[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.]

                                 
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