit from Better Data and Guidance, GAO 02-925
(September 2002)(``GAO Day Labor Report'') (Noting that day laborers
rarely complain to DOL due to fear and intimidation by employers and
perception of inactivity on the part of DOL).
\31\ For a list of the statistics on various low-wage industries,
see, Holding the Wage Floor: Enforcement of Wage and Hour Standards for
Low-Wage Workers in an Era of Government Inaction and Employer
Unaccountability, (New York: National Employment Law Project, Oct.
2006), available at http://www.nelp.org/.
\32\ See, Workers are Paid at or Below Minimum Wage in 2002, BLS
Says, 173 Lab.Rel.Rptr. 16, ECONOMIC NEWS, September 1, 2003.
\33\ See Craig Becker, A Good Job for Everyone, LegalTimes, Vol.
27, No. 36. (Sept. 6, 2004).
\34\ Planmatics, Inc., Independent Contractors: Prevalence and
Implications for Unemployment Insurance Programs (February 2000).
\35\ U.S. GENERAL ACCOUNTING OFFICE, Tax Administration
Information: Returns Can Be Used to Identify Employers Who Misclassify
Employees GAO/GGD-89-107 (1989).
\36\ Projection of the Loss in Federal Tax Revenues Due to
Misclassification of Workers, Coopers & Lybrand (1994).
\37\ New York State Workers' Compensation: How Big Is the Coverage
Shortfall?, (New York: Fiscal Policy Institute, Jan. 2007).
\38\ Francois Carre, J.W. McCormack, et al., ``The Social and
Economic Cost of Employee Misclassification in Construction'' 2, Labor
& Worklife Program, Harvard Law School and Harvard School of Public
Health, Dec. 2004, available at http://www.faircontracting.org/
NAFCnewsite/prevailingwage/pdf/Work--Misclass--Stud--1.pdf
\39\ A major problem barring effective enforcement against
independent contractor abuses is the safe harbor provision in the
Internal Revenue Code, at Section 530 of the Revenue Act of 1978, 26
U.S.C. Sec. 7436. Currently, employers decide whether their workers are
employees or independent contractors with little scrutiny from the IRS
and no consequences. Under current law, an employer who is found by the
IRS to have misclassified its workers can have all employment tax
obligations waived. Section 530 also prevents the IRS from requiring
the employer to reclassify the workers as employees in the future.
Among other factors, a business can rely on its belief that a
significant segment of the industry treated workers as independent
contractors, thereby perpetuating industry-wide noncompliance with the
law.
\40\ Annette Bernhardt & Siobhan McGrath, Trends in Wage and Hour
Enforcement by the U.S. Department of Labor, 1975-2004, Economic Policy
Brief No. 3 (New York: Brennan Center for Justice at NYU School of Law,
September 2003).
\41\ Id. There are nearly 88 million people covered by FLSA. Id.
\42\ Judd Legum, Faiz Shakir, Nico Pitney, Amanda Terkel, and
Payson Schwin et.al., Labor--Bush Priorities Hurt Workers, Help
Employers (Under the Radar), THE PROGRESS REPORT, June 14, 2006.
\43\ Employment Arrangements: Improved Outreach Could Help Ensure
Proper Worker Classification, GAO-06-656 (July 2006), at p. 33, 35.
\44\ See Memorandum of Understanding Between the Immigration and
Naturalization Service (Department of Justice, and the Employment
Standards Division, Department of Labor, November 23, 1998).
______
Chairwoman Woolsey. Thank you very much.
Thank you, all four of you, for your testimony.
I would like to start with you, Mr. Shavell. Does ABC have
training programs or handouts or information that you send to
your members so that they can actually learn the difference
between an independent contractor and an employee? And what
would you tell them? What are the standards and guidelines that
you would tell them, to prove whether they have an employee or
an independent contractor?
Mr. Shavell. The issue, as you point out in your opening
statement, is extremely complex.
The determination of whether somebody is an independent
contractor or an employee is going to affect different aspects.
Chairwoman Woolsey. I am asking you--it isn't that complex.
I am telling you that. I was a human resources manager
professional for 20 years. I know the difference between an
employee and an independent contractor.
What do you tell your members? Do you have guidelines that
you have to be working for more than one, you cannot be under
the control of just that one employer.
Mr. Shavell. To answer the question directly, I am sure
that there are materials that are involved in the different
programs that ABC shares with its members for educational
purposes.
My point was simply that the definition is different for
different purposes. I was focusing on tax. There are different
tests for different purposes. The Department of Labor actually
uses a different test than the IRS would use, and there are
other boards that would use different tests.
At the state level, there are different issues also.
Chairwoman Woolsey. Well, except you either are an employee
or you are not.
Ms. Ruckelshaus?
Ms. Ruckelshaus. Yes, Madam Chair. Mr. Shavell is correct
that there are different tests, but there are certain objective
factors that are crystal clear. And the main concern is, is
this person in business for him or herself? Is there a business
there? Is there capital invested? Is there a specialized skill
that the person brings to the business? Is the work that is
being performed integrated into the worksite employer's
business?
Those are the primary concerns that people look to to
determine independent contractor status.
Chairwoman Woolsey. And also, is this independent
contractor able to go to work for somebody else without that
employer thinking that they are leaving a job, that they have
the right to go someplace else.
All right. So I would suggest also to you, Mr. Shavell, do
you talk to your members about what the penalties will be if
they are caught? I mean, if they have a whole workforce of
``independent contractors,'' and somebody has a Workers Comp
claim, do they know that they are going to have to reach back
and make up for all those Workers Comp premiums that they have
been ducking all this time? Do they know they have to go back
and pay payroll taxes for the state that they have been ducking
all this time?
Go ahead, you may answer.
Mr. Shavell. I sense a presumption that ABC members are
doing something wrong. ABC members are 24,000 businesses across
the country. There are many, many other businesses.
So as far as what we are doing, as I indicated, I am sure
within some of the materials and education programs, I am sure
they share the information with the businesses. The point is
that there are a lot of small businesses that start out as
independent contractors and a lot of members of ours, as well
as many other associations and other industries within the
country.
Chairwoman Woolsey. Well, yes, indeed, that is true, but
they start out as individuals themselves as independent
contractors, then they start hiring. That is an entire
different bag of tricks. So that is where we have to be able to
distinguish between this is my business I can do because it is
me and my family. Those are the only people you can take
advantage of. You can't legally take advantage of others than
yourself and your family.
Mr. Flynn?
Mr. Flynn. Yes, I guess in our case, we are a union, but we
do have collective bargaining agreements with over 12,000
employers with our union. And they are all called
subcontractors, generally. They are all independent
contractors. But they do run legitimate businesses. They do
have employees. They do pay the benefits and the things that
are involved with being in business.
And we think that is why this is such an important issue.
When other employers, who are hiring people and classifying
them as independent contractors and not, you know, paying in
the proper taxes on those employees, we think that causes an
undermining of the system and the laws that protect employees
here in America. And we think that is the big difference in our
country. That is what creates our middle class in order for
people to be employees and make fair and decent wages.
And letting this go on simply undermines the ability of Mr.
Horn and others in our industry to be able to run their
businesses and continue to compete.
Chairwoman Woolsey. Thank you. Thank you very much.
Mr. Wilson, from South Carolina?
Mr. Wilson. Thank you very much, Madam Chairman.
Mr. Flynn, thank you for being here. You have an excellent
reputation in Washington for effectiveness.
And, Mr. Horn, thank you for coming. You have really
brought a great perspective, being a mason, foreman, business
owner. Thank you for being here.
I am particularly happy to see a CPA and an attorney
sitting together. I am a former real estate attorney, and
something I ran into frequently is if you mention the word IRS,
I immediately threw my hands up and said, ``We have got to get
a CPA involved.'' But it is a good team relationship.
Mr. Shavell, you have identified the 20-factor test and it
has also been identified, or I have read, about IRS ambiguity
and inconsistency with the 20-factor test, with other tests,
that may be used. What are the factors in particular that IRS
looks at? And is there a consistency?
Mr. Shavell. On the tax side, this 20-factor test has been
around for quite a while, and was explained, some of the key
factors you are going to be looking at is who is controlling
the work, whether or not the independent contractor has the
ability to work for other businesses as well, who is
controlling the hours, the location, who is making the
investment, is there risk of loss, on and on. There are 20
factors.
Are there inconsistencies? As I have pointed out, there are
some differences. Maybe not significant, but there are some
differences as to how the Department of Labor and some other
entities may look at these factors. And probably if you look at
the one consistent one is the control factor. Who is
controlling how the work is being done? That is a key thing.
And also controlling the schedule.
Also, at the state level, various states have different
rules as to what the factors may be. They may look at a 10-
factor test, a financial reality test. There are a few
different ones.
My point was simply that there is a complexity for the
business owner in dealing with these things, and the point I
want to go back to, if I can just make one last point, there is
a consistency sitting here on this panel. Everybody here wants
a level playing field. There is no need for people to be doing
wrongful acts. Wrongful misclassification is wrong. There is no
doubt about it. Everybody, a business owner like myself, we
want a level playing field. Mr. Horn wants a level playing
field. Everybody wants a level playing field. I think that is
the consistency you see here in front of you.
Mr. Wilson. Ms. Ruckelshaus, with your background, with the
20-factor test, the other tests that are used, do you see
consistency? Or what can be done?
Ms. Ruckelshaus. Yes, in my opinion, legislative action on
the actual test is not necessary right now because the way the
laws are drafted, if they were enforced correctly and fully, we
wouldn't need any legislative changes.
The laws are sufficiently broad and sufficiently define
employee to cover most of the people I have been talking about
and most of the people that my co-presenters have been
discussing. It is really not a question of changing the law as
much as enforcing the laws that are on the books and doing it
more strategically, to plug up these loopholes.
Mr. Wilson. Mr. Shavell, you have identified that different
states have different efforts. Are there some states that have
been more active and effective? Which ones may they be?
Mr. Shavell. The expert is right here next to me, but I
will give you two examples.
Mr. Wilson. And I was going to ask her that question, too.
Mr. Shavell. Two examples would be California, for example,
in the construction industry. One of the members of our tax
advisory group shared with me before I came here today, he said
in California, with contractors, if the worker does not have a
license for the service they are going to perform, then that
individual worker must be an employee of whom they are doing
the work for. So it eliminates a high level of confusion there.
In my home state of Florida, in 2003 they changed some
rules on Workers Compensation and the rule changes really
weren't significant, but what was truly significant is since
that point in time in 2003, when they tightened up some filing
requirements and regulator requirements, they have done a
pretty good job of enforcement and publicizing where they have
been able to catch people that are doing things wrong. And some
people have been facing criminal action. And that message
permeates the industry and people begin to realize they need to
do something differently.
I agree with what was just said. There isn't need for
congressional action. There is need for better enforcement and
my personal opinion is that at the state levels, that is where
action can really occur, and they need help with enforcement.
They need more funding. They need to get out there and do
things like I am talking about that Florida has done.
Mr. Wilson. Could Ms. Ruckelshaus answer briefly?
Ms. Ruckelshaus. Just to clarify, I am not saying that we
don't need congressional action, it just may not be legislative
action. I think there is a lot that this committee could do to
encourage Department of Labor to beef up its strategic
enforcement.
But to answer your question, sir, on the state reforms,
some states have been very successful at combating these
problems by creating presumptions of employee status. It
doesn't get away from independent contractor status, but it
creates a presumption in certain low-wage sectors where it is
pretty clear people aren't in business for themselves.
Another thing states have done that is very effective that
we can do at the federal level is to create interagency
collaboration for Departments of Revenue and Departments of
Labor and Departments of Workers Comp or Unemployment, to work
together to try to combat the independent contractor problems
and some of those ideas are outlined in my written testimony.
One thing that we would caution at the federal level is,
because a lot of these independent contractor problems have
undocumented workers in the workplaces and we need to be sure
the labor standards are there for everybody, at the federal
level, with interagency cooperation, we would highly recommend
that there be a firewall between immigration enforcement and
the labor and tax enforcement. Because otherwise, you drive
people underground, you drive them further away from any
regulation, and the problem worsens instead of gets better.
Mr. Wilson. Thank you.
Chairwoman Woolsey. Thank you.
The gentleman from New York, Mr. Bishop?
Mr. Bishop. Thank you, Madam Chair, and thank you very much
for holding this hearing and shedding light on this shameful
and I suspect growing problem.
Let me start with you, Mr. Shavell. You make the point in
your testimony that whatever is done to ensure a level playing
field, we would need to be careful not to impose regulations
and other requirements that would make it more difficult for
legitimate businesses to do their jobs.
The practice that Massachusetts has put in place, for
example, in which they simply presume the employer-employee
relationship unless certain tests are met or the practice that
New Mexico has put in place, which they simply assume the
employer-employee relationship for all construction jobs, would
you find those to be consistent with maintaining a level
playing field? Or would you find those to be falling under the
heading of imposing an undue burden?
Mr. Shavell. I honestly don't know how to answer that, but
let me try and answer that.
I guess to focus on the regulatory concerns, it really
depends on how they would go about doing that. In my mind,
being a tax guy, I always jump to the tax end of things. I am
trying to figure out how that gets done.
Mr. Bishop. Just for a second--I was a history major, so we
look at things rather simplistically. But, I mean, if a person
comes to a construction job and just as a matter of practice,
as a matter of state law, that is an employee, not an
independent contractor, walk me through why that would be
complex? That strikes me as pretty straightforward.
Mr. Shavell. You are making a presumption that everybody is
the same.
Mr. Bishop. Well, this is New Mexico law, so I guess what
my question is----
Mr. Shavell. I guess it is very similar to what California
did.
Mr. Bishop. It sounds like it is.
Mr. Shavell. Which says that, hey, document that you are
different and then you can be treated differently.
Mr. Bishop. Right.
Mr. Shavell. That would probably help level the playing
field. My concern would be how we accomplish that at the
federal level.
Mr. Bishop. Perhaps we can't accomplish it at the federal
level.
Mr. Shavell. Right. I think we are all in--maybe we are all
in agreement that from a state level, you know, maybe that is
where the action needs to occur.
Mr. Bishop. Okay.
Ms. Ruckelshaus, how would you approach this issue of using
perhaps what is in place in either New Mexico or Massachusetts,
or both, as a national model that we might encourage other
states to replicate?
Ms. Ruckelshaus. I think at the state level it can work
very well, because the presumption has been in place, as you
mentioned, in New Mexico. Ten states have it in their Workers
Compensation acts and it has been working quite well for years
under those acts.
I am not sure how it would work at the federal level. I
still return to my original point that just enforcing what we
have now would do huge things to solve this problem, and I
think making the Department of Labor more strategic and
targeted for some of these independent contractor abuses and
perhaps creating presumptions within the Department of Labor's
regulations or enforcement could do the trick.
Mr. Bishop. Thank you.
Mr. Flynn, you, in your written testimony, talked about how
the bricklayers sent people into certain situations to see how
they were treated. Did the results of that reveal any
differences between how union contractors versus nonunion
contractors, how they lined up on this issue? Were union
contractors more or less likely to misclassify employees?
Mr. Flynn. Well, a union contractor is a legitimate
business person, usually, and they are not trying, as far as I
know, I guess there certainly could be occasions when they
would, but usually if they have a collective bargaining
agreement, it defines anybody working for them is an employee
as described in the agreement.
But now what I think our organizers discovered when they
began to look into this, they actually went to some of these
accounting firms. And they said, oh, sure, we will teach you
how to classify everybody as an independent contractor and then
you don't have to pay any income tax or social security or
unemployment insurance or any of these things, and that is how
they discovered that this network of folks is out there,
teaching people how to avoid the burdens of the tax system and
the insurance.
And Mr. Horn might be able to tell you more about it,
because he is from Illinois. That is where the study with our
own people was done. And one of those organizers is here, Joe
Provola. He is here in the audience.
Mr. Bishop. Madam Chair, I am out of time, but can Mr. Horn
answer?
Chairwoman Woolsey. Yes, absolutely.
Mr. Horn?
Mr. Horn. Part of the union audit that they do annually on
my books, they look at all my subcontractors, my independent
contractors that I contract to, and if any of their work
jurisdictions fall under the classifications of the
bricklayers, I have to in turn pay full benefits and everything
for those individuals, so there is sort of an additional
monitoring piece.
I believe that enforcement is the key. The thing that you
have to remember is the potential gains of these guys or these
employers to operate in this environment is so great. For
example, in my business, at the $10 million level, earning the
industry average is between 3 percent and 5 percent net margin,
you are at 300,000 to 500,000. If I switch to the independent
contractor model, I can increase my margins close to 20
percent, that would be $2 million in a $10 million business.
So the potential gain for these guys to cheat is so great,
and again, in the Chicagoland area, I am not aware of one
incident that there has been enforcement on this issue, and I
know as soon as there is, it will spread through the industry
and, I think, have a significant impact on it.
Mr. Bishop. Thank you.
Thank you, Madam Chair.
Chairwoman Woolsey. And now the gentleman from Minnesota,
Mr. Kline.
Mr. Kline. Thank you, Madam Chair.
Thank all the witnesses for their testimony today and being
here.
I am finding this not quite as simple and straightforward
as the chair indicated earlier, because the further we go, the
more complicated it seems to me. Let me try to sort of cut
through my ability to understand.
One of the claims, and I think Mr. Flynn and Mr. Horn have
both addressed this, is there is apparently a very large-scale
effort out there to intentionally break the law. By your
testimony, you have accountants out there trying to teach
employees how to evade the law, which of course would be
illegal. So that would be an issue of enforcement, back to Ms.
Ruckelshaus' position, and I think Mr. Shavell's.
Let me ask you, Mr. Shavell, are you hearing this from your
side, that there are these efforts to teach employers how to
evade the law? Or are there efforts to explain a complicated
law? Let me just hear another perspective on that, if I could.
Mr. Shavell. I have been a CPA since about 1985 and working
in construction since about 1987, so I have been dealing with
contractors for all those years. Nobody has walked in my office
and said, ``Teach me how to do this.''
Again, there is the saying, ``Dishonorable people will do
dishonorable things when given the opportunity.''
ABC believes wrongful misclassification is just plain
wrong. So I would hope that it is not the majority of people
out there doing things that are wrong. People don't walk in my
office and say teach me how to break the law because I would
throw them out.
Mr. Kline. Thank you.
And if they are, then the law ought to hold them to account
about something we are trying to get at here.
But let me just see if I can understand some of the
complications here. I have got a sort of hypothetical here, and
I will talk to this end of the table, if I could. We would all
agree that a general contractor could be in the overall
business of, let us say, building houses or something else.
They typically have subcontractors, and that has been
recognized here, who may be involved in brickwork, we have got
a lot of bricklayers out here, drywall, electrical or something
like that.
These subcontractors typically are not employees of the
general contractor. Is that not the case? They are not
employees?
Mr. Shavell. If you are talking about a single individual
who is handling one trade, he could or could not be, but the
typical situation is they are going to hire a firm who is going
to bring the labor with them, and that will be the
subcontractor.
Mr. Kline. So they could have, in theory, and that would be
the problem, they could have individuals who were either
contractors or employees, and that is the position of
enforcement that we are trying to get to.
I found it interesting, you were talking about California
and the state law there, and I am just trying to understand
this as well, I think it would be pretty clear in the case of
the construction trades, but what about other--and here is a
kind of bizarre hypothetical that we were doing a little
offline chatting up here, as some of you may have noticed.
What about the case of a college kid, 18-or 19-year-old
college kid, who decides to be a babysitter? Now, this is a
person without any specialized skills. They certainly wouldn't
have a license. Would this person be an employee or a
contractor under California law? How would that work?
Ms. Ruckelshaus. She may be exempt, because there are
exemptions under law for babysitters, but let us take that
aside. I think that you walk through whatever tests you are
looking at. It is complicated, because there are tests for
whether or not she is an employee for minimum wage and
overtime. It is a different test for tax purposes.
But if you look at some of the core questions, you see,
does she have a specialized skill? That could be argued, if she
does or not. She probably hasn't invested much capital in a
business. She is probably not working--wherever she is working
is on the worksite in somebody else's business, because she is
working in a home, presumably. She could be working in an
institution or in some day care center, which again would
change the calculus.
But these are facts-based determinations that you have to
make on a case-by-case basis. You can have broad
generalizations, as you were just discussing with Mr. Shavell,
in construction. But it is important to look at each individual
instance and look at the facts and see, is she in business for
herself or not? Is she hanging out a shingle? Is she taking out
ads in the newspaper or in the want ads to market a business?
Mr. Kline. The difficulty, of course, becomes that you are
the couple getting ready to go out to the ballgame and you are
having to determine whether or not this person is an
independent contractor, whether they are an employee----
Chairwoman Woolsey. Would you yield to me, just a minute?
Mr. Kline. I would be happy to yield, Madam Chair.
Chairwoman Woolsey. Thank you very much.
Isn't it very clear that this young babysitter babysits for
more than one family?
Mr. Kline. Excuse me, reclaiming my time. I don't know how
you would know if you were potentially the person hiring.
Mr. Shavell, do you have a comment?
Mr. Shavell. No. I just wanted to point out that there is
actually an IRS case on a fact pattern with babysitters.
Mr. Kline. Might want to address it for people who mow
lawns as well.
I was very interested--I see my time is about to run out.
You mentioned, Ms. Ruckelshaus, the possibility of some
interagency effort, because clearly we have definitions here
from the IRS, the Department of Labor, and perhaps ought to be
simplified if we are going to try to enforce it, because we
have different enforcing agencies here as well, to try to get
to the bottom of this. That is an interesting approach.
I don't know how far you have progressed with that, but I
have a few seconds left, if you could talk to us about how that
might work.
Ms. Ruckelshaus. Yes, I am not advocating a simplification
of the rules. I am more advocating information sharing and data
sharing between the agencies, because if Unemployment Insurance
finds that there are misclassifications, they can tell Wage and
Hour, and Wage and Hour can go. And similarly, with Treasury,
they see when there is a lot of 1099s coming in that there may
be a violation there. And usually if you see one violation, you
see lots of workplace violations.
So that was the proposal, was to have that----
Mr. Kline. So not changing the regulations, but changing
the--that is a very interesting concept.
Thank you, Madam Chair. I yield back.
Chairwoman Woolsey. And the gentleman from Georgia, Mr.
Price?
Mr. Price. Thank you, Madam Chair. I appreciate that.
And I thank you for holding this hearing on an issue about
which I have learned a lot with your testimony and with the
information that you have presented, and I appreciate you all
coming and sharing your story with us.
Mr. Horn, you present a wonderful American dream story. You
truly do. I guess that you became an independent contractor, is
that right?
Mr. Horn. I would love to, I just don't like breaking the
law.
Mr. Price. Your final comments on your prepared testimony
is that you strongly urge Congress to take action to clearly
define who is and who is not an independent contractor. Do you
have any benchmark that you would use for that? Any model that
you would use for that?
Mr. Horn. I think a lot of the--like you are saying, a lot
of the rules and regulations are already in place. They just
need to be enforced.
I don't think it is usually a question--when the
individuals or the firms are practicing this procedure, I don't
think there is a question in their mind of where they are on
the line. They know their way over into that area.
So as far as identifying it for the employee and clarifying
it for the employee, that may be helpful, but it is my belief
that the individual or institution that is implementing this
type of structure is well aware of what is going on.
Mr. Price. You think they know what they are doing.
Mr. Shavell, you also provide four different options for us
to consider, potential resolutions, as you described them. The
final one is to eliminate the availability of independent
contractor status, and then you talk about why that is not an
appropriate thing to do for a variety of reasons.
And I would assume that everybody else on the panel agrees
that the independent contractor status ought to remain in place
in some way. Is that accurate, Mr. Flynn?
Mr. Flynn. Yes. I have no problem with the idea of a
subcontractor or an independent contractor. I guess the real
issue becomes who controls whether the person is going to work
this morning.
If I am an independent contractor and I get up and I am
tired, maybe I can go play golf. But if I am an employee, if I
don't show up, I am probably going to get fired.
Mr. Price. Right, but you don't believe that we ought to do
away with an independent contractor status?
Mr. Flynn. No. I think calling it----
Mr. Price. Or do you?
Mr. Flynn [continuing]. An independent contractor really
confuses it. We would usually more describe it or call it a
subcontractor.
Mr. Price. Subcontractor, okay.
Mr. Horn, do you----
Mr. Flynn. But everybody that we have a collective
bargaining agreement with, or nearly everybody, they are
subcontractors to larger companies. They are also all
businesses----
Mr. Price. Right, and I would concur with that.
Mr. Horn, you believe that independent contractor status
ought to remain in some way. Is that correct?
Mr. Horn. Yes.
Mr. Price. Ms. Ruckelshaus?
Ms. Ruckelshaus. Yes, that is correct. I do.
Mr. Price. Good.
Mr. Flynn, it has been alluded to a couple of times, you
talk about this network of accountants and insurance brokers
whose primary business is to, as you describe, ``aid and abet
the fraudulent misclassification of workers.''
And I find that--I guess that is possible. Would you care
to identify who you are referring to?
Mr. Flynn. Well, let me explain now. You know, I am with
the International Union. We have local unions in different
communities. This was discovered by our local union and the
organizers and business agents who work for the local union in
Chicago.
I could probably get more specific information for you----
Mr. Price. I would be interested in the specific firms of
accountants and insurance brokers who are in fact engaging in
that activity. I would appreciate that.
Mr. Flynn. I will request that our folks get that
information. Should we send it to the chair or to each of you
individually?
Mr. Price. I will give you my card and you can send it to
me.
Chairwoman Woolsey. And if you would yield----
Mr. Price. Sure.
Chairwoman Woolsey [continuing]. We could have that as a
request to the panel that would come back through the
committee.
Mr. Price. I appreciate that.
Ms. Ruckelshaus, my time is running short, but I was amused
by your topic heading on Page 9 of your testimony, ``Making the
U.S. Department of Labor More Effective.''
In my district, when I talk about the government becoming
more effective, I just get chuckles. So I had to make certain
that that was clear.
The final paragraph, however, I am struck by your final
paragraph in your prepared testimony, which talks about
preserving the historic boundaries between labor, law
enforcement and the enforcement of immigration law, and I read
this to say that you support the Department of Labor, knowing
and understanding and appreciating that there are individuals
who are working illegally that are identified as individuals
who are working here illegally, but to remain mute when they
are talking--with that knowledge with relationship to other
federal agencies. Is that correct?
Ms. Ruckelshaus. Not exactly.
Just to clarify that, and I realize this is
counterintuitive, and a lot of people who aren't in labor
enforcement don't understand this initially. It is current
practice for the Department of Labor not to share any
information it may glean when it is doing a workplace audit of
the existence of undocumented workers. And the reason for that
is that to enable us to have the baseline labor standards in
place, we need witnesses. We need workers to come forward. Our
system of labor standards enforcement is complaint-driven.
So if you don't have workers willing to come forward and
they are intimidated and they are retaliated against, that
sends the message to employers let us hire more undocumented
workers. They are not going to complain. They are not going to
come forward. They will never show their faces at the
Department of Labor because they are scared, and I am going to
turn them in to the INS or the Immigration Service.
So Department of Labor and Immigration have the memorandum
of understanding. It has been reaffirmed numerous times under
numerous administrations, that you have to keep this
information separate, otherwise the labor standards enforcement
cannot happen and the workplaces go underground even more than
they are now.
Mr. Price. So you support one agency in the federal
government keeping quiet about their knowledge of illegal
status of workers, as I understand you saying it.
Ms. Ruckelshaus. No. There is typically not knowledge on
the part of the Department of Labor, because they are not
equipped to determine who is work authorized and who isn't.
That is an immigration enforcement role that the ICE is
particularly trained and able to do. Department of Labor
doesn't know how to do that. They are not equipped to do that
and they are not supposed to do audits on immigration
enforcement, so there is no knowledge on their part. They are
there to do the workplace audit and they shouldn't blend over
into areas that they are not equipped to do.
Mr. Price. If I may, Madam Chair.
Mr. Flynn, do you support knowledge gained by an employer
or an agency of the federal government about the legality or
illegality of a worker being kept quiet?
Mr. Flynn. I don't really know. Whatever the law is. I
mean, we generally support the law.
The problem for us as a union representative is that our
employers generally try to comply with the law. It is against
the law for them to employ someone who is in the country
illegally. And so we don't try to get in the middle of that. I
have just never taken a position on it.
Mr. Price. Thank you very much.
Thank you, Madam Chair.
Chairwoman Woolsey. Mr. Flynn, did you have an answer you
would like to complete?
Mr. Flynn. Yes, I have one point I would like to----
Chairwoman Woolsey. That would be fine.
Mr. Flynn [continuing]. Ask the chair.
One of our staff people just advised me that this situation
in Illinois is in the hands of the state attorney general and
we will give you whatever information we can, but it is under
investigation with the attorney general's office. So we are not
sure how much we can supply, but we will give you whatever we
can.
Chairwoman Woolsey. And that is understandable. And it is
appreciated.
And at this time I would like to thank you, witnesses. You
have been grand. And members of the committee have asked really
wonderful questions.
And I would like to enter into the record, with unanimous
consent, the Chicago Sun-Times article, ``State Agencies
Investigating Significant Problems.'' So that is as far along
as we can get, probably, for what Mr. Flynn can provide us. But
if you can provide more, we would sure appreciate it.
[The article follows:]
[From the Chicago Sun Times, March 19, 2007]
State Agencies Investigating `Significant Problem': Some Employees
Unaware Until the Bills Come
By Francine Knowles, the Chicago Sun-Times
Misclassification of workers as independent contractors ``is viewed
as a significant problem'' across the country, said Anita Bartels,
acting program manager for employment tax policy with the Internal
Revenue Service.
She acknowledged investigations are under way in the Chicago area,
but wouldn't provide details.
Union leaders say they have met with Attorney General Lisa Madigan
several times over the past year to discuss the issue.
According to a state government source, Madigan's office has
subpoenaed some Chicago area companies as part of the office's
investigation. Cara Smith, deputy chief of staff for policy with the
office, would not confirm or deny that's the case. But she said ``we've
been looking at this issue for quite some time. There's significant
dollars at issue * * * and the impact on the worker is incredibly
significant.''
Often employees aren't even aware they've been misclassified, until
``they're stuck with sometimes impossible tax bills to pay'' months
after being hired, or land in the hospital with workplace injuries to
discover they have no workers comp insurance protection, she said.
She said illegal immigrants are taken advantage of by the illegal
practice, noting they have a disincentive to come forward to report
misclassification because of fears of being deported.
Legislation sponsored by state Rep. Harry Osterman (D-Chicago)
affecting the construction industry would require a person performing
services for a contractor to be classified as an employee unless he or
she meets certain requirements. Those requirements include that the
worker is free from control or direction over the performance of the
service, is deemed a legitimate sole proprietor or partnership or is
engaged in an independently established trade, occupation, profession
or business.
The bill, which was voted out of the Illinois House Labor Committee
last week, includes penalties of $1,500 to $2,500 for each violation
and provides a path for criminal prosecution in certain cases. Osterman
expects the House to vote on the bill in the next two weeks. The
legislation is supported by the attorney general's office, Smith said.
The issue of misclassification also is on the congressional radar
screen. The U.S. House Education and Labor Committee will hold a
hearing next week on misclassification of workers. Members of
Bricklayers and Stone Masons Local 21 in Chicago will testify along
with national labor leaders.
A. Horn Inc. masonry contracting company President Cliff Horn, who
said his Barrington-based business has been left at a competitive
disadvantage because of the problem, will also testify at the hearing.
______
Mr. Flynn. Okay. Thank you.
Chairwoman Woolsey. One thing I want you to know is Joe
Wilson and I, representative Wilson and I, are going to write a
letter and reach out to the Department of Labor and ask them
about this enforcement and give them opportunity to respond
back. And, indeed, if they don't respond back or if we are
dissatisfied with their response, then that will lead us to an
oversight hearing and bring them to this very ominous position
of having to answer to us.
You have been all very generous, and we appreciate you very
much, but we will be doing that.
So as previously ordered, members will have 14 days to
submit additional materials for the hearing record. Any member
who wishes to submit follow-up questions in writing for the
witnesses should coordinate with majority staff within the
requisite time.
Without objection, the hearing is adjourned.
[Additional material submitted by Mr. Flynn follows:]
Office of the President,
International Union of Bricklayers and Allied Craftworkers,
Washington, DC, April 9, 2007.
Hon. Lynn Woolsey,
Chairwoman, Subcommittee on Workforce Protections, Committee on
Education and Labor, Washington, DC.
Dear Chairwoman Woolsey: On behalf of the nearly 100,000 members of
the International Union of Bricklayers and Allied Craftworkers (BAC), I
want to deeply thank the Workforce Protections Subcommittee for its
decision to hold hearings on the employee misclassification crisis. As
the testimony that the Subcommittee heard on March 27, 2007 made clear,
the rampant misclassification of working Americans as independent
contractors is having severe and far-reaching effects. A degree of
Congressional action is plainly necessary to effectively combat this
crisis.
At the conclusion of the March 27 hearing, you solicited further
comments for consideration by the Subcommittee. In light of the fact
that the members of the Subcommittee seemed to be searching for ways
that Congress could proactively work to reduce the incidence of
employee misclassification, BAC is suggesting four key initiatives that
Congress might consider as it continues to address this critical issue.
1) Congress should commission a comprehensive study to determine
the economic impact of the misclassification crisis on federal tax
revenue, the Social Security system, and Medicare and Medicaid. In
recent years, respected economists have analyzed the effect of
misclassification on the state tax revenues, workers' compensation
systems, and unemployment insurance systems in a number of states; I
appended Cornell University's study* of the cost of misclassification
in New York and the University of Missouri-Kansas City's analysis of
misclassification in Illinois to my written testimony to the
subcommittee. But as I noted in my testimony, a comprehensive study of
the national cost of misclassification has not been conducted in well
over 10 years. We simply have no real idea of how big the tax gap
caused by misclassification of employees has become. It is almost
certainly a number of times greater than the $3.3 billion found in
1995--but we need hard numbers, not guesses. We need to ascertain the
true scope of the misclassification crisis before we can determine the
best way to attack it. Congress should therefore act swiftly to
commission a comprehensive study, similar to the New York and Illinois
analyses, to evaluate the degree to which misclassification is
defunding the Federal government, the Social Security system, Medicare,
and Medicaid.
---------------------------------------------------------------------------
*The report, ``The Cost of Worker Misclassification in New York
State,'' is available on the Cornell University ILR School website at
the following URL:
http://digitalcommons.ilr.cornell.edu/reports/9/
---------------------------------------------------------------------------
2) Congress should budget significantly more money for Department
of Labor and Internal Revenue Service enforcement of the existing laws
governing employment status, and should allow those agencies to better
share information regarding misclassification of employees. I pointed
out in my testimony that the decade-old $3.3 billion estimate of the
tax gap created by misclassification was nearly 20 times greater than
the 2006 budget for the Department of Labor's Wage and Hour Division.
Wage and Hour is, of course, one of the primary federal bodies charged
with preventing misclassification. One of the most obvious causes of
the misclassification crisis is the chronic lack of funding for
enforcement of the laws that are intended to prohibit
misclassification. The Wage and Hour Division simply does not have the
personnel necessary to police the profligate misclassification that is
plaguing the United States, especially in light of its other
responsibilities, which include enforcement of federal prevailing wage
law. And the budgets of recent years have not helped Wage and Hour
accomplish its mission; over the past five fiscal years, the Department
of Labor's Office of Labor-Management Standards (which is primarily
responsible for oversight of labor union finances and activities) has
received an appropriations increase three times greater than that
received by Wage and Hour.
All the best-intentioned, best-crafted legislation in Washington
won't really begin to address the misclassification crisis unless there
are a sufficient number of properly funded, hard-working federal agents
available to enforce the legislation. A significant increase in funding
for the Wage and Hour Division, in conjunction with earmarks for
increased targeted auditing of dubious employers, will lead to better
enforcement of the laws prohibiting misclassification. And that is an
investment which will pay for itself in spades.
Another way that Congress could improve enforcement of the laws
governing employment status would be to remove any impediments barring
federal agencies from sharing information regarding the
misclassification of employees. Unless the IRS and Department of
Labor--in addition to any other agencies that might uncover evidence of
misclassification--are allowed to share that information with each
other, the government will never be able to bring the full force of its
enforcement power against those employers who have willfully chosen to
injure their workers and defraud the American people.
3) Congress should seriously consider federal legislation, similar
to that in Massachusetts and New Mexico, adopting a presumption that
workers are employees until proven otherwise. All of the panelists who
testified on March 27 recognized the confusion presented by the
multiple definitions of employees and independent contractors found in
the current federal regulatory environment. Although BAC agrees with
Chairwoman Woolsey that the distinction between employees and
independent contractors is usually intuitive and simple, and although
we have found that vast numbers of misclassified workers are
``employees'' under any test and are clear victims of
misclassification, it is true that the present regulatory framework may
make the employee/independent contractor determination more complex
than it needs to be. Different agencies have embraced different tests,
and different laws have defined ``employees'' in different ways.
One approach to ameliorating this problem would be to consider
legislation--like that already adopted by Massachusetts, New Mexico,
and a number of other states--which would create a presumption under at
least some federal laws that workers are ``employees'' unless
affirmatively shown to be independent contractors. At the March 27
hearing, Congressman Bishop and Catherine Ruckelshaus both discussed
the advantages inherent in this approach, although they also recognized
that such a law could result in an unintended disruption of existing
regulation. For that reason, BAC would suggest that Congress carefully
evaluate which areas of federal regulation would best benefit from
imposition of a presumption of employee status, and only then move
forward with legislation. But we do believe that, carefully
implemented, legislation creating a presumption of employee status
would go a long way toward eliminating a great deal of existing
employee misclassification of workers as independent contractors.
4) Congress should strongly consider amending, or even eliminating,
the ``safe harbor'' provisions of the Internal Revenue Code. Although
originally enacted in 1978 to protect the unwitting wrongful
misclassification of workers as independent contractors by an employer,
this provision has actually emboldened the underground community of
misclassifying employers and their enablers. Recent changes to the law
have further complicated and protected unscrupulous employers by
placing the burden on the IRS to assert the employer misclassified an
employee. This additional burden placed on the IRS has rendered an
already under funded enforcement effort even less effective.
This unfortunate situation was all too clearly brought to light by
the efforts of BAC's Chicago local leadership to involve the IRS in the
near-criminal exploitation of the loophole by a residential masonry
contractor. This contractor had misclassified his entire workforce,
even though industry standards (and practical necessity) require the
existence of an employer/employee relationship. The IRS consistently
ignored this situation until BAC's local officers petitioned Senator
Durbin for an investigation. The Senator's investigation of the
situation eventually led to seven and one-half hours of testimony
before the IRS by masonry contractor Cliff Horn and BAC Local 21
President Jim Allen. It is unlikely the framers of the original
legislation or the most recent revisions to the safe harbor provision
anticipated that it would require the IRS to be prodded to intervene
into an egregious violation, but as this example indicates, the need
for intervention has become the norm rather than the exception.
I would once again like to commend you, Chairwoman Woolsey, as well
as Ranking Member Mr. Wilson and the other members of the Committee for
your willingness to question the Department of Labor regarding its role
in the exponential growth of misclassification in recent years. Your
future efforts and those of your colleagues in Congress will hopefully
lead to an effective solution to the misclassification crisis. BAC
stands ready to assist you in any way that we can.
Sincerely,
John J. Flynn,
President.
______
[Whereupon, at 11:45 a.m., the subcommittee was adjourned.]