[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                  THE MISCLASSIFICATION OF WORKERS AS 
                 INDEPENDENT CONTRACTORS: WHAT POLICIES 
                  AND PRACTICES BEST PROTECT WORKERS? 

=======================================================================

                             JOINT HEARING

                               before the

                        SUBCOMMITTEE ON HEALTH,
                     EMPLOYMENT, LABOR AND PENSIONS

                                and 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, JULY 24, 2007

                               __________

                           Serial No. 110-56

                               __________

      Printed for the use of the Committee on Education and Labor


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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             Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Kenny Marchant, Texas
Timothy H. Bishop, New York          Tom Price, Georgia
Linda T. Sanchez, California         Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland           Charles W. Boustany, Jr., 
Joe Sestak, Pennsylvania                 Louisiana
David Loebsack, Iowa                 Virginia Foxx, North Carolina
Mazie Hirono, Hawaii                 John R. ``Randy'' Kuhl, Jr., New 
Jason Altmire, Pennsylvania              York
John A. Yarmuth, Kentucky            Rob Bishop, Utah
Phil Hare, Illinois                  David Davis, Tennessee
Yvette D. Clarke, New York           Timothy Walberg, Michigan
Joe Courtney, Connecticut            Dean Heller, Nevada
Carol Shea-Porter, New Hampshire

                     Mark Zuckerman, Staff Director
                   Vic Klatt, Minority Staff Director

         SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS

                ROBERT E. ANDREWS, New Jersey, Chairman

George Miller, California            John Kline, Minnesota,
Dale E. Kildee, Michigan               Ranking Minority Member
Carolyn McCarthy, New York           Howard P. ``Buck'' McKeon, 
John F. Tierney, Massachusetts           California
David Wu, Oregon                     Kenny Marchant, Texas
Rush D. Holt, New Jersey             Charles W. Boustany, Jr., 
Linda T. Sanchez, California             Louisiana
Joe Sestak, Pennsylvania             David Davis, Tennessee
David Loebsack, Iowa                 Peter Hoekstra, Michigan
Phil Hare, Illinois                  Cathy McMorris Rodgers, Washington
Yvette D. Clarke, New York           Tom Price, Georgia
Joe Courtney, Connecticut            Virginia Foxx, North Carolina
                                     Timothy Walberg, Michigan

                 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 July 24, 2007....................................     1

Statement of Members:
    Andrews, Hon. Robert E., Chairman, Subcommittee on Health, 
      Employment, Labor and Pensions.............................     1
        Prepared statement of....................................     3
        Statement of the Laborers' International Union of North 
          America (LIUNA)........................................    67
    Kline, Hon. John, Senior Republican Member, Subcommittee on 
      Health, Employment, Labor and Pensions.....................     3
        Prepared statement of....................................     5
        Additional statements submitted:
            Associated Builders and Contractors, Inc. (ABC)......    71
            Travis Boardman......................................    73
            Randy Eystad.........................................    75
            Michael P. Mannion...................................    77
            National Association of Home Builders (NAHB).........    80
            William Vazquez......................................    85
    Wilson, Hon. Joe, Ranking Republican Member, Subcommittee on 
      Workforce Protections......................................     8
        Prepared statement of....................................     9
    Woolsey, Hon. Lynn C., Chairwoman, Subcommittee on Workforce 
      Protections................................................     5
        Prepared statement of....................................     7

Statement of Witnesses:
    DeCamp, Paul, Administrator of the Wage and Hour Division, 
      U.S. Department of Labor...................................     9
        Prepared statement of....................................    11
    Socolow, David J., Commissioner, New Jersey Department of 
      Labor and Workforce Development............................    49
        Prepared statement of....................................    51
    Stafford, Sara, President and Sole Owner, Stafford 
      Construction Services, Inc.................................    41
        Prepared statement of....................................    43
    Walters, Christine V., MAS, JD, SPHR, independent consultant, 
      FiveL Company, on behalf of the Society for Human Resource 
      Management.................................................    43
        Prepared statement of....................................    45
    Williams, Robert V., transportation recruiting and operations 
      consultant, former FedEx employee..........................    37
        Prepared statement of....................................    39


                    THE MISCLASSIFICATION OF WORKERS
                      AS INDEPENDENT CONTRACTORS:
                      WHAT POLICIES AND PRACTICES
                         BEST PROTECT WORKERS?

                              ----------                              


                         Tuesday, July 24, 2007

                     U.S. House of Representatives

         Subcommittee on Health, Employment, Labor and Pensions

                 Subcommittee on Workforce Protections

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The subcommittees met, pursuant to call, at 10:30 a.m., in 
Room 2175, Rayburn House Office Building, Hon. Robert Andrews 
[chairman of the Subcommittee on Health, Employment, Labor, and 
Pensions] presiding.
    Present from Subcommittee on Health, Employment, Labor, and 
Pensions: Representatives Andrews, Kildee, Tierney, Wu, Holt, 
Loebsack, Hare, Kline, McKeon, Boustany, and Walberg.
    Present from Subcommittee on Workforce Protections: 
Woolsey, Payne, Bishop of New York, Shea-Porter, Hare, Wilson, 
and Kline.
    Staff present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Jordan Barab, Health/Safety Professional; 
Jody Calemine, Labor Policy Deputy Director; Lynn Dondis, 
Policy Advisor for Subcommittee on Workforce Protection; Carlos 
Fenwick, Policy Advisor for Subcommittee on Health, Employment, 
Labor and Pensions; Michael Gaffin, Staff Assistant, Labor; 
Jeffrey Hancuff, Staff Assistant, Labor; Brian Kennedy, General 
Counsel; Joe Novotny, Chief Clerk; Megan O'Reilly, Labor Policy 
Advisor; Rachel Racusen, Deputy Communications Director; 
Michele Varnhagen, Labor Policy Director; Robert Borden, 
Minority General Counsel; Cameron Coursen, Minority Assistant 
Communications Director; Steve Forde, Minority Communications 
Director; Ed Gilroy, Minority Director of Workforce Policy; Rob 
Gregg, Minority Legislative Assistant; Jim Paretti, Minority 
Workforce Policy Counsel; Molly McLaughlin Salmi, Minority 
Deputy Director of Workforce Policy; Linda Stevens, Minority 
Chief Clerk/Assistant to the General Counsel; and Loren Sweatt, 
Minority Professional Staff Member.
    Chairman Andrews [presiding]. Ladies and gentlemen, the 
subcommittee will come to order. I would ask everyone to please 
take their seats.
    We welcome our witnesses and the members of the public for 
today's hearing.
    In the last 6 years, over 2 million Americans have found 
themselves in a situation where the 40-hour work-week law that 
applies to virtually everyone else doesn't apply to them; where 
laws that govern pensions and health care, that apply to just 
about everyone else, do not apply to them; where laws that deal 
with the right to collectively bargain, the right to organize, 
the right to grieve, that apply to almost everyone else, does 
not apply to them.
    In the last 5 or 6 years, we have had an increase of more 
than 2 million people who fall into the category in our 
workforce of independent contractors.
    Now, in some cases, that status is quite right and quite 
appropriate. If someone is retained for a limited purpose, 
usually for a limited time, to do a specific job function for 
an employer, it is quite necessary and appropriate that that 
person not be treated as an employee for reasons of 
flexibility, for reasons of fair compensation, for reasons of 
the appropriate organization and carrying out of the employer's 
business.
    But in cases where someone looks an awful lot like an 
employee--is told what to do and when he or she can do it, is 
given no discretion over how to conduct the affairs of the 
business, whose compensation is fixed and set by the employer--
when that person looks an awful lot like an employee, we think 
the law should treat them as an employee, should provide that 
person with the protections and the rights that employees have 
under our federal laws.
    The question before the committee today was initiated by 
Chairwoman Woolsey's efforts a few weeks ago. This is a joint 
hearing of the Workforce Protections Subcommittee and our HELP 
Subcommittee. And Chairwoman Woolsey did a great job with our 
colleagues in beginning to flesh out the issue as to how 
prevalent is the problem of misclassification of people. How 
prevalent is it that someone who truly is an employee is being 
treated as an independent contractor and, therefore, divested 
of the rights that I made reference to earlier?
    As a result of the good work that Ms. Woolsey did at that 
hearing, she and I and some of our colleagues wrote a letter to 
the United States Department of Labor, asking that the 
department outline its efforts in identifying the scope of the 
problem and outline its efforts to deal with reducing and 
solving the problem.
    The purpose of today's hearing is to get answers to those 
questions that were asked in our letter in May in our first 
panel. And then to proceed with the second panel, we will look 
at various perspectives on the scope of the problem, the nature 
of the problem, and some ideas to solve the problem.
    Our first witness today, Mr. DeCamp, is the director of the 
Wage and Hour Division of the Department of Labor. We are very 
happy he is with us today. And we look forward to an exchange 
where we can hear more about the department's efforts to 
properly define the scope of this problem and to remediate its 
effects.
    I will say this to you in closing my remarks. The image 
that is often conjured up of an independent contractor is a Web 
site designer, you know, someone who designs Web sites and Web 
pages for a multiplicity of clients and works out of his or her 
home, and is very much on the fly, on the go; an independent 
entrepreneur with a laptop and a vision and a business card and 
a chance to make himself or herself a wealthy person. Long may 
that person be treated as an independent contractor, because 
they are.
    But there are people who are mowing lawns and driving 
trucks and working in garment linen factories, working in all 
different places around this country, who sure do look like 
employees to me. And if they have the functional job of an 
employee--if they are told what to do, when to do it, how much 
money they are going to make, what the work rules are, what 
they can and cannot do--if they have that sort of work life as 
an employee, then I think the law should treat them as an 
employee. And they should get the benefits of the 40-hour work-
week and the workers' safety laws and the pension and health-
care laws and the other protections of this country.
    Legislating is about drawing lines. And where we draw this 
line and how we deal with remediating problems that fall on the 
wrong side of the line is the legislative job of the committee. 
I look forward to a full and vigorous discussion of those 
issues here today.
    At this point, I am going to turn to the ranking member of 
the HELP Subcommittee, my friend from Minnesota, Mr. Kline, for 
his opening statement.
    [The statement of Mr. Andrews follows:]

Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee on 
                 Health, Employment, Labor and Pensions

    Good morning and welcome to the Joint Health, Employment, Labor, 
and Pensions Subcommittee and Workforce Protections Subcommittee 
hearing on ``The Misclassification of Workers as Independent 
Contractors: What Policies and Practices Best Protect Workers.'' I am 
delighted to share the gavel today with my colleague, Chairwoman 
Woolsey.
    Today, we will examine the issue of worker misclassification. This 
joint venture is a follow-up to the Workforce Protections 
Subcommittee's previous hearing on the misclassification or workers as 
independent contractors. Today we will have the opportunity to hear the 
views from the Department of Labor regarding worker misclassification 
and what actions they have taken to address the problem.
    Worker misclassification is a problem that adversely affects 
employees, employers, taxpayers, and states. Billions of dollars of tax 
revenue and unemployment insurance have been stolen by employers 
seeking to avoid the costs of payroll taxes, insurance premiums, and 
benefits. The witnesses' testimony today will further prove how worker 
misclassification 1) strips workers of employee benefits and 
protections; 2) puts good employers at a competitive disadvantage; and 
3) cheats the taxpayer out of revenue. I thank the witnesses for their 
testimony today and look forward to the hearing.
                                 ______
                                 
    Mr. Kline. Thank you, Mr. Chairman.
    Good morning to all, and welcome to our distinguished 
panels of witnesses.
    As a member of the Workforce Protections Subcommittee and 
as the ranking member of the Health, Employment, Labor, and 
Pensions Subcommittee, I am particularly interested in this 
morning's joint hearing.
    At a Workforce Protections Subcommittee hearing earlier 
this year, we heard from a number of witnesses as to policy 
issues surrounding the potential misclassification of workers 
as contractors rather than employees.
    I would highlight one point that I think all of our 
witnesses and, indeed, many of our members agreed upon. This 
point was put particularly well by Mr. Richard Shavell, who had 
testified on behalf of the Associated Builders and Contractors.
    He testified, ``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. 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.''
    I think that all of us here this morning share that view: 
that the wrongful classification of workers should not be 
tolerated. Where we may differ is in whether and how the law 
currently allows, if not outright condones, confusion by 
subjecting employers to a multitude of different tests under a 
multitude of different statutes.
    Perhaps that is a good question for today's hearing and one 
that I certainly hope that we are going to get to.
    I would also point out that a number of witnesses at our 
hearing back in March, both Democrats and Republicans, made 
plain their view that our focus should not be on amending the 
underlying substantive laws, but rather, focusing on 
enforcement and, in particular, targeted enforcement.
    One witness, Ms. Catherine Ruckelshaus, the director of the 
National Law Employment Project, put it very succinctly when 
she testified, ``The laws are sufficiently broad and 
sufficiently define 'employee' to cover most of the people I 
have been talking about,'' said she, ``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.''
    And in that light, I am particularly pleased to welcome our 
first witness, Paul DeCamp, the administrator of the Department 
of Labor's Wage and Hour Division. I know the chairman will 
reintroduce him.
    The Wage and Hour Division is the lead agency tasked with 
administering our nation's wage and hour laws and one of a 
number of federal agencies charged with ensuring workers are 
correctly classified. I am particularly interested in hearing 
how the department has been strategically addressing the issue 
of worker classification in a targeted way.
    I look forward to Mr. DeCamp presenting to us the 
challenges the department faces in doing so and offering any 
suggestions as to how we may better assist the department in 
its enforcement efforts.
    Again, I welcome all our witnesses, and I yield back.
    [The statement of Mr. Kline follows:]

   Prepared Statement of Hon. John Kline, Ranking Republican Member, 
        Subcommittee on Health, Employment, Labor, and Pensions

    Good morning, and welcome to our distinguished panel of witnesses.
    As a member of the Workforce Protections Subcommittee, and as 
Ranking Member of the Health, Employment, Labor, and Pensions 
Subcommittee, I am particularly interested in this morning's hearing.
    At a Workforce Protections Subcommittee hearing earlier this year, 
we heard from a number of witnesses as to policy issues surrounding the 
potential misclassification of workers as ``contractors'' rather than 
``employees.'' I would highlight one point that I think all of our 
witnesses--and indeed, many of our Members--agreed upon. This point was 
put particularly well by Mr. Richard Shavell, who testified on behalf 
of the Associated Builders and Contractors. As Mr. Shavell testified, 
it is critical to distinguish between wrongful classification and mis-
classification. 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. 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.
    I think that all of us here this morning share that view--that the 
wrongful classification of workers should not be tolerated. Where we 
may differ is in whether and how the law currently allows, if not 
outright condones, confusion by subjecting employers to a multitude of 
different tests under a multitude of different statutes. Perhaps that 
is a good question for today's hearing, one that I hope our witnesses 
will address.
    I would also point out that a number of witnesses at our hearing 
back in March,--both Democrat and Republican--made plain their view 
that our focus should not be on amending the underlying, substantive 
laws, but rather focusing on enforcement, and in particular, targeted 
enforcement. One witness, Ms. Catherine Ruckelshaus, the Director of 
the National Law Employment Project, put it very succinctly when she 
testified:
    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.
    In that light, I am particularly pleased to welcome our first 
witness, Paul DeCamp, the Administrator of the Department of Labor's 
Wage and Hour Division. The Wage and Hour Division is the lead agency 
tasked with administering our nation's wage and hour laws and one of a 
number of federal agencies charged with ensuring workers are correctly 
classified. I am particularly interested in hearing how the Department 
has been strategically addressing the issue of worker classification in 
a targeted way. I look forward to Mr. DeCamp presenting to us the 
challenges the Department faces in doing so and offering any 
suggestions as to how we may better assist the Department in its 
enforcement efforts.
    I welcome each of our witnesses this morning, and yield back my 
time.
                                 ______
                                 
    Chairman Andrews. Thank you, Mr. Kline.
    When she assumed the chairmanship of the Workforce 
Protections Subcommittee, Chairwoman Woolsey launched a 
vigorous effort to regenerate oversight and legislative review 
of the laws that protect people in the workplace. She has done 
some outstanding work already on public-sector employee safety. 
She has helped to guide through some important legislation 
already in that area. And I am honored to share this joint 
hearing with her today.
    The gentlewoman from California.
    Ms. Woolsey. Thank you, Mr. Chairman.
    And welcome to all of our witnesses.
    This is going to be a very useful, productive joint hearing 
this morning.
    As you know, and as the chairman said, the Workforce 
Protections Subcommittee held a hearing on this very important 
issue of misclassification of workers as independent 
contractors in March.
    It seems like just yesterday, right, Mr. Chairman?
    And we are really pleased to be here with this joint 
committee because we are going to continue to look at the 
issue. It became more important, not less important, after our 
first hearing.
    Today, we will have the opportunity to hear from the 
administration. And we will hear from others, also, about this 
serious problem. And it is a problem that hurts our workers, 
but not only our workers, but also honest contractors and all 
of society as states and federal governments lose billions of 
dollars in lost revenues by this misclassification.
    After the last hearing, Mr. Andrews and I wrote a letter to 
Department of Labor asking for information about the 
misclassification. We got the department's response. It was 
just a little over a week ago, in time for this hearing. Thank 
you.
    And I am pleased that Mr. DeCamp is here to present answers 
to the questions that we asked.
    But I have some very serious reservations about whether the 
department is really dealing with this problem in an adequate 
manner. And what we need to find out today is: if the 
department can't deal with it, what does the Congress need to 
do to make it possible for the overreaching agency to do the 
right thing?
    And, at the outset, I would like to say that there are true 
independent contractors and that this is not about them. Nobody 
questions that. This is about the countless workers who are 
really employees but have been deliberately misclassified by 
employers because those employers want to avoid the costs 
associated with an employee, such as workers' compensation 
insurance, payment into Social Security and Medicare systems.
    The number-one reason that employers deliberately 
misclassify is to avoid paying workers' compensation and 
otherwise avoid workplace injury and disability disputes. So if 
a worker gets seriously injured--and make no mistake, this 
practice usually affects mostly low-income workers--there is no 
income that he or she can go to when they can't work. And there 
is likely no health insurance to help with the medical 
expenses. But the employer lowers its costs.
    In fact Mr. Wade Horn, a contractor who testified at the 
hearing in March, said that when companies misclassify their 
employees, they expect to reduce their labor costs between 15 
and 20 percent.
    In March, our witnesses were principally from the building 
trades. They told us how widespread miscalculation is in that 
industry. But we know for certain misclassification occurs 
across a wide range of industries.
    For example, Representative Stupak, chair of the 
Subcommittee on Oversight and Investigations on the Energy and 
Commerce Committee, has been investigating the widespread 
misclassification of jockeys as independent contractors.
    I am very glad that Mr. Williams is here today to testify 
about his experiences with FedEx. My own state of California is 
waging a battle against FedEx's practice of misclassifying its 
couriers as independent contractors. And in the year 2004, the 
California Employment Development Department issued a payroll 
tax assessment of $7.8 million against the company. And they 
did that because it failed to pay payroll taxes for appropriate 
employees.
    In California, misclassification is an enormous problem. 
But we are an enormous state. The California insurance 
commissioner has reported that 30 percent of employers in the 
state do not carry workers' compensation insurance, and that is 
one of the sure signs that those employers' workers are being 
treated as independent contractors.
    This problem has so concerned my state that there is a bill 
in the assembly, State Assembly Bill 622, which, if passed, 
will make willful misclassification illegal. And it will assess 
penalties of up to $15,000 per violation and up to $25,000 for 
those employers who have engaged in a pattern of practice of 
misclassification. Our very own attorney general has started a 
program to protect vulnerable workers from unscrupulous 
employers throughout this process.
    But, unfortunately, other states are having problems with 
misclassification, as well. And it is a national problem. It 
has far-reaching consequences.
    And I have great confidence that we are working to find out 
why we can't do something about it. But first we have to find 
out what we need to do about it.
    Thank you very much, Mr. Chairman.
    [The statement of Ms. Woolsey follows:]

Prepared Statement of Hon. Lynn C. Woolsey, Chairwoman, Subcommittee on 
                         Workforce Protections

    Thank you Chairman Andrews and welcome to all of the witnesses for 
joining us here today.
    As you know, my Workforce Protections Subcommittee held a hearing 
on this very important issue of misclassification of workers as 
independent contractors in March.
    And I am very glad that--through this Joint Subcommittee hearing--
we are continuing to look at this issue.
    Today we will have an opportunity to hear from the Administration 
and others about this serious problem, which hurts not only our 
workers, but also honest contractors and all of society as state and 
federal governments lose billions of dollars in lost revenues.
    After the last hearing, Mr. Andrews and I wrote a letter to DOL 
asking for information about misclassification.
    We got the Department's response a little over a week ago. It was a 
late reply but in time for this hearing.
    I am very pleased that Mr. DeCamp from DOL is present to answer 
questions about DOL's response because I have serious reservations 
about whether the Department is dealing with this problem in an 
adequate manner.
    At the outset let me say that there are true independent 
contractors out there--this is not about them.
    This is about the countless other workers who are really employees 
but have been deliberately misclassified by employers because those 
employers want to avoid the costs associated with an employee, such as 
workers compensation insurance and payment into the Social Security and 
Medicare systems.
    So if a worker gets seriously injured--and make no mistake, this 
practice affects mostly low-income workers--there is no income when he 
can't work and likely no health insurance to help with medical 
expenses.
    But the employer lowers its costs.
    In fact, Mr. Wade Horn, a contractor who testified at the hearing 
in March said that when companies misclassify their employees, they 
expect to reduce their labor costs between 15 and 20 percent.
    In March, our witnesses were principally from the building trades 
and they told us how widespread misclassification is in that industry.
    But misclassification occurs across a wide range of industries.
    For example, Representative Stupak, Chair of the Subcommittee on 
Oversight and Investigations on the Energy and Commerce Committee has 
been investigating the widespread misclassification of jockeys as 
independent contractors.
    I am very glad that Mr. Williams is here to testify about his 
experiences with Fed-Ex.
    My own state of California is waging a battle against Fed Ex's 
practice of misclassifying its couriers as independent contractors.
    And in 2004, the California Employment Development Department 
issued a payroll tax assessment of $7.8 million against the Company 
because it failed to pay payroll taxes on employees that they had 
misclassified as independent contractors.
    In California, misclassification is an enormous problem.
    The Insurance Commissioner has reported that 30% of employers in 
the State do not carry worker's compensation insurance--one of the sure 
signs that those employers' workers are being treated as independent 
contractors.
    This problem has so concerned my State that there is a bill in the 
State Assembly, S.B. 622, which if passed will make willful 
misclassification illegal and assesses civil penalties of up to $15,000 
per violation and up to $25,000 per violation for those employers have 
engaged in a pattern or practice of misclassification.
    And our Attorney General has started a program to protect 
vulnerable workers from unscrupulous employers.
    I am confident that this hearing will bring us closer to solutions 
to it.
                                 ______
                                 
    Chairman Andrews. Thank you, Madam Chairman. I appreciate 
it.
    I will now turn to the ranking member of the Workforce 
Protections Subcommittee, our friend from South Carolina, Mr. 
Wilson?
    Mr. Wilson. Thank you, Mr. Chairman, and thank you, Madam 
Chairman, for conducting this hearing today.
    Good morning. In the interest of moving on to hear directly 
from our distinguished panel of witnesses this morning, I will 
keep my remarks brief.
    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.
    As I said at our subcommittee's last hearing on this topic, 
a point borne out by the testimony of witnesses at that 
hearing, I expect that there may be many areas in which we 
agree and areas in which we disagree. I was particularly 
interested to note at our last hearing that there was 
significant agreement among the witnesses, Democrat and 
Republican, as to a number of points.
    First, that the law relating to the classification of a 
worker as a contractor or employee is complicated, often 
confusing and, in many instances, not at all clear as to the 
proper outcome.
    Second, that no one defends the practice of an employer 
purposefully or intentionally misclassifying workers.
    Third, many agree that the laws, as written, are adequate 
to address these concerns. And many agree that our focus should 
be not on changing the laws or statutes we have on the books.
    And finally, there was general agreement that the issue 
here may be one of enforcement, particularly targeted 
enforcement.
    In that light, I especially welcome Wage and Hour 
Administrator Paul DeCamp. And I look forward to him telling us 
what his agency, which is but one of many charged with 
administrating the laws relating to contractor status, is doing 
to ensure that the law is being followed and administrated 
properly.
    So with that in mind, I look forward to today's hearing and 
the testimony of our two panels of witnesses. And I yield back 
my time.
    [The statement of Mr. Wilson follows:]

   Prepared Statement of Hon. Joe Wilson, Ranking Republican Member, 
                 Subcommittee on Workforce Protections

    Good morning. In the interests of moving on to hear directly from 
our distinguished panel of witnesses this morning, I will keep my 
remarks brief.
    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.
    As I said at our Subcommittee's last hearing on this topic--a point 
borne out by the testimony of witnesses at that hearing--I expect that 
there may be areas in which we agree, and areas in which we disagree. I 
was particularly interested to note at our last hearing that there was 
significant agreement among witnesses, Democrat and Republican, as to a 
number of points:
    First, that the law relating to the classification of a worker as a 
contractor or employee is complicated, often confusing, and in many 
instances not at all clear as to the proper outcome;
    Second, that no one defends the practice of an employer 
purposefully or intentionally misclassifying workers;
    Third, that the laws, as written, are adequate to address these 
concerns, and our focus should not be on changing the laws or trying to 
``create'' a failure in the statutes we have on the books;
    And finally, there was agreement that the issue here may be one of 
enforcement, particularly targeted enforcement. In that light, I 
especially welcome Wage and Hour Administrator DeCamp, and look forward 
to him telling us what his agency--which is but one of many charged 
with administering the laws relating to contractor status--is doing to 
ensure that the law is being followed and administered properly.
    So with that said, I look forward to today's hearing and the 
testimony of our two panels of witnesses and yield back my time.
                                 ______
                                 
    Chairman Andrews. I thank Mr. Wilson.
    And we welcome Mr. DeCamp to the subcommittees.
    Mr. DeCamp, your written statement is accepted into the 
record, without objection, in its entirety. We would ask if you 
could summarize your written remarks in about 5 minutes.
    I think you have testified here before and know the light 
system. When the yellow light goes on, you have about a minute 
left, and when the red light goes on, we would ask you to 
summarize.
    Paul DeCamp is the administrator of the Wage and Hour 
Division of the United States Department of Labor, a post he 
has held since 2006. Prior to his appointment to this position 
by President Bush, Mr. DeCamp was a senior policy advisor to 
the assistant secretary of labor for employment standards.
    He also practiced law with the firm of Gibson, Dunn and 
Crutcher in Los Angeles and here in Washington, where he 
focused on employment matters. Mr. DeCamp received his B.A. 
from Harvard and his J.D. from Columbia University. But he 
overcame these liabilities----
    [Laughter.]
    He clerked for the Honorable Alan E. Norris for the Sixth 
Circuit Court of Appeals.
    Mr. DeCamp, we are delighted to have you with us this 
morning. Welcome to the subcommittees.

 STATEMENT OF PAUL DECAMP, ADMINISTRATOR OF THE WAGE AND HOUR 
               DIVISION, U.S. DEPARTMENT OF LABOR

    Mr. DeCamp. Thank you.
    Chairman Andrews, Chairwoman Woolsey, Ranking Members 
Wilson and Kline, and distinguished members of the 
subcommittees, thank you for the opportunity to appear before 
you today to discuss the misclassification of workers as 
independent contractors.
    This type of misclassification can lead to a number of 
harms. Misclassified workers may find themselves without access 
to employers' benefits plans and without the protection of 
workers' compensation or unemployment insurance.
    Businesses that comply with the law may be at a significant 
disadvantage with respect to competitors who elect to lower 
their operating costs by calling their employees independent 
contractors.
    And the federal and state governments potentially lose out 
on tax revenues, at least to the extent that the misdesignated 
workers do not pay the taxes that their employers should have 
withheld.
    One important point to understand at the outset is that 
misdesignation of employees as independent contractors is not, 
in and of itself, a violation of any of the approximately 70 
laws that the Wage and Hour Division enforces.
    If, for example, an individual works 40 or fewer hours in a 
work-week and receives compensation at least equal to the 
minimum wage, there is no violation of the Fair Labor Standards 
Act--the law that accounts for more than 80 percent of the 
agency's cases--even if the worker is misdesignated.
    Therefore, the Wage and Hour Division historically has not 
focused resources on the independent contractor issue, per se. 
Instead, we look for the violations of our laws, such as 
failure to pay the required minimum wage or overtime, or the 
improper denial of family or medical leave, or the unauthorized 
transportation of migrant farm workers.
    Approximately 60 percent of the Wage and Hour Division's 
enforcement centers on low-wage industries, where violations of 
the laws we enforce tend to be the most prevalent. The agency 
devotes more than one-third of its enforcement resources to 
nine of those industries, including such sectors as janitorial 
services, construction and landscaping. The agency's experience 
has been that many of these same low-wage industries tend to 
have a high incidence of misdesignation of employees as 
independent contractors.
    In short, the Wage and Hour Division vigorously protects 
workers whose rights may be jeopardized by misdesignation as 
independent contractors. We do so, however, by focusing on 
their rights under the federal wage and hour laws.
    The Wage and Hour Division's enforcement work represents a 
combination of investigating worker complaints and conducting 
investigations on the agency's own initiative in the absence of 
a complaint.
    The agency recognizes that low-wage workers, among others, 
are often unlikely to report wage and hour violations for a 
variety of reasons. Therefore, we supplement our complaint-
based investigations with strategically targeted cases directed 
at those industries and employers where we have reason to 
believe violations are going unreported.
    Every year, the agency devotes extensive management 
resources to our annual strategic planning process, which is 
how we determine the types of issues and industries to focus on 
in the coming year. Those directed cases constitute around 20 
percent of our caseload.
    We also make available to workers and employers a 
significant amount of information regarding the issue of 
employee versus independent contractor. On our Web site, we 
have fact sheets that explain the applicable rules. Much of 
this information is available in Spanish, Chinese, Thai, and 
Vietnamese.
    We also have an interactive advisor on our Web site that 
allows a user to answer some questions and then receive 
guidance regarding how a worker should be classified. Our Web 
site also includes a chapter from our field operations handbook 
regarding, among other things, the employment relationship.
    In addition, the agency conducts approximately 2,000 
training and outreach events each year. When we address workers 
or businesses in industries where misdesignation as independent 
contractors is a significant concern, we provide information on 
that issue.
    One final point that I would like to discuss involves 
communication with other government entities. The Wage and Hour 
Division is very reluctant to provide information to other 
agencies where doing so might jeopardize our enforcement 
mission.
    In order to be able to protect the wage and hour rights of 
all workers, we need information from workers regarding 
violations. If workers are hesitant to report violations to us, 
it becomes much more difficult to maintain the integrity of the 
labor standards set forth in our statutes.
    Many of the employers we investigate are in low-wage 
industries that employ ever-increasing numbers of undocumented 
workers. We, therefore, need to be very careful to avoid taking 
steps that would have the unintended consequence of deterring 
those workers from seeking our assistance.
    If workers believe that they may be worse off for having 
contacted the Wage and Hour Division, we will not hear from 
them. And then workers lose, as a result. It is important to 
our agency that we avoid that outcome.
    Thank you. And I will be happy to answer any questions that 
the subcommittees may have.
    [The statement of Mr. DeCamp follows:]

 Prepared Statement of Paul DeCamp, Administrator of the Wage and Hour 
                   Division, U.S. Department of Labor

    Chairwoman Woolsey, Chairman Andrews, Ranking Members Wilson and 
Kline, and distinguished members of the Subcommittees: Thank you for 
the opportunity to discuss the efforts of the Department of Labor's 
Wage and Hour Division (WHD) to promote compliance with the Nation's 
labor standards laws. WHD has a strong record of enforcement on behalf 
of workers in this country, including employees who have been 
misclassified as independent contractors.
    WHD employs a number of strategies for ensuring that employees are 
paid in accordance with the laws WHD enforces. Many of these strategies 
address worker classification issues. Before discussing these 
strategies, however, it is important to understand the backdrop against 
which these strategies are implemented. The misclassification of an 
employee as an independent contractor is not itself a violation of the 
Fair Labor Standards Act (FLSA) or the many other laws that WHD 
enforces. The Government Accountability Office (GAO) acknowledged this 
fact in its 2006 audit, Employment Relationships: Improved Outreach 
Could Help Ensure Proper Worker Classification (GAO-06-656). In that 
report, GAO also accurately noted that, despite the fact that such 
misclassification is not a violation of the FLSA, WHD nevertheless 
detects and addresses the issue of employees who have been 
misclassified as independent contractors in its investigations of 
employer compliance with the FLSA. It is critical to understanding 
WHD's approach to enforcing the provisions of the various statutes for 
which it is responsible that one also understand that the act of 
misclassification is not a violation of the FLSA.
Determining An Employment Relationship Under The Federal Wage And Hour 
        Laws
    Under most labor standards laws, an employer-employee relationship 
must be established in order for the law's provisions to apply. The 
FLSA, which establishes minimum wage, overtime, and child labor 
protections, defines ``employee'' more broadly than virtually any other 
federal statute. In cases such as Rutherford Food Corp. v. McComb, 331 
U.S. 722 (1947), United States v. Silk, 331 U.S. 704 (1947), and 
Bartels v. Birmingham, 332 U.S. 126 (1947), the U.S. Supreme Court 
provided guidance for determining whether a worker is an employee under 
the FLSA, and those rulings continue to inform how WHD and the courts 
analyze the issue today. The Court provided that an employee, as 
distinguished from a person who is engaged in a business of his or her 
own (i.e., an independent contractor), is one who, as a matter of 
economic reality, is dependent on the business that he or she serves.
    The Court further indicated that there is no single rule or test 
for determining whether an individual is an independent contractor or 
an employee for purposes of the FLSA. Instead, the determination must 
be based on the totality of the circumstances and not on a single 
criterion. The relevant factors include the following:
     The extent to which the services rendered are an integral 
part of the principal's business;
     The permanency of the relationship;
     The amount of the alleged contractor's investment in 
facilities and equipment;
     The nature and degree of control by the principal;
     The alleged contractor's opportunities for profit and 
loss;
     The amount of initiative, judgment, or foresight in open 
market competition with others required for the success of the claimed 
independent contractor; and
     The degree of independent business organization and 
operation.
    See, e.g., Silk, 331 U.S. at 716; Brock v. Mr. W Fireworks, 814 
F.2d 1042 (5th Cir. 1987); Donovan v. DialAmerica Mktg., 757 F.2d 1376 
(3d Cir. 1985).
    I mention these specific factors for two reasons. First, all WHD 
investigators must use these criteria to establish an employment 
relationship to pursue remedies on behalf of workers under most of the 
statutes the agency enforces, including the FLSA and the Family and 
Medical Leave Act (FMLA). As a consequence, investigators will, at 
various stages throughout the investigation, examine how an employer 
classifies its workers. For example, investigators will ask for 
information during the initial conference with an employer to establish 
the employer's classification practices. Investigators will review 
records including without limitation payroll records, cash 
disbursements journals, check registers, and 1099s to ensure that all 
workers are identified and that any worker not listed on the payroll is 
properly compensated. As a normal part of investigations, WHD 
investigators will tour an employer's establishment and question 
workers about their pay, their duties, and their working conditions, as 
well as those of their co-workers, looking for, among other things, 
potentially misclassified employees. As GAO noted in its audit, when 
WHD investigators suspect that employers are not properly classifying 
workers as employees, the investigator will pursue several avenues of 
investigation to ascertain whether a violation of a wage and hour 
statute has occurred.
    The second reason for highlighting the FLSA employment relationship 
factors is to distinguish these criteria from the test used by the 
Internal Revenue Service (IRS) in applying the common law ``right to 
control'' test often used by the courts and from the definitions and 
standards set forth in other statutes. WHD acknowledges that the issue 
of employee misclassification raises a number of concerns wholly 
outside the responsibility or authority of WHD. The misclassification 
of workers may affect some state programs such as worker compensation 
and unemployment insurance programs, in addition to other federal and 
state worker protection statutes. Finally, misclassification issues may 
involve the IRS and the Social Security Administration.
    Consequently, in establishing an employment relationship under the 
FLSA, there may be instances where WHD investigators identify potential 
misclassification issues of other programs or statutes. WHD has no 
authority or expertise, however, to interpret or to enforce provisions 
outside its jurisdiction. In many instances, the misclassification of a 
worker under the FLSA will not, given the broad interpretation of the 
FLSA, result in a violation of another statute or program.
WHD Strategies For Enforcing Labor Standards Provisions Relating To 
        Independent Contractor Issues
    The labor standards that WHD enforces provide basic protections for 
all workers in this country. Although they differ in scope, all of the 
statutes enforced by WHD are intended to protect the welfare of the 
Nation's workforce and to ensure fair compensation for work performed. 
Minimum wage, overtime, and child labor cases constitute the majority 
of WHD's enforcement responsibilities. FLSA cases represent 
approximately 84 percent of all WHD cases, and FMLA investigations an 
additional one percent. The Migrant and Seasonal Agricultural Worker 
Protection Act (MSPA), the Davis-Bacon Act (DBA), and the McNamara-
O'Hara Service Contract Act (SCA) are other key statutes enforced by 
WHD.
    Misclassified workers may be identified during the course of 
investigations that cover many provisions and statutes enforced by WHD. 
For example, WHD investigators must establish an employment 
relationship under the FMLA and most of the MSPA provisions. 
Investigations into compliance with these program areas necessarily 
contain an element of inquiry into the status of workers as employees.
    Under DBA and SCA, however, WHD does not need to establish such an 
employment relationship. According to the statutory language of the 
DBA, laborers and mechanics are entitled to prevailing wage rates 
``regardless of the contractual relationship that is alleged to exist 
between a contractor or subcontractor and such persons.'' Similar 
language applies to service employees performing on Federal service 
contracts. Under these two statutes, the individuals performing work 
are entitled to prevailing wage and fringe benefit compensation even if 
they are classified as independent contractors.
    Because erroneous classification of an employee as an independent 
contractor is not itself a violation of the federal wage and hour laws, 
WHD does not maintain data regarding how many cases present that issue. 
Thus, WHD cannot provide statistics regarding the prevalence of 
misclassification. However, there have been instances in which a 
misclassification resulted in a minimum wage or overtime violation. 
These cases clearly demonstrate WHD's attention to potential violations 
that may result from the improper designation of workers. The following 
are some recent examples:
     In November 2006, WHD collected nearly $75,000 in back 
wages for 76 employees of an Ohio construction contractor that had 
misclassified its workers as independent contractors.
     In October 2006, a Houston construction company paid 
nearly $130,900 in back wages to 81 employees who had been 
misclassified.
     The Department sued a Houston drywall company in August 
2006, to recover over $500,000 in back wages on behalf of misclassified 
employees who were working to rebuild the Mississippi Gulf Coast 
casinos following Hurricane Katrina.
     In a similar case involving the employees working to 
rebuild the Gulf Coast region, WHD collected over $362,000 in back 
wages from three construction firms that had misclassified employees as 
independent contractors.
     In March 2006, the Department sued a Glendale, California, 
janitorial company for $900,000 in back wages that resulted from the 
company's improper practice of classifying the workers as independent 
contractors.
    WHD has, for a number of years, prioritized its statutory 
enforcement responsibilities to maximize protections for workers, 
including the most vulnerable in the workforce: low-wage, immigrant, 
and young workers. WHD receives approximately 30,000 complaints during 
a fiscal year and utilizes approximately 70% to 78% of the program's 
enforcement resources to resolve complaints. In addition to its 
responsibilities to respond to allegations of noncompliance, WHD has 
devoted between 22% and 30% of its enforcement resources to targeted 
investigations (i.e., investigation initiated without a complaint), the 
focus of which is in low-wage industries that employ large numbers of 
vulnerable, low-skilled workers.
    These industries, such as construction, janitorial, restaurants, 
landscaping, agriculture, garment manufacturing, and health care, are 
often characterized by the employment of immigrant workers who are 
particularly vulnerable to exploitation, as well as young workers who 
are not fully versed in FLSA protections. Investigations in these 
industries tend to disclose high rates of FLSA minimum wage and 
overtime violations. Moreover, it is the experience of WHD that 
undocumented workers, many of whom may have been misclassified as 
independent contractors or have been engaged in contingent employment 
relationships, account for an increasing percentage of employees in 
these industries.
    WHD initially focused its low-wage program on the three nationally 
targeted industries of garment manufacturing, agriculture, and health 
care. While compliance efforts continue in those identified industries, 
in FY 2004 WHD began expanding its low-wage program to include a 
broader group of identified low-wage industries. Working with external 
evaluators, WHD identified approximately 33 low-wage industries in 
which workers were most likely to be the subject of a minimum wage or 
overtime violation. This research enabled the agency's local and 
regional offices to identify and to target in their geographic areas 
industries with the most serious compliance issues.
    In FY 2006, WHD collected nearly $50.6 million in back wages for 
approximately 86,700 workers in nine of the larger group of low-wage 
industries, an increase in back wages collected in the same low-wage 
industries of over 10% as compared to the previous fiscal year. Over a 
third of WHD enforcement resources are attributed to investigations in 
nine low-wage industries, which include day care, restaurants, 
janitorial services, landscaping, and temporary help. This fiscal year, 
WHD is conducting over 100 initiatives in low-wage industries. These 
compliance initiatives are concentrated in restaurants, retail, 
construction, janitorial, hotels and motels, and health care. WHD 
offices in garment manufacturing centers are continuing their 
enforcement efforts to increase compliance in that industry. WHD 
offices also have enforcement and compliance assistance activities in 
agriculture and reforestation. Again, these industries share common 
characteristics with the industries in which employees are most likely 
to be misclassified as independent contractors.
    As a complement to its enforcement activities, WHD has an active 
compliance assistance program that takes advantage of opportunities to 
educate employers and employees about the laws that it enforces. WHD 
outreach to the employer and employee community is a critical component 
of its overall compliance program because it aims to ensure that 
employers have information on the statutory and regulatory requirements 
in a clear and concise manner and that employees are versed in their 
rights and the remedies available to them. In its 2006 audit, GAO 
acknowledged WHD's outreach to workers and to employers on employment 
relationship concepts and the agency's procedures for its field staff 
in identifying and reporting potential misclassification issues to 
other Federal agencies.
    Among the examples of compliance assistance information noted by 
GAO is Fact Sheet 13: Employment Relationship Under the Fair Labor 
Standards Act (FLSA), which describes the factors involved in 
determining whether an individual is an employee under the FLSA and 
where to find additional information or help in making such a 
determination. This fact sheet is available in Chinese, Korean, 
Spanish, Thai, and Vietnamese, as well as English. The Employment 
Relationship fact sheet and others like it, including various industry 
specific fact sheets, are available on WHD's web site. The Employment 
Laws Assistance for Workers and Small Businesses (elaws) FLSA Advisor, 
also on the web site, is another tool that provides an interactive 
mechanism for employers and workers to determine whether a worker is an 
employee under the FLSA.
    In addition to these electronic and printed materials, WHD field 
personnel participate in a variety of outreach activities such as 
seminars, training programs, and community-based activities, including 
Spanish-language radio and television programs. WHD distributes worker 
rights cards to day laborers, health care workers, garment workers, and 
farmworkers, among others, in order to inform workers of their rights 
and to prevent misclassification from happening in the first place.
Justice and Equality in the Workplace Program
    To further increase awareness of relevant labor laws, to encourage 
greater employer compliance with those laws, and to assist vulnerable 
workers in achieving the protections to which they are entitled, WHD 
has also developed strategic partnerships and collaborations with 
businesses and trade associations; labor unions; federal, state and 
local government agencies; faith- and community-based organizations; 
and foreign agencies. Just one example is the established in Houston, 
Texas, to educate low-wage immigrant and non-immigrant workers about 
their rights under federal law and to bring the employers of these 
workers into compliance through education and enforcement.
    In summary, WHD balances three complementary strategies--compliance 
assistance, partnerships and collaborations, and strong complaint-based 
and targeted enforcement--to promote and achieve compliance on behalf 
of all employees, including those who have been misclassified as 
independent contractors.
WHD Response To GAO Recommendations To Improve Outreach To Facilitate 
        Proper Worker Classification
    As mentioned previously, GAO examined WHD's role in identifying and 
addressing instances in which workers were misclassified as independent 
contractors. While recognizing WHD's efforts in addressing instances of 
worker misclassification under the FLSA, GAO had two recommendations 
for WHD. Both have been addressed by WHD.
    First, GAO recommended that because WHD's enforcement program was 
primarily complaint-based, the FLSA poster should be modified to 
provide additional contact information. This revision was intended to 
facilitate the reporting of possible misclassification complaints that 
also alleged minimum wage or overtime violations. WHD agreed with the 
recommendation, and the new FLSA poster prominently displays the 
agency's toll-free number and web site address. Calls to the toll-free 
number are answered by call center staff who refer complainants to the 
appropriate WHD local office. The call center has Spanish-speaking 
customer service representatives and an interpreter service that 
supports 150 languages.
    Second, GAO recommended that WHD evaluate the extent to which 
misclassification cases identified through FLSA investigations are 
referred to the appropriate federal or state agency potentially 
affected by employee misclassification, and take action to make 
improvements as necessary. GAO also suggested that WHD build upon 
efforts by its district offices currently engaged in such referrals. 
Finally, GAO indicated that any referral of cases should include 
notifying the employer that the misclassification case has been 
forwarded to the appropriate agency.
    WHD agreed with GAO that there is value in sharing potential 
employee misclassification with appropriate federal and state programs. 
As a result, WHD reviewed its internal processes for referral of 
potential employee misclassification to other agencies with all first-
line field managers during a national managers training conference in 
May 2007. To ensure that all WHD district offices refer employee 
misclassifications that could lead to potential violations of laws 
enforced by other agencies, the first-line managers were reminded to 
follow the agency's longstanding Field Operations Handbook instructions 
and to refer such violations using the established form WH-124.
    We believe that an explicit policy of automatic referrals to all 
other agencies, however, could have an adverse impact on WHD's mission 
and ultimately harm those workers whom the agency is tasked with 
protecting. If it becomes common knowledge that WHD routinely refers 
potential violations to some agencies it would hinder the agency's 
ability to persuade employees to report violations of the wage and hour 
laws or otherwise voluntarily provide workplace information. Moreover, 
employers would be less likely to produce copies of written documents 
or records if they believed such documents were going to other law 
enforcement authorities for reasons unrelated to the labor standards 
investigation. As a result, WHD would be required to compel the release 
of information through the courts, a timely and costly means of 
enforcing federal labor standards. In addition, because the definition 
of ``employee'' under the FLSA is more inclusive than the definition 
used in many other statutes, a determination of misdesignation of an 
employee as an independent contractor by WHD may not be applicable for 
other purposes. Accordingly, WHD disagrees with GAO that referral is 
appropriate in all instances and believes that determinations as to 
whether to refer a matter to another agency must be made after 
considering the particular circumstances. In terms of the worker 
protections that WHD is trying to ensure, there are tradeoffs in 
reporting to other agencies, and whether or not reports are made 
represents the outcome of a balancing of benefits and costs for the 
workers the agency is trying to help.
    WHD also does not agree with GAO's recommendation that employers be 
notified when WHD refers potential misclassification cases involving 
laws not enforced by the WHD to another agency. As WHD explained, this 
type of process would place WHD staff in the untenable position of 
explaining or defending a referral based upon interpretations of laws 
concerning which WHD has neither expertise nor interpretive or 
enforcement authority.
Future WHD Compliance Activities
    Over the last several years, WHD has planned a number of compliance 
initiatives in low-wage industries to address the more common 
violations, such as off-the-clock violations and misclassification of 
executive, administrative, and professional employees as exempt 
personnel. In support of its compliance priorities in low-wage 
industries, WHD's FY 2008 performance plan focuses on addressing the 
violations that may arise from employment relationships not designated 
as such, especially those involving contingent workforces, 
misclassified employees, and subcontracting structures. Each of the 
agency's regional and local district offices' low-wage initiatives will 
include compliance activities in at least one of the low-wage 
industries in which independent contractor misclassifications are 
common. WHD is committed to promoting compliance in low-wage industries 
and to ensuring that the designation of workers as independent 
contractors does not result in violations of the labor standards laws 
that we enforce.
    Madam Chairwoman, Mister Chairman, this concludes my prepared 
remarks. I will be happy to answer any questions that you or the 
Members of the Subcommittee may have.
                                 ______
                                 
    Chairman Andrews. Thank you very much, Mr. DeCamp. We 
appreciate it.
    On page four of your testimony, you indicate that the 
division receives about 30,000 complaints a year. And then the 
resolution of those complaints absorbs between 70 and 78 
percent of your enforcement resources. Between 22 and 30 
percent of your enforcement resources are to targeted 
investigations.
    How many targeted investigations do you do in a year?
    Mr. DeCamp. I think it varies, depending on the year, 
depending on the resources available, but somewhere in the 
neighborhood, I believe, of 7,000 to 10,000 a year.
    Chairman Andrews. Of the 7,000 to 10,000 a year, how many 
are for violations of the Fair Labor Standards Act?
    Mr. DeCamp. That is about 80 percent of our caseload, 5,000 
to 6,000 probably.
    Chairman Andrews. Okay. So it would be 80 percent of that?
    Mr. DeCamp. Or more.
    Chairman Andrews. And a precondition to pursuing an FLSA 
claim is that there be an employer-employee relationship, 
correct?
    Mr. DeCamp. Correct.
    Chairman Andrews. So of those FLSA investigations that you 
have conducted, how many of them yield the result that there is 
a misclassification of an employee who should be under FLSA but 
isn't?
    Mr. DeCamp. We don't really track the cases that way 
because independent contractor versus employee is a coverage 
issue, rather than a violation issue. So we haven't 
historically kept records of how the violations came about.
    Chairman Andrews. I would think if you did some data-mining 
you would be able to figure that out, right, because if you 
follow up on an FLSA violation claim, by definition, the person 
is an employee, right? You wouldn't be pursuing the claim if 
you conclude the person is not an employee.
    Mr. DeCamp. If we get to the end of the investigation and 
have concluded that, yes, the person is an employee, then, yes, 
we would have found that person is covered.
    Chairman Andrews. So some subset of those investigations 
that you get to the end, you have made a prior determination 
that the person is an employee or there has been some dispute 
about that, right?
    Mr. DeCamp. Yes, except that information isn't necessarily 
reflected in the case file or in the records.
    Chairman Andrews. So if one of your inspectors goes into an 
employer and says, ``These 12 people are not being paid 
overtime,'' the employer says, ``Well, they are not employees; 
they are independent contractors,'' there is nothing in your 
case file that would say that that defense was raised?
    Mr. DeCamp. There might or there might not be. And it is 
not in the computer records, which is the basis from which we 
would really pull data together.
    Chairman Andrews. Would you favor a statutory change that 
would require you to keep that kind of record?
    Mr. DeCamp. I take no position on that.
    Chairman Andrews. You think it would be a good idea?
    Mr. DeCamp. I don't know that it would help our enforcement 
mission in terms of protecting the workers.
    Chairman Andrews. Well, let us look at this for a moment.
    In New Jersey, in 2006, 871 audits of the construction 
industry were conducted. And in 41 percent of those cases, the 
finding was that there was a misclassification of workers.
    Do you have any basis to either agree or disagree with--if 
one were to put forth the proposition that that is typical of 
across the country, are you in a position to agree or disagree 
with that statement?
    Mr. DeCamp. I don't know in terms of the specific numbers 
whether the New Jersey results would generalize nationwide. But 
I would agree, certainly, that in construction, that is a low-
wage industry with a high incidence of misdesignation.
    Chairman Andrews. So you think it would be fairly probable 
there would be a high incidence of misclassification?
    Mr. DeCamp. Yes.
    Chairman Andrews. Okay.
    Another thing that you say in your testimony repeatedly is 
that misclassification of an employee as an independent 
contractor is not, in and of itself, a violation of the FLSA, 
correct?
    Mr. DeCamp. Correct.
    Chairman Andrews. Should we make it a violation of the 
FLSA?
    Mr. DeCamp. Well, it depends on what the policies of the 
FLSA are. Currently, the FLSA is about making sure that people 
are getting minimum wage and overtime, among other things.
    Chairman Andrews. Well, which people?
    Mr. DeCamp. Covered employees.
    Chairman Andrews. Okay. So if there is a dispute about 
systematic misclassification of covered employees, wouldn't it 
be logical--if the public policy behind that statute is to say 
that people who are in an employer-employee relationship should 
get overtime, should get minimum wage, should get the other 
protections, wouldn't it be logical to make it one of the 
enforcement duties to make that determination?
    Mr. DeCamp. Again, it is an issue of whether the workers 
have been harmed. If----
    Chairman Andrews. Well, they have been harmed, haven't 
they? If someone has been misclassified and not being treated 
as an employee, and they don't get overtime for their 41st 
hour, they have been harmed, right?
    Mr. DeCamp. Well, sure. And in that case, we would assert 
an overtime violation under the FLSA.
    Chairman Andrews. So would you favor making a violation of 
the FLSA the misclassification of employees? Is that a good 
idea?
    Mr. DeCamp. I don't think it is because we already protect 
the workers by enforcing their rights to minimum wage and to 
overtime.
    Chairman Andrews. But how do you protect the workers if 
they have been misclassified? Because you just told us that you 
don't keep records of that. So if someone had been 
misclassified and the investigation was not properly handled, 
you wouldn't know, would you?
    Mr. DeCamp. If the worker has been misclassified, then we 
would assert an employment relationship, and then we would look 
to see whether their rights to minimum wage or overtime had 
been violated.
    Chairman Andrews. But you don't know in how many cases you 
have done that because you don't keep track of it. You assume 
that your field people have done that, but you don't know, do 
you?
    Mr. DeCamp. I don't know whether people have kept track of 
the independent contractor issue. It is not part of the 
computer database.
    Chairman Andrews. No. But if an employer has raised a 
defense that someone is an independent contractor, not an 
employee, your database doesn't let you keep track of how you 
have resolved that defense, does it?
    Mr. DeCamp. I don't believe that it does.
    Chairman Andrews. Okay. Thank you.
    I see my time is up. Mr. Kline is recognized for 5 minutes.
    Mr. Kline. Thank you, Mr. Chairman.
    And thank you, Mr. DeCamp.
    We are in these continuing discussions of lawyers and 
lawyers here, so I will admit, once again, that I am not one, 
so I need to cut down to some sort of basics here.
    We heard in the previous hearing, I think one of our 
colleagues said that the issue of whether an individual worker 
is a contractor or an employee isn't that complex. Would you 
agree with that?
    Mr. DeCamp. I think it really depends on the situation. I 
think there are many employment relationships where it is 
perfectly clear who is an employee and who wouldn't be. I think 
there are certain industries where it becomes difficult to draw 
the lines. I think construction and some of the industries that 
we have talked about present some of the more challenging gray 
areas.
    Mr. Kline. So in some cases it may be, in fact, quite 
complex, and others it might be pretty straightforward. I think 
Mr. Andrews indicated some cases where it might be pretty 
straightforward and others where it is not clear at all. He 
talked about people mowing lawns. Well, sometimes that may be 
clear that they are an employee, and sometimes it is clear that 
they are an independent contractor. So just what industry you 
are in and what job you are doing may not be the best 
indication of that.
    Now, let us get to a couple of things here, because I am 
going to run out of time.
    In its examination of misclassification cases, the GAO made 
a number of recommendations to the Wage and Hour Division. Can 
you explain in more detail what these recommendations were and 
how the division has responded to GAO's recommendations?
    Mr. DeCamp. There were really two recommendations the GAO 
made in the report.
    One of the recommendations was to include contact 
information on our workplace poster that would explain to 
workers how to contact the Wage and Hour Division in order to 
pursue issues, to present a complaint. We have addressed that 
by including the toll-free number for the Wage and Hour 
Division on our poster.
    The second recommendation was that we regularize, I guess 
would be the best way to put it, our processes for 
communicating information about potential violations to other 
agencies. That is an issue where we continue to examine how 
best to approach that issue, because there are pros and cons to 
dealing with other agencies, such as IRS or other agencies, as 
well.
    We need to balance the need to enforce and protect those 
other laws that are outside our agency's jurisdiction with the 
need to maintain the integrity of our enforcement mission.
    Mr. Kline. Okay. Thank you.
    Now, I want to go back, because I am still thinking about 
this, how your division works. Let us take a for-instance case, 
a hypothetical. You have someone working for a company, Company 
A, and they are working as an independent contractor. But, in 
your judgement, they have been misclassified.
    Mr. DeCamp. Okay.
    Mr. Kline. You are not concerned with that as a matter of a 
violation of law. But if that person who has been misclassified 
is making less than minimum wage, for example, what would you 
do? What would your department do?
    Mr. DeCamp. We would assert a minimum-wage violation and 
pursue back wages or any other remedies that were appropriate.
    Mr. Kline. Okay. So even though they are an independent 
contractor, and neither the worker nor their employer is 
breaking a law because of that--or not being held accountable 
because of your department--nevertheless, because they were 
getting less than minimum wage, your department would take 
action. Is that correct?
    Mr. DeCamp. Well, we would say that they are being held 
accountable for the substantive violation of the Fair Labor 
Standards Act, the minimum-wage violation.
    Mr. Kline. Right. But the misclassification itself is not 
an issue with you, and so, because of that, you are not 
recording that. It is not in your computer database.
    Mr. DeCamp. Right----
    Mr. Kline. But the fact that there was a violation that 
they were not paid the minimum wage or perhaps weren't paid 
overtime, those the employer is held accountable for. Is that 
correct?
    Mr. DeCamp. Right. Technically, the Fair Labor Standards 
Act does not require that employees be classified one way or 
another. It requires that employees who are genuinely employees 
under the law receive overtime and receive minimum wage as 
required by the law.
    Mr. Kline. Okay. I see my yellow light is coming on.
    Let me just explore something else with you. You have cases 
where people are reluctant to come forward and make a 
complaint. You probably also have cases where you have workers 
who prefer that status to the employee status and wouldn't come 
forward either. Is that correct?
    Mr. DeCamp. That is probably fair to assume.
    Mr. Kline. Okay. I yield back.
    Chairman Andrews. Thank you very much.
    I recognize the gentlewoman, the chairperson of the Labor 
Standards Subcommittee, Ms. Woolsey, for 5 minutes.
    Ms. Woolsey. I feel like we are going backwards, Mr. 
Chairman. We get to a point where we know we have a problem. 
And we ask the agency, the department who we think should be 
responsible for protecting all workers, and all we hear is that 
it ain't their responsibility.
    So let me ask you who, then, if not the Department of 
Labor, is responsible for protecting all employees? And whose 
mission is it to investigate? And if we, the Congress, and if 
our laws are making it impossible for you to do your job, what 
is it we need to change?
    Because these answers are not acceptable. The answers to 
our questions in the letter were the same kind of gray mushy 
mush. It is probably not your fault; maybe you can't be any 
clearer than this.
    We have to get clear. We know we have workers that are 
called one thing and are another. And they are not getting 
their full benefit from being a working American.
    So give us some guidance. What can we do?
    Mr. DeCamp. Well, again, I think the agencies that enforce 
the particular statutes are the ones who protect the workers.
    For example, the wage and hour rights: The Wage and Hour 
Division very aggressively pursues cases in low-wage industries 
where misdesignation of independent contractors is common. We 
protect those rights to minimum wage, to overtime.
    Ms. Woolsey. But you don't know who they are.
    Mr. DeCamp. We do.
    Ms. Woolsey. You don't keep track of them.
    Mr. DeCamp. We do know who they are because we are very 
active in the workplaces where these people are working, where 
these issues arise. We are active in the industries. So we go 
to the worksites. And we don't care how an employer wants to 
designate a worker, as an independent contractor or an 
employee.
    Ms. Woolsey. Well, then let me ask it another way. Why are 
there so many of them still? What is wrong with the way you are 
doing your jobs?
    Mr. DeCamp. I wouldn't say there is anything wrong with the 
way we are doing the job. I think it is partly a resource 
issue, frankly. I would love to see the agency able to do more 
investigations, to have more investigators, to be more active. 
And that is mainly a resource constraint.
    And, frankly, you know, the administration has asked for 
additional resources. And I hope that we will receive 
additional resources so that we can do more of these 
investigations.
    Ms. Woolsey. Well, get back to us about that. That is what 
we are trying to find out. What do we need to do?
    Mr. DeCamp. Again, I think it is about getting more 
investigators on board so that we can do more targeted 
investigations. I think targeted investigations in low-wage 
industries are the most important tool that we have to try to 
protect these workers, because many low-wage workers don't come 
to us. They have concerns about immigration status or other 
concerns where they don't come to us.
    Ms. Woolsey. Well, what does an inspector do? Do they need 
to be called into the place of employment? Do they need to 
interview the workers? Do they need to interview the employer?
    Mr. DeCamp. Right, well, investigations can come about in a 
couple of different ways. One is that we may receive a 
complaint from a worker or from another interested party, in 
which case that might spur an investigation.
    Another way is that we may, as part of our strategic 
planning process, decide we need to target this industry this 
year. And so, without a complaint, we might go into several 
workplaces and conduct an investigation, which would involve 
examining records, interviewing workers, interviewing all sorts 
of personnel to try to figure out what is going on in the 
workplace.
    Ms. Woolsey. And, well, how long have you been in this 
position, Mr. DeCamp?
    Mr. DeCamp. Since August of last year.
    Ms. Woolsey. Okay. Give us some examples of a success 
story, where you made a difference for a misclassified group of 
employees.
    Mr. DeCamp. Well, the department filed a lawsuit recently 
against Benitez Drywall Company, where the issue was 
misdesignation of employees as independent contractors. So we 
have pursued remedies for them in court.
    I have outlined, actually, in the testimony on page four, a 
number of recoveries that we have had, or also litigations that 
we have commenced.
    We have another case in Glendale, California, a janitorial 
company, where we sued them for $900,000 in back wages.
    Chairman Andrews. Will the gentlelady yield?
    Ms. Woolsey. Yes, I will.
    Chairman Andrews. Were those two cases initiated by the 
department, or were they a result of complaints by workers?
    Mr. DeCamp. We actually don't disclose that information 
because of concerns about retaliation for the workers involved. 
I can tell you that on----
    Chairman Andrews. Okay. But if they were initiated by the 
department, you wouldn't have that concern, would you?
    Mr. DeCamp. I am sorry. I didn't understand.
    Chairman Andrews. If the cases were initiated by the 
department, you know, that would not be an issue, would it? In 
other words, you respond to complaints, and then you initiate 
some audits.
    Mr. DeCamp. Right.
    Chairman Andrews. Were these initiated by audits, or were 
they complaints?
    Mr. DeCamp. Well, this is what I am saying. If we identify 
only the cases that were initiated by the department, that also 
identifies which cases were initiated by complaints. 
[Laughter.]
    Chairman Andrews. Okay.
    Ms. Woolsey. Mr. Chairman, may I reclaim my time?
    Is there follow-up? Do you know what that industry is doing 
now? Do you know what like industries are doing because of the 
initial complaint?
    Mr. DeCamp. Well, whether or not it is a complaint, in 
those cases, they certainly received a lot of publicity. We are 
hoping that that has a spillover effect to increase compliance.
    But we know we need to remain very active in janitorial 
work, in construction, and in these other low-wage industries. 
A continuing enforcement presence is going to be critical in 
those industries.
    Ms. Woolsey. My time has expired.
    Chairman Andrews. The chair recognizes the gentleman from 
South Carolina, Mr. Wilson, for 5 minutes.
    Mr. Wilson. Thank you, Mr. Chairman.
    And I want to join with my colleague from Minnesota, 
Colonel Kline, and express, as a fellow attorney, how happy I 
am to be in the presence of so many fine attorneys.
    As we begin this morning, we have heard testimony about the 
IRS 20-factor test, as well as other tests used by other 
federal agencies and departments.
    Can you tell us, are all of these tests consistent? What 
factors does IRS look at that Wage and Hour Division does not? 
And, perhaps most important, do each of these tests always 
produce the same result?
    Mr. DeCamp. To take the last question first, my 
understanding is that the tests do not necessarily yield the 
same result in all cases.
    As I mentioned before, there are many situations where the 
tests would all come out the same way regarding somebody who is 
clearly an employee as an employee.
    But in the grayer areas--in construction, in some of these 
other types of industries that we are talking about where 
compliance is a particular concern--there may be differences in 
the outcomes under the tests.
    The test that we use under the Fair Labor Standards Act is 
the economic realities test, which was set forth by the Supreme 
Court in a number of cases beginning in the 1940s. And what 
that is really looking at is: Is the worker functioning as an 
independent business, or is the worker functioning more as a 
traditional employee?
    The IRS test--and I am not even certain that they still use 
the 20-factor test--is dealing with the common law right-to-
control test, which has a different focus. I am not an expert 
in what factors the IRS uses. But I think that, given that they 
are looking at these statutes from more of a revenue than a 
wage perspective, I suspect that that is more of a focus of 
their inquiry. But I can't get into details of the IRS test. I 
am not an expert on that.
    Mr. Wilson. You had indicated correctly that IRS is looking 
at the financial side of it. Is there anything that Wage and 
Hour specifically looks at that they wouldn't look at?
    Mr. DeCamp. Again, I can talk about what Wage and Hour 
looks at, but I am truly not familiar with the way IRS goes 
about its task.
    Mr. Wilson. Setting aside the issue of lost revenue, what 
sorts of damages will an employee who is misclassified be 
entitled to? In the absence of minimum-wage or overtime 
violations, are there other damages that misclassified workers 
suffer? Are these enforced by the Wage and Hour Division?
    Mr. DeCamp. Again, with regard to the statutes that the 
Wage and Hour Division enforces, our focus is going to be on 
minimum wage and overtime primarily under the Fair Labor 
Standards Act. We also deal with other types of issues under 
the Family Medical Leave Act and the other 70 or so statutes 
that we enforce.
    Generally, we are talking about back wages, and we may be 
talking about liquidated damages. We may be talking about other 
remedies that would be available for violations.
    But I wasn't sure whether the premise of your question was 
that there was no overtime or minimum-wage violation.
    Mr. Wilson. Right.
    Mr. DeCamp. There may also be other issues that are outside 
the scope of Wage and Hour's jurisdiction, such as 
contributions to benefits plans, tax payments, you know, 
employment insurance payments, unemployment insurance payments, 
workers' comp. These may be harms that a worker would suffer if 
the worker is misdesignated under those statutes, under the IRS 
statutes or under state or other insurance programs.
    Mr. Wilson. And it is so important that persons know their 
rights. Practically, how does this work? Is there a poster that 
is placed at workplaces? How do people know?
    Mr. DeCamp. Well, we have a number of pamphlets and 
brochures and information on our Web site that helps to clarify 
this issue. We have fact sheets on our Web site that explain 
the difference between an employee and independent contractor, 
focusing on the tests that the Supreme Court has articulated 
for our statute.
    We have a chapter from our field operations handbook that 
explains the employment relationship. We also have a lot of 
informational programs that we put on where we will talk to 
workers, we will talk to employers, and we will explain these 
tests and we will take questions to try to clarify.
    We also have, as I mentioned in my opening statement, an 
advisor on our Web site, where, by responding to a few 
questions, the Web site will give guidance to a worker or to an 
employer or anyone else about the proper designation status.
    Mr. Wilson. And there are training schools for technical 
students that I think would come right into this. Are the 
rights explained to students as they are taking courses in 
technical schools?
    Mr. DeCamp. I don't know about technical schools.
    Mr. Wilson. I just think that would be a way to reach 
really bright young people who are learning skills.
    I yield the balance of my time.
    Chairman Andrews. I thank the gentleman for yielding. I 
think that is an interesting idea about some training course, 
perhaps something we could pursue together in the Higher 
Education Bill.
    Mr. Wilson. Yes.
    Chairman Andrews. That is a good idea.
    The chair recognizes the gentleman from Michigan, Mr. 
Kildee, for 5 minutes.
    Mr. Kildee. Thank you, Mr. Chairman.
    Mr. DeCamp, you talked about a lack of resources to respond 
to complaints. Is that a lack of depth of response or just a 
lack of any response at all to the complaints?
    Mr. DeCamp. I think the more resources that we have, the 
more investigations we can do and the more thorough we can be 
in the investigations that we do.
    Mr. Kildee. Are some not investigated at all because of a 
lack of resources, or is it a question of the depth of the 
response?
    Mr. DeCamp. We investigate the complaints we receive. And 
then with the resources that are available over and above 
responding to the complaints, that is how we do our targeted 
investigations.
    So the more resources we have over and above those that are 
necessary to respond to the complaints we receive, the more 
targeted investigations we can do.
    Mr. Kildee. Were your budgetary requests this year higher 
than what you had received previous years?
    Mr. DeCamp. Yes, by about 10 percent.
    Mr. Kildee. And did the budget sent to the Congress reflect 
that difference?
    Mr. DeCamp. Yes, sir.
    Mr. Kildee. I thank you very much.
    Chairman Andrews. I thank the gentleman for his time.
    I recognize the gentleman from Louisiana, Dr. Boustany, for 
5 minutes.
    Dr. Boustany. Thank you, sir.
    I guess we have to admit that the workforce or the 
workplace is a very complex and diverse area with regard to 
relations among workers and those who deal with the 
transactions of, you know, paying out for work and so forth. 
And I am struck by the fact that the tests that were talked 
about did not always yield the same results.
    And so there are a number of variables out here that really 
complicate this. And God bless you for trying to figure it all 
out. It seems very complicated to me. I am just a heart 
surgeon. [Laughter.]
    I would also think that workforce shortages which we are 
seeing, particularly in the construction area, certainly in my 
state of Louisiana and I think nationwide, would also create a 
different type of variable in this that would have some impact 
on whether somebody is misclassified versus wrongfully 
classified.
    Because if you have a workforce shortage with plumbers or 
carpenters or some group like that, then clearly you will get a 
lot of free agents out there trying to do things. So trying to 
sort through this would seem to be very difficult.
    I wanted to talk to you about the strategic targeting a 
little bit and explore that. Could you tell us a little bit 
more about the process? You said that you have a strategic 
planning session each year. You devote I forget how much of 
your resources to that? Could you tell us a little bit more 
about the process and how you go through that?
    Mr. DeCamp. Well, each year we try to plan our targeted 
enforcement priorities for the coming fiscal year. Now, it is 
an annual process. It takes several months.
    And it is an iterative process where we will get our senior 
leadership team involving career professionals, as well as the 
leadership of the agency, together in the same room to 
brainstorm, largely to talk about, you know, are there 
particular industries where we are seeing emerging problems of 
compliance? Has there been confusion? Is there willful conduct 
in a particular industry or a particular region? Or other types 
of issues where we feel that expenditure of resources and 
targeted investigations can really affect compliance in a 
positive way.
    And so we have several sessions over the course of the year 
where we refine our plans for targeted enforcement.
    And we know that each year we are going to focus on low-
wage industries. We know that each year we are going to focus 
on agriculture, child labor and several other areas that 
traditionally don't necessarily lead to high volumes of 
complaints for a variety of reasons. We know we need to be 
active in those areas or else the rights will go unprotected.
    And so we try, on an annual basis, to fine-tune those 
enforcement plans and figure out, you know, this year is re-
forestation a problem, H2B workers in the Pacific Northwest or 
Gulf Coast work, in light of some of the federal government 
contracting issues, you know, in and around the Hurricane 
Katrina area? And we try to focus on what are the real 
compliance problems where expenditure of targeted, directed 
resources would be most beneficial.
    Dr. Boustany. Thank you.
    Have you seen any trends with regard to workforce shortage 
in how this is playing out?
    Mr. DeCamp. Well, certainly in the Gulf Coast. We have seen 
issues in Louisiana, Mississippi, Alabama of a large influx of 
inexperienced employers who are not used to the rules, who 
don't know the rules and don't necessarily care about the rules 
applicable to government contracting or the other federal wage 
and hour laws. Many of these folks may be trying to comply with 
the law, and many of them don't know the law.
    And what we see is--and we see this across the board in 
industries--that compliance rates for newer businesses, smaller 
businesses, tend to be lower, in part because the wage and hour 
laws--not just the FLSA, but across the board--tend to be 
fairly voluminous, fairly complicated. And we are dealing with 
many employers who haven't yet invested in compliance with wage 
and hour laws, and so they make mistakes. And sometimes it is 
willful; sometimes it is accidental.
    But what we have seen in the Gulf Coast especially is a lot 
of contractors who are less like traditional businesses and 
more like folks who aggregate teams of workers and bring them 
to a worksite to be integrated into an existing contracting 
regime.
    And so, one thing that we have tried to do to address that 
issue is to be more aggressive in asserting joint employment so 
that these workers are employees, not just of the contractor 
who rounds them up, but of the higher-level contractors on the 
project who are actually directing the work.
    Dr. Boustany. And one final question. Year to year, have 
you seen variances in the results of your targeted enforcement 
program, or strategic targeting program, or is it fairly 
consistent?
    Mr. DeCamp. Well, I think it is fairly consistent in terms 
of the violation rates that we see on targeted cases.
    We are always looking to improve our targeting so that we 
have a higher likelihood that, when we are going to expend 
resources and send an investigator into a workplace, that it is 
actually a workplace where there is a problem, as opposed to a 
workplace where everybody is in compliance. So we are always 
looking to improve that.
    Dr. Boustany. Thank you.
    And, Mr. Chairman, I would submit maybe there is an 
education component here for new employers and small employers 
that might be of benefit.
    So I yield back. Thank you.
    Chairman Andrews. I thank the gentleman for his time.
    And the chair recognizes the gentleman from Illinois, Mr. 
Hare, for 5 minutes.
    Mr. Hare. Thank you, Mr. Chairman.
    Mr. DeCamp, I just have three questions for you.
    You stated that you have a record of aggressive enforcement 
in protecting the workforce. And of the more than 132,000 
workers who were misclassified in the 2008 national U.I. tax 
audit, can you tell me in how many of those cases did the 
Department of Labor conduct a follow-up investigation to 
determine whether those workers were receiving adequate back 
pay?
    Mr. DeCamp. I don't have that information.
    Mr. Hare. Could you get that for us?
    Mr. DeCamp. We can look and see whether we can provide that 
information.
    Mr. Hare. I would appreciate that.
    You also said in your testimony that a policy of automatic 
referrals would discourage employees from reporting violations 
of wage and hour laws and to provide other information. Can you 
explain this to me? Because I am a little bit perplexed by 
that.
    Mr. DeCamp. The main issue comes about when we are dealing 
with undocumented workers. If we take information that we 
receive involving undocumented workers and refer that 
information over to ICE or refer it over to IRS, for example, 
then those workers themselves may find themselves in jeopardy 
of being arrested and deported for their immigration 
violations.
    The last thing that undocumented workers want to do, 
generally, is to be dealing with the federal government in any 
of its respects. But certainly they don't want to be dealing 
with enforcement agencies dealing with the immigration laws.
    The same concern arises when a lot of undocumented workers 
use fraudulent Social Security numbers, for example. So if the 
IRS or other agencies start investigating employer records 
dealing with tax payments, and they start to notice that, you 
know, three workers for this employer have the same Social 
Security number, that may then lead to prosecution or at least 
further inquiry and scrutiny of those workers, which may make 
the workers very uncomfortable.
    And if word gets out that Wage and Hour is providing 
information in significant quantities to other agencies, then 
workers may elect to forgo their wage and hour rights so as to 
avoid having to deal with enforcement of immigration laws.
    Mr. Hare. You also said that employers would be less likely 
to produce copies of written documents or the records if they 
believe the documents are going to other law enforcement 
authorities. Well, what if they were required to do so?
    Mr. DeCamp. What if who were required to do so?
    Mr. Hare. If the employers----
    Mr. DeCamp. If they were required to give us the documents?
    Mr. Hare. Yes.
    Mr. DeCamp. Well, right now, when we get the documents, it 
is generally a very cooperative process. We don't have to use 
subpoenas. We don't have to use formal legal process to get 
that information. We can use those processes if we need to, if 
an employer refuses to give us information. But we generally 
don't have to go the formal route to get documents.
    I think that if we were to more aggressively use employer 
documents to refer them to other agencies, employers would be 
more likely to require a formal process, which would then 
present a severe resource drain in terms of the number of 
investigations that we can conduct.
    Mr. Hare. And then just one final question before I run out 
of time.
    You said that, you know, you need some additional personnel 
or the resources. Can you tell us how many additional 
investigators would you need, in your professional opinion, to 
adequately do what it is you want to do? I mean, how short are 
you?
    Mr. DeCamp. It is hard to know what the right number is. I 
know that the right number is north of where we are now. And I 
think that the request that we have now seeks about 40 
additional investigators. But I think that we need to go well 
beyond that at some point.
    There is also an issue of if we get too many investigators 
at once, that actually has negative effects for the agency, 
because training resources are very intensive, for example.
    Chairman Andrews. Will the gentleman yield?
    Mr. Hare. I certainly would.
    Chairman Andrews. If I could just take some of his time.
    You made the statement earlier about needing more. These 
data are for overall inspectors, not just this target, but I 
want you to explain this to us.
    In fiscal 2001, there were 4,334 positions requested for 
inspectors. For fiscal 2006, the request was 4,282, from the 
administration. For fiscal 2007, the request was 3,889. Now, it 
is back up to 4,082 for fiscal 2008.
    So the number of people the administration asked for went 
down from 2006 to 2007, and in 2006 was considerably less than 
what you inherited when you took over in fiscal 2001.
    You have been asking for fewer people, haven't you?
    Mr. DeCamp. With all due respect, those are not the Wage 
and Hour numbers. Those are not the numbers of investigators 
that have been requested for Wage and Hour. That might include 
personnel for ESA.
    Chairman Andrews. They are.
    Mr. DeCamp. But that is not reflective of the number of 
investigators that we have been requesting. We actually did 
request----
    Chairman Andrews. But the numbers of personnel that you 
have been asking is going down generally, right?
    Mr. DeCamp. But we have also asked for increases in the 
Wage and Hour investigators.
    Chairman Andrews. That is how your presentation was made to 
the Appropriations Committee?
    Mr. DeCamp. I don't know how the presentations were made in 
previous years, but I can say that, in terms of the 2008 
request, the 2007 request, we have specifically asked for 
increased----
    Chairman Andrews. Okay.
    Mr. DeCamp. We asked for specific amounts for increased 
numbers of investigators for Wage and Hour.
    Chairman Andrews. But not in the overall.
    I thank the gentleman for his time.
    Mr. Hare. I yield back, Mr. Chairman.
    Chairman Andrews. I would recognize the gentleman from 
Michigan, Mr. Walberg, for 5 minutes.
    Mr. Walberg. Thank you, Mr. Chair. I have no questions at 
this time.
    Chairman Andrews. The chair would recognize the gentleman 
from New York, Mr. Bishop, for 5 minutes.
    Mr. Bishop. Thank you.
    I just want to quickly follow up. When you are saying ``the 
request that we made'' with respect to inspectors, is the 
``we'' here the Wage and Hour Division making a request to OMB, 
or is the ``we'' here the administration making a request to 
Congress?
    Mr. DeCamp. The latter.
    Mr. Bishop. Thank you.
    I want to pursue this issue of automatic referral. And I 
want to use a specific case. And it is the case that is raised 
by a witness on the second panel. I don't know whether you have 
had access to the testimony, but Mr. Williams outlined the case 
in which I think, to any reasonable person, he was an employee.
    The relationship that he had with his employer was a 
traditional employer-employee relationship. And, as I say, I 
think that would be the case to a layman. I think it would be 
the case by looking at the ABC test, by looking at the IRS 20-
point test.
    Let us assume that his testimony were submitted to the Wage 
and Hour Division. And let us assume that you had sufficient 
staffing to pursue an investigation.
    Your investigation, if I understand the constraints under 
which you feel you are working, would limit your findings, so 
to speak, to whether or not he was being paid minimum wage, 
whether or not he was being paid overtime, and so on. Is that 
correct?
    Mr. DeCamp. I think that is largely correct. We wouldn't 
require a finding of independent contractor versus employee.
    Mr. Bishop. Let us assume that you look at this. And he is 
being paid overtime, and minimum wage is not a problem. But 
clearly he is an employee. Therefore, his employer is not 
paying in to the Social Security Trust Fund, not paying into 
the Medicare Trust Fund.
    What does Wage and Hour Division do with that finding? Do 
they refer?
    Mr. DeCamp. We might. We might refer it to IRS.
    Mr. Bishop. Stay on that for a second. Why would there be 
hesitation? Why is your answer you ``might''? Why isn't it 
``absolutely''?
    Mr. DeCamp. I think what we would need to do in a case like 
that is to balance whether referring would do more harm than 
good, in particular, with the workers.
    Mr. Bishop. Okay. I understand the testimony you just gave 
about exposing illegal immigrants to retaliation and so on. 
But, again, this is a national reputable company. And this is 
clearly a U.S. national that we are dealing with here who is 
being treated as an independent contractor.
    So I guess my frustration is--and this goes to the question 
Ms. Woolsey asked--if it isn't the Department of Labor that is 
going to act on what is clearly, at least to this person, 
clearly an egregious violation, what agency within the federal 
government can either employees turn to or can the Congress 
turn to?
    Mr. DeCamp. Well, again, first of all, there is a 
significant chance that in a case like that, we would refer the 
matter to IRS, given the facts that you have described. In 
addition, the IRS and the state agencies dealing with 
unemployment insurance certainly have jurisdiction to enforce 
their laws. And they can do that, as well.
    Mr. Bishop. Okay.
    The commissioner of labor for New Jersey, Mr. Socolow, in 
his testimony, he recommends that the federal government take 
action in five areas. One of them is that we establish a strong 
universal federal definition of an employee.
    What is your response to that?
    Mr. DeCamp. Not knowing enough about the tax laws or the 
other laws to understand whether there are differences in the 
policies that would dictate a different outcome, I think it 
would certainly make things easier for everybody if there were 
one definition.
    Mr. Bishop. And would that enhance your--by ``your,'' the 
Wage and Hour Division--would that enable or enhance your 
enforcement capabilities?
    Mr. DeCamp. I don't think it would enhance our enforcement 
capabilities. But it would make it clearer when we ought to be 
considering referring information over to other agencies.
    One issue is that, because the tests are different, we 
don't know, for example, in every case--now, maybe in a clear 
case, that is a different matter--but in one of these gray 
areas, we have a broader definition of ``employee'' under the 
FLSA than exists under most other laws.
    We don't want to be referring information over to other 
agencies that might not even be a violation of their laws. And 
we don't train our investigators in the tests used by the other 
laws.
    Mr. Bishop. I am about to run out of time, but I want to 
ask you one more quick question.
    On the issue of resources, we just had a hearing in the 
Budget Committee in which the people from CMS estimated that 
for every dollar of enforcement they receive, they will get 
back somewhere between $4 and $13 of savings.
    Has your division conducted any form of assessment of that 
kind of ratio?
    Mr. DeCamp. Not that I am aware of. We just know that we 
want to be able to do more investigations.
    Mr. Bishop. Okay. Thank you.
    I am out of time. Thank you, Mr. Chairman.
    Chairman Andrews. Thank you very much.
    Next on our list is the gentleman from Iowa, Mr. Loebsack, 
for 5 minutes.
    Mr. Loebsack. Thank you, Mr. Chair. I have no questions.
    Chairman Andrews. Next on our list is the gentlelady from 
New Hampshire, Ms. Shea-Porter, for 5 minutes.
    Ms. Shea-Porter. Thank you.
    You know, without trying to sound facetious, I have to 
wonder if you are working for the same government that we are 
working for. And I will tell you some of my concerns here, and 
ask you to please address them.
    For example, we know that we have the largest deficit in 
history. And the IRS reports that they are losing an estimated 
$2.72 billion in 2006 alone. And yet I heard you say that you 
might report it to the IRS and, then again, you might not. And 
you also do not train your workers about these violations and 
where to take them.
    Are we all on the same page, working for the same 
government, with the same goals?
    Mr. DeCamp. Right. I appreciate the question.
    There is certainly a tension there. We certainly appreciate 
the importance of all of the federal laws, including the 
immigration laws, the revenue laws and the other laws. And I 
don't want my testimony to be misunderstood as suggesting that 
we somehow don't value those laws.
    Our approach to not referring every case is more a focus of 
the pragmatic consequences of referring matters and thereby 
deterring workers from reporting violations. That is the 
concern.
    Ms. Shea-Porter. Well, I have trouble with that answer, 
also. Because earlier, you said your mission of protecting the 
workers--and I need to ask you how. If we don't protect them 
about accidents and Medicare and Social Security and 
unemployment compensation and retirement and benefits, exactly 
how are you protecting them?
    Mr. DeCamp. Well, the concern is that if we are deterring 
workers from coming forward to us--because, frankly, we know 
that the workers would much rather not come to us at all than 
risk being deported or having other adverse consequences like 
that--if we deter workers from coming to us, then we are going 
to be getting less good information about violations in the 
workplace.
    And if the labor standards for the undocumented workers and 
other low-wage workers are not protected, that undermines the 
labor standards for all the workers. And that is the concern.
    We are not just concerned about the one worker who may have 
the issue. We are concerned about the integrity of the labor 
standards for all the workers in the workplace. And to protect 
those standards, we need to protect the undocumented worker and 
every other worker.
    Ms. Shea-Porter. Well, I will tell you that it smacks of 
protecting the people who are breaking these rules.
    And also, as somebody who did a lot of social work, there 
are ways to protect identities without, you know, having them 
lose their jobs. What have you pursued? Have you looked at ways 
to be able to allow employees to announce these violations 
without having them prosecuted or lose their status?
    What exactly are you doing to take steps? Because to do 
nothing is not acceptable.
    Mr. DeCamp. Well, we certainly conduct investigations, and 
we enforce our laws vigorously.
    We don't require necessarily employees to submit a 
complaint with their name on it. We will take information 
sometimes from media sources, sometimes from workers reporting 
things anonymously. We get out there and we investigate and we 
protect those rights.
    The concern comes into play if we refer a matter over to 
another enforcement agency that then comes in and starts 
scrutinizing the employer's records and sees that, you know, 
there are problems with the Social Security numbers or problems 
with I-9s or problems with other issues.
    Then, even if we haven't, you know, announced the identity 
of any particular worker who is complaining, the fact that the 
worker is part of a workplace that is now being investigated by 
another enforcement agency may put that worker in jeopardy for 
having tax problems or immigration problems. And that would 
have a very chilling effect on workers.
    Ms. Shea-Porter. Have you worked with communities that work 
with, say, illegal immigrants or people who have green cards? 
Is there anything specific that you are doing with these 
organizations so that they could protect them?
    Mr. DeCamp. Well, absolutely. We do a lot of outreach to 
exactly that kind of group: to religious groups, to groups that 
advocate on behalf of immigrants, in particular, undocumented 
workers. We do a lot of outreach to educate those individuals 
and those groups about the protections that apply for those 
workers under our laws.
    Ms. Shea-Porter. Well, I will tell you, I am sure you could 
accomplish that and still do what your mission is. And I am 
disturbed that you haven't done that.
    Earlier, you were talking about not wanting to bring in 
more people because--and let me see if I had this right--that 
it is intensive training. When you are talking about how many 
people do you really need, and you said something along the 
lines of: Well, it is intensive training. So we wouldn't really 
want to bring in too many because it is a rigorous process.
    Do you recall saying that? Am I quoting you right?
    Mr. DeCamp. Well, what I said was that if we add staff too 
quickly, if we add investigators too quickly, it overwhelms the 
agency. Because in talking about how it is resource-intensive, 
we want to grow. But if we grow too quickly, it overwhelms the 
capacity of the agency to absorb these investigators.
    Ms. Shea-Porter. Well, I have to say that you can look at 
all kinds of work like that--say, air traffic controllers. 
Remember when they all were let go for a while, and they 
managed to bring a lot in because they knew they needed them? 
It was essential.
    And I would suggest that it is essential. And it almost 
sounds like stonewalling, whether it is the intention of the 
agency or not. By saying that we can't have these people come 
help us because they would be a burden on us sounds, at best, 
weak.
    Thank you. My time has ended. Thank you.
    Mr. DeCamp. Can I respond to that briefly?
    Chairman Andrews. Of course.
    Mr. DeCamp. The training process is very intensive. As I 
noted, it takes about 3 years, because of so many laws that we 
enforce, to get investigators fully trained.
    In addition, during their training, before they are really 
fully ready to go out and conduct investigations on their own, 
they are often accompanied by senior investigators, who then 
have to mentor them and teach them how to conduct 
investigations properly. That is part of why it is a drain.
    We want to grow our staff, certainly. We want to have more 
investigators. But we have to do it in a way that is not 
overwhelming the agency by bringing in so many inexperienced 
investigators that they can't really do their job and, at the 
same time, they drag down the productivity of our senior 
investigators.
    Ms. Shea-Porter. Well, one last comment. When you talk 
about productivity, the Department of Labor found a 50 percent 
increase in the number of misclassified workers in the past 6 
years--a 50 percent increase. I would say that, whether it 
drags down your supervisors' productivity or not, it is 
probably a good time to start.
    Thank you.
    Chairman Andrews. I thank the gentlelady.
    The gentleman from Massachusetts has no questions, is that 
correct?
    Mr. Tierney. Yes.
    Chairman Andrews. The gentleman, my friend from New Jersey, 
Mr. Payne, is recognized for 5 minutes.
    Mr. Payne. Thank you very much, Mr. Chairman.
    And sorry that I missed your testimony.
    However, just generally speaking, we have seen in a number 
of areas of employment the question of the workers being 
considered in a different category, as independent contractors.
    When I was elected to Congress, in my federal building, the 
Peter Rodino Building--that was my predecessor and a good 
friend of mine, and every day I went into the building, I 
certainly remembered him because the building had his name.
    But the terrible thing that occurred was that when I began, 
the federal government decided to privatize the custodial 
workforce. People had worked there for many, many years, had 
benefits. And it was really a very disturbing thing because 
then they turned to contractors.
    And it took about 6 months before they put out bids, or a 
year or so. But the same people--the same work that was done, 
people had reduced salaries, had no benefits.
    It might have been a great day for the GAO or the Office of 
Budget, but it was a terrible day for those hardworking people 
who had worked, had stayed on the job, took pride in their 
work, worked to send their children to school, where, in the 
flip of a pen, they lost health benefits, they lost pensions. 
They had to do more than the previous--the workload, at less 
money.
    Now, I just wonder, just quickly, I understand you did 
outreach and you sort of did some surveys. So, let me just ask 
you this. Can you quantify what effect your outreach efforts 
have had on misclassification of workers?
    I mean, mine, it was less misclassification, but it is all 
in the same general trend. We are pushing down wages.
    You know, this country was great because people tended to 
be able to do better as time went on. Now, there are people who 
are doing better, believe me. I mean, these funds on Wall 
Street are going through the roof.
    However, the typical, average, hardworking person that 
lives in my city of Newark, New Jersey, is doing worse every 
year. The cost of fuel goes up. Cost of housing goes through 
the roof. And they are taken out of jobs that is reducing their 
benefit.
    How in the world can we continue to do this?
    We have got some serious external problems with terrorism 
and people hating us around the world and all that. Internally, 
we are turning our backs on our own people right here, which 
just complicates the situation.
    So let me just ask you, since my time is probably expiring, 
what has been the effect of your outreach efforts? What effect 
have they had on misclassification of workers? Because it 
appears that the number of misclassified workers have increased 
pretty steadily since 2000, so what is going on?
    Mr. DeCamp. Well, I don't think that we have data that 
would quantify the effects of outreach. But it is important to 
keep in mind that outreach is not all that we do in this area. 
We also devote about 60 percent of our enforcement resources to 
low-wage industries, including the custodial industry that you 
mentioned, and construction and landscaping and many of the 
other industries where this misdesignation issue is a concern.
    Mr. Payne. Just concluding, you know, on Wall Street, where 
a union, SEIU 32BJ, was attempting to organize the custodians 
and the doormen at these condos in the area. You know, the 
owners fought them tooth and nail to prevent the custodians 
from being organized because maybe they will take away from 
their profits.
    I mean, it is a sad day in this country when we continually 
see hardworking people being beaten down daily.
    Thank you, Mr. Chairman.
    Chairman Andrews. Thank you, Mr. Payne.
    The chair recognizes the gentleman from Oregon, Mr. Wu, for 
5 minutes.
    Mr. Wu. Thank you, Mr. Chairman.
    I would like to ask the witness from the Department of 
Labor about the factors that are considered by the federal 
government in a determination of whether someone is an 
independent contractor.
    When I was practicing law in Oregon, I believe Oregon has 
roughly half the number of factors to be considered about 
whether someone is an independent contractor than the IRS.
    What factors does DOL look to to make the determination of 
whether someone is an independent contractor or not? And how 
much weight is given to each factor?
    Mr. DeCamp. Well, actually, this is set forth on page two 
of the written testimony, but I will be happy to address that.
    Mr. Wu. So I understand.
    Mr. DeCamp. I will just read through them. One is the 
extent to----
    Mr. Wu. Why don't you just tell me?
    Mr. DeCamp. All right. Well, I mean, the main concern is 
the extent to which the business is operating as a business 
versus operating as an employee would be.
    So we are looking at ability to gain profit and control the 
revenue stream. We are looking at the ability to assign one's 
own work versus being directed as to what to do. We are looking 
at the permanency of the relationship.
    We are looking at the extent of investment by the 
individual in the supplies and tools and other costs of doing 
business, other materials for doing business, versus, you know, 
is another entity providing that kind of material.
    Those are really the main factors.
    Mr. Wu. In terms of immediate factors that one might look 
to, for example, if someone is holding out their business to 
others, they would have business cards. Are those things that 
you look at?
    Mr. DeCamp. That would be part of the mix, yes, sir.
    Mr. Wu. Okay. And if someone were to mischaracterize 
someone as an independent contractor as opposed to an employee, 
how large is the discrepancy in costs to the employer and the 
costs to the employee?
    Mr. DeCamp. I don't think that is an issue that the 
department has described. I know that some other witnesses, in 
the previous hearing, have weighed in on that issue.
    Mr. Wu. Do you have any knowledge of this?
    Mr. DeCamp. Not in my capacity, no.
    Mr. Wu. So you have no idea how much tax savings or tax 
costs is incurred by an employer or incurred by the independent 
contractor/employee.
    Mr. DeCamp. All I know is what was attested to at the 
previous hearing, sir.
    Mr. Wu. Which is what?
    Mr. DeCamp. I think they were saying on the order of 15 to 
20 percent.
    Mr. Wu. That seems a little low.
    Mr. DeCamp. I think that is what was said. I am not 
disputing the numbers or vouching for the numbers. I am just 
saying that is my understanding of what was said.
    Mr. Wu. When the marginal tax rate is in the what, mid-to 
low-30s, and then there are taxes for FICA and FUTA and all the 
other things that come off the paycheck?
    Mr. DeCamp. Sir, I am agreeing with your premise that there 
are economic incentives to----
    Mr. Wu. I am just trying to get my arms around it. And you 
are from the Department of Labor, so I sort of thought you 
might know.
    Mr. DeCamp. It is not an issue that the Wage and Hour 
Division studies. It is not relevant to our enforcement 
mission.
    Mr. Wu. The gross savings isn't relevant to your 
enforcement mission?
    Mr. DeCamp. In other words, we are looking at: Is this a 
worker who is an employee under the statute? And, if so, were 
the worker's rights under the statute protected?
    That is our concern, not why did the employer do it, 
necessarily, unless it was willful. And then there are added 
penalties that would come into play, if we are talking about a 
willful violation.
    Mr. Wu. So you don't care about the size of the motivation, 
if you will?
    Mr. DeCamp. That would bear on whether the violation was 
willful. In which case, for example, a longer statute of 
limitations could apply.
    Mr. Wu. Well, it would also bear on the size of the problem 
that you have. Don't you think?
    Mr. DeCamp. When we are looking at remedies for the worker, 
we are looking at whatever minimum wage or overtime the worker 
was denied. In terms of the employer's motivation for doing so, 
if we conclude that the violation was willful, we could pursue 
back wages for 3 years instead of 2. We would be more likely to 
pursue liquidated damages in a case like that----
    Mr. Wu. I am just trying to understand the scope of the 
problem. And if an employer saves 10 percent, that doesn't seem 
like that is much motivation, but if an employer saves 50 
percent or 100 percent, you know, that is a different scale of 
problem.
    I am just trying to get my arms around this. And I thought 
you would have those kind of numbers right off the top of your 
head.
    Mr. DeCamp. Again, that doesn't affect how we would carry 
out our enforcement mission. We are looking to protect the 
workers under the statutes and----
    Mr. Wu. How long have you been working in this arena?
    Mr. DeCamp. I have been involved in labor and employment 
law since about 1995.
    Mr. Wu. Okay. So in 12 years, you have never had reason to 
inquire as to the scope of potential savings that employers or 
contractors would experience as a result of characterizing or 
mischaracterizing the relationship?
    Mr. DeCamp. That is correct, sir.
    Mr. Wu. Thank you.
    Chairman Andrews. The gentleman's time has expired.
    Thank you, Mr. DeCamp, for your testimony here this 
morning. I know the committee will be interacting with you as 
we go down the line on this issue. And I thank you very much 
for your attendance this morning.
    Mr. DeCamp. Thank you.
    Chairman Andrews. Thank you.
    I am going to ask if the witnesses from the second panel 
would approach the table and wait for their name tags to be set 
up.
    I am going to turn over the prerogative of the chair to my 
friend from California, Ms. Woolsey, and she will conduct the 
balance of the hearing.
    Ms. Woolsey [presiding]. As Chairman Andrews said, if you 
have not testified here before, you may note that we have a 
lighting system, 5-minute rule. And everyone, including 
members, is limited to 5 minutes of presentation and 
questioning.
    The green light is illuminated when you begin to speak. 
When you see the yellow light, it means you have 1 minute 
remaining. When you see the red light, it means your time is 
expired and you need to conclude your testimony. You don't have 
to stop mid-sentence, believe me.
    Be certain, as you testify, to turn on your microphone. 
Otherwise, we will all be yapping after you from up here, and 
you will wonder what we are trying to tell you. So just turn it 
on, and then we can hear you.
    And now we would like to introduce our witnesses. And 
Chairman Andrews will introduce David Socolow.
    Chairman Andrews. I appreciate that privilege.
    David Socolow is the commissioner of labor for the state of 
New Jersey. He is a graduate of Harvard University. Again, 
someone else has overcome that liability to be with us today. 
[Laughter.]
    I am especially proud of David for several reasons. He and 
I had the privilege of working together here in Washington when 
he served first as my legislative director, then my chief of 
staff.
    He then went to work for Secretary of Labor-elect Herman. 
He worked for the state of New Jersey's Unemployment Division 
and was the director of that division for a number of years, 
and became our commissioner of labor last summer.
    He is an outstanding public servant. He is an authority in 
this field. He has done a great job on this issue in the state 
of New Jersey.
    And I must confess some personal affection. He is fortunate 
enough to be married to my sister-in-law, Erin. [Laughter.]
    And they have two spectacular children, one of whom is my 
goddaughter. And we are just very proud of the work that he has 
done. I am delighted he is here with us today.
    David, welcome. Great to have you with us.
    Ms. Woolsey. We welcome you, too, David.
    Robert Williams is currently a transportation recruiting 
and operations consultant to numerous transport companies in 
New England. Between the year 2000 and the year 2005, he worked 
first as a temporary driver and then as a contracted driver for 
FedEx Home Delivery in Northborough, Massachusetts. Prior to 
that position, he worked for over 30 years in a number of 
senior management positions at UPS, Federal Express, Airborne 
Express, and United States Line. Mr. Williams served for 28 
years in the U.S. Reserve and retired as a sergeant major in 
1996.
    Sara Stafford is president of Stafford Construction located 
in Saugus, Massachusetts. In 1993, after working as manager for 
a supply company for 13 years, Ms. Stafford opened her own 
union drywall and plastering contracting firm. Her company's 
portfolio involves about 50 percent public and 50 percent 
private work. Sara Stafford has been a resident of Raleigh, 
Massachusetts, for 15 years.
    Christine Walters is an independent consultant in human 
resources and employment law at the FiveL Company in Glyndon, 
Maryland, and is testifying on behalf of the Society of Human 
Resources Management. Ms. Walters has over 20 years of combined 
experience in H.R. administration, management law and teaching. 
She has been gauged as an expert witness regularly, presenting 
at conferences across the country. And she is a columnist for 
national publications. Walters serves in a variety of volunteer 
leadership roles at the national, state and local levels for 
the society and is currently on its employee relations panel.
    Thank you all for being here.
    We will begin with you, Mr. Williams.

  STATEMENT OF ROBERT WILLIAMS, TRANSPORTATION RECRUITING AND 
          OPERATIONS CONSULTANT, FORMER FEDEX EMPLOYEE

    Mr. Williams. Thank you, Chairman Andrews and Chairwoman 
Woolsey, for inviting me to testify today. Thanks also to the 
members of the subcommittees who are interested in the 
misclassification issue that is hurting so many FedEx Ground 
and Home Delivery drivers today.
    After retiring, I read an advertisement in the Worcester 
Telegram and Gazette in April of 2001 for independent 
contractors at the FedEx Home Delivery in Northborough, Mass. 
The ad basically stated, ``Run your own business. Become a 
business owner with a national leader. Be your own boss.''
    When I applied for the position as an independent 
contractor, I was told there were none available at present. 
The manager offered to train me as a temporary driver before I 
could become a contractor and do any work at all at FedEx Home 
Delivery. I completed the mandatory training course and went to 
work as a temporary driver.
    I was paid by the hour as a temp for a firm called Adecco 
and eligible for overtime. I was furnished a uniform and rental 
van supplied by FedEx, but I was not a FedEx employee. I did 
not pay any expenses while a temp. State and federal 
withholding were taken out of my weekly check by Adecco.
    I continued working as a temporary driver until June 2002, 
when a route position became available. At that time, I signed 
a FedEx Home Delivery standard contractor operating agreement. 
I purchased a small commercial van that had to be white and 
inspected by FedEx for approval.
    After utilizing this van for a period of time, I was told 
it would no longer accommodate the number of packages for my 
area. I was told I would have to have a larger vehicle.
    So, through FedEx, I leased a larger vehicle called a P400. 
This vehicle was painted white and had all of the FedEx logos 
on permanent decals. This vehicle was also arranged for by 
FedEx, who took care of all of the paperwork.
    I worked with this new van until October 15, 2002, when I 
was involved in a serious accident and hospitalized. I did not 
return to work for 13 months. I did not pursue worker's 
compensation. I was not able to work until early November 2003, 
and returned as a temporary driver.
    I worked on and off as a temporary driver, driving a rental 
van supplied by FedEx and being paid by the temp agency Adecco. 
I was offered a different route and soon became a so-called 
contractor again in June 2004.
    I was told I had to lease or buy a much larger truck than I 
had before. This new truck was called a P500 and was obtainable 
only through FedEx. It was white and colored with logos, 
numbered in a FedEx series, and showed USDOT markings on it.
    FedEx had a supply of these vehicles in their Manchester, 
New Hampshire, terminal. And FedEx arranged the financing 
through one of the leasing companies they offered. The whole 
transaction, leasing arrangements, and credit information, et 
cetera, all flowed through FedEx.
    This was the only type of vehicle that FedEx approved. 
There were no exceptions.
    As a contractor, I was responsible for the cost of the 
vehicle, for the fuel, for the tires, for the maintenance, and 
all of the operating costs, including breakdown and emergency 
expenditures. I paid a worker's accident policy in lieu of 
workman's comp weekly deductions. I also paid weekly for 
liability insurance for protective insurance.
    These expenses were taken out of my settlement by FedEx. 
There were no other insurance services or policies that were 
made available to us. We were told we could get our own 
insurance. But having personally checked with a number of 
insurers, I found the cost prohibitive.
    Additional expenses that were taken out from time to time 
were for uniforms, scanners, claims against me, mapping 
software, random drug-testing, annual DOT inspection, and 
truck-washing.
    No taxes or Social Security were ever deducted from my 
settlements. We were issued a 1099 form annually. I was 
responsible for reporting my federal and state tax to the 
federal and state tax authorities.
    In the holiday period of 2004, things began to change 
drastically. We were being monitored more and more by the use 
of the scanner. The scanner was a tracking device used to 
monitor our daily delivery areas.
    We are required each morning to report early to load our 
trucks. The number of packages and stops were the means by 
which were compensated. We were paid by the package, and not an 
hourly wage.
    FedEx Home Delivery controls the number of packages tended 
to the drivers and controls the amount a driver can make 
through their computer systems. This means of controlling a 
driver is ongoing today.
    There were many times when FedEx managers would not allow 
us to leave the building and go out on our routes until all the 
packages were accounted for. This could severely impact our 
earnings by reducing the time we would have to make deliveries. 
Packages were added or subtracted to our routes, affecting our 
earnings on a daily basis.
    I remain in contact with numerous drivers who are still 
with FedEx Home Delivery throughout the country. I contact many 
drivers in the New England area on a regular basis, especially 
Northborough, Mass. The same issues, treatment and procedures I 
experienced still go on today.
    Due to my many years of working in the transportation 
industry, I understand clearly the differences between an 
employee and an independent contractor. The control that FedEx 
Home Delivery had over me and over the drivers it has today 
shows these drivers are controlled like employees but called 
contractors.
    FedEx Home Delivery drivers must pay for uniforms worn to 
FedEx standards with a black belt, proper shoes, no sneakers.
    They must purchase or lease a FedEx truck, purchased by 
FedEx, prescribed by FedEx for size, color and logos, 
numbering, et cetera.
    To purchase or lease a FedEx scanner--this is a mandatory 
item. The daily package deliveries cannot be performed without 
it. It is monitored by FedEx.
    Drivers must pay for all maintenance prescribed by FedEx 
and USDOT. Drivers must furnish all fuel, tires and other costs 
related to the operation of their vehicle.
    Drivers must pay for a weekly worker's accident policy and 
liability policy deducted by FedEx to protective insurance.
    Drivers who cannot work on a given day and cannot find a 
FedEx-approved temp driver are regularly threatened with 
contract terminations.
    To me, the biggest personal issue I had was the time-off 
program. Drivers--can I continue?
    Ms. Woolsey. You need to sum up now, Mr. Williams. And then 
you will bring some of that into your questions and answers.
    Mr. Williams. All right.
    I could now just finish up and say I was terminated by 
FedEx in December 2005. The National Labor Relations had 
ordered an election before the company fired me and a number of 
other people who were attempting to support the union. The 
board filed a complaint against FedEx for illegally terminating 
me for protected union activities.
    There are more charges pending against the company for 
unfair labor practices in the Northborough location. A hearing 
is set for August.
    After I was terminated, I filed for unemployment benefits 
in Massachusetts, and I did receive those benefits. I was the 
first one to do so under the FedEx Ground or Home Delivery.
    Many present FedEx Ground or Home Delivery drivers would be 
too scared of the company's reaction if they testified. I am 
here to state my professional opinion with over 45 years of 
experience in the industry. The FedEx Ground model rests 
clearly on the misclassification of its drivers as so-called 
contractors.
    Thank you.
    [The statement of Mr. Williams follows:]

Prepared Statement of Robert V. Williams, Transportation Recruiting and 
              Operations Consultant, Former FedEx Employee

    Thank you Chairman Andrews and Chairwoman Woolsey for inviting me 
to testify today. Thanks also to the members of the Subcommittees who 
are interested in the misclassification issue that is hurting so many 
FedEx Ground and Home Delivery drivers today.
    After retiring, I read an advertisement in the Worcester Telegram 
and Gazette in April 2001 for Independent Contractors at FedEx Home 
Delivery in Northboro, MA. The ad basically stated: ``Run your own 
business, Become a business owner with a national leader, Be your own 
boss''. When I applied for a position as an ``Independent Contractor'' 
I was told that there were none available at present. The manager 
offered to train me as a temporary driver before I could become a 
``contractor'' and do any driving work at FedEx Home Delivery.
    I completed the mandatory training course and went to work as a 
temporary driver. I was paid by the hour by a temp firm named ADECCO 
and eligible for overtime. I was furnished a uniform and rental van 
supplied by FedEx but was not a FedEx employee. I did not pay for any 
expenses while a temp. State and federal withholding were taken out of 
my weekly check by ADECCO.
    I continued working as a temporary driver until June of 2002, when 
a route position became available. At that time, I signed a FedEx Home 
Delivery standard contractor operating agreement. I purchased a small 
commercial van that had to be white and inspected by FedEx for 
approval.
    After utilizing this van for a period of time, I was told it no 
longer could accommodate the number of packages for my area. I was told 
I had to have a larger vehicle, so through FedEx I leased a larger 
vehicle called a P400. This vehicle was painted white and had all of 
the FedEx logos on permanent decals. This vehicle was also arranged for 
by FedEx who took care of all the paperwork. I worked with this new van 
until October 15, 2002, when I was involved in a serious accident, and 
hospitalized.
    I did not return to work for 13 months. I did not pursue workers 
compensation. I was not able to work until early November of 2003, and 
returned as a temporary driver. I worked on and off as a temporary 
driver, driving a rental van supplied by FedEx and being paid by the 
temp agency ADECCO.
    I was offered a different route and became a so-called 
``contractor'' again in June 2004. I was told I had to lease or buy a 
much larger truck called a P500. This vehicle, only attainable through 
FedEx, was white in color with logos, numbered in a FedEx series and 
showed USDOT markings on it. FedEx had a supply of vehicles at their 
Manchester, NH terminal, and FedEx arranged financing with one of the 
leasing companies it offered. The whole transaction, leasing 
arrangements, the credit information, etc., all flowed through FedEx. 
This was the only type of vehicle that FedEx approved. There were no 
exceptions.
    As a ``contractor'' for FedEx, I was responsible for the cost of 
the vehicle, for the fuel, for the tires, for the maintenance, and all 
operating costs, including breakdown and emergency expenditures. I paid 
for a worker's accident policy, in lieu of Workmen's Comp weekly 
deductions and I also paid weekly for liability insurance from 
Protective Insurance. These expenses were taken out of my settlement by 
FedEx. There were no other insurance services or policies that were 
made available to us.
    We were told we could get our own insurance, but having personally 
checked a number of insurers, I found it to be cost prohibitive. 
Additional expenses taken from my settlement were for uniforms, 
scanners, claims against me, mapping software, random drug testing, 
annual DOT inspection and truck washing.
    No taxes or Social Security were ever deducted from our 
settlements. We were issued a 1099 form annually. I was responsible for 
reporting my income to federal and state tax authorities.
    In the Holiday period of 2004, things started to change 
drastically. We were being monitored more and more by the use of the 
scanner. The scanner was used as a tracking device to monitor our daily 
delivery areas. We were required each morning to report early to load 
our trucks. The number of packages and stops were the means by which we 
were compensated. We were paid by the package and not an hourly wage. 
FedEx Home Delivery controls the number of packages tendered to drivers 
and controls the amount a driver can make through their computer 
systems. This means of controlling drivers is on going today. There 
were many times when FedEx managers would not allow us to leave and go 
out on our routes until all packages were accounted for. This could 
severely impact our earnings by reducing the time we would be able to 
make deliveries. Packages were added or subtracted to our routes, 
affecting our earnings on a daily basis.
    I remain in contact with numerous drivers who are still with FedEx 
Home Delivery throughout the country. I contact many drivers in the New 
England area on a regular basis especially Northboro, MA. The same 
issues, treatment and procedures I experienced still go on today.
    Due to my many years of working in the transportation industry, I 
understand clearly the differences between an employee and independent 
contractor. The control that FedEx Home Delivery had over me and has 
over the drivers today shows that the drivers are controlled like 
employees but called ``contractors.''
     FedEx Home delivery drivers must pay for uniforms worn to 
FedEx standard, with a black belt, proper shoes, no sneakers.
     Purchase or lease a FedEx truck; prescribed by FedEx for 
size, color, logos, numbering, etc.
     Purchase or lease a FedEx scanner; this is a mandatory 
item. The daily package delivery duties cannot be performed without it 
and it is monitored by FedEx.
     Drivers must pay for all maintenance prescribed by FedEx 
and USDOT. Drivers must furnish all fuel, tires, and any other costs 
related to the operation of the vehicle.
     Drivers must pay for a workers accident policy, and 
liability policies, deducted by FedEx to Protective Insurance Company.
     Drivers who cannot work on any given day and cannot find a 
FedEx approved temp driver are regularly threatened with contract 
termination.
    To me the biggest personal issue I had was the Time Off program. 
Drivers participate at the rate of $17.50 per week to join into the 
``Drivers Time off'' program. Time off requests are made in May of each 
year according to ``contractor'' seniority. Any holiday falling in the 
week off would be included as part of the week off with no 
compensation. A ``contractor'' who signs up for the time off program, 
must remain in the program for the entire year. All selected weeks must 
be honored by ``contractors'' and managers. So we were paying FedEx to 
book two weeks away from delivering with no return to us. No interest 
was paid on this account. We don't know where this money went. No one 
in management could explain how the program really worked.
    In August 2005, FedEx terminated the Senior Manager who had been 
there approximately 3 years. He was replaced by a number of additional 
roving managers, until a new manager was appointed, in September. At 
this point, nearly all drivers signed authorization cards to join 
Teamster Local Union 170. From the time that FedEx was notified of 
these actions by the drivers there was a drastic change in management. 
This continued through November 2005 when a hearing was held by the 
NLRB. I testified at that hearing as I am testifying today. We were 
found to be employees.
    I was terminated by FedEx in December 2005. The National Labor 
Relations Board ordered an election but after the company fired me and 
a number of other union supporters the election was postponed. The 
Board filed a complaint that charged FedEx for illegally terminating me 
for protected union activities. There are more charges pending against 
the company for unfair labor practices at the Northboro location. A 
hearing is set for August.
    After I was terminated, I filed for unemployment benefits in 
Massachusetts. The state investigated my work conditions. The company 
argued that I was a so-called ``contractor'' and not eligible for 
benefits. The state concluded that FedEx controlled me as an employee 
and I was awarded unemployment. Since that ruling, other FedEx Ground 
and Home Delivery drivers have also been found eligible for 
Massachusetts unemployment coverage. With the Chairman's permission, I 
ask that the Massachusetts ruling in my unemployment case be submitted 
with my statement for the record.
    Many present FedEx Ground or Home Delivery drivers would be too 
scared of the company's reaction if they testified. I am here to state 
my professional opinion. With over 45 years of experience in the 
industry, the FedEx Ground model rests clearly on the misclassification 
of its drivers as so-called ``contractors.'' Thank you.
                                 ______
                                 
    Ms. Woolsey. Thank you, Mr. Williams.
    Ms. Stafford? Turn on your microphone.

 STATEMENT OF SARA STAFFORD, PRESIDENT, STAFFORD CONSTRUCTION 
                         SERVICES, INC.

    Ms. Stafford. Thank you, Chairwoman Woolsey and Chairman 
Andrews and the members of the subcommittees. It is a pleasure 
to address you here today on this important issue.
    I have been in the construction industry for about 30 
years. I am the president and sole owner of the Stafford 
Construction Services Incorporated. Primarily, we are a 
subcontractor working in the union arena. And we do drywall 
plastering, metal framing, that type of thing, in the 
metropolitan Boston area. I do both public and private work.
    I am a union company. I have been since the day I opened my 
business 14 years ago. And I have agreements with the New 
England Regional Council of Carpenters, as well as three other 
unions.
    The construction industry is particularly prone to illegal 
practices. And the industry is very competitive, with jobs 
frequently being awarded to the lowest bidder. Under those 
circumstances, it is difficult to compete against others that 
misclassify workers as independent contractors.
    We at Stafford play by the rules. And for the 50 to 70 
employees that work for me that means regular audits of my 
employment records are shown to the union. They are shown to my 
workers' compensation company. They are shown to my bank. My 
bonding company has access to them. It is an open book.
    We have common interests in having a market of high 
standards and fair competition as a rule. The basic rule is 
abiding by the law. And my company's employees are all on the 
payroll.
    They get overtime pay and workers' compensation. We pay 
federal and state unemployment taxes, Social Security, 
Medicare, and we withhold state and federal from every dollar 
that we pay out in employment. And many of these funds, of 
course, go to the support of the health benefits for these 
underinsured people.
    That is okay because that is the law. But it becomes 
difficult when I have to compete against other companies that 
routinely misclassify their workforce and do none of those 
things. Automatically, they get at least a 30 percent advantage 
in labor costs and this all goes to profits.
    The bill for this gap in taxes paid and employee benefits 
comes due to every employer, like myself, that follows the 
rules. It is an unequal taxation through misclassification of 
employees.
    Another rule basic to many responsible companies, like 
mine, is to provide employees with good family medical and 
retirement plans, a foreign concept to most businesses that 
misclassify workers.
    The result of that kind of conduct is not difficult to 
fathom.
    More of the insurance and tax burden is put on responsible 
employers, such as myself, that play by the rules, because less 
people are paying into the system. Also, my company has lost 
work and my employees have lost income because the bids were 
won by employers that misclassify workers.
    There are whole market segments, such as residential 
construction, that are almost impossible for legitimate 
companies to enter into, especially in the interior trades. 
That is not fair and more concern needs to be shown to law-
abiding companies. Otherwise, they will either have to go out 
of business or become one of the cheaters.
    And what about the workers? Misclassified workers don't 
have the benefits of union protection. They do not have a cop 
on the beat, so to speak, that will make sure that the employer 
is playing by the rules. If they want union representation, 
their irresponsible employer will make them jump through hoops 
to prove that they are employees.
    That is the driving force behind the continuing 
misclassification problem in our industry.
    As I said earlier, I have a common interest with the union 
to provide high standards and to make sure the competition in 
the construction industry is fair. When union representation is 
made more difficult by misclassification, then 
misclassification becomes an even bigger problem, threatening 
the existence of employers like me who are paying into the 
system and hoping that the system will recognize the need for a 
level playing field.
    Thank you.
    [The statement of Ms. Stafford follows:]

Prepared Statement of Sara Stafford, President and Sole Owner, Stafford 
                      Construction Services, Inc.

    Chairwoman Woolsey, Chairman Andrews and members of the 
subcommittees it is a pleasure to address you today on an important 
subject adversely affecting the construction industry--the 
misclassification of workers as independent contractors.
    I have been in the construction industry for many years. I am the 
President and sole owner of Stafford Construction Services, Inc. 
Primarily, we do interior framing, drywall and plastering in 
metropolitan Boston. I am a union company--I have collective-bargaining 
agreements with local unions of the New England Regional Council of 
Carpenters as well as three other unions.
    The construction industry is particularly prone to illegal 
practices. The industry is very competitive, with jobs frequently 
awarded to the lowest bidder. Under those circumstances, it is 
difficult to compete against others that misclassify their workers' as 
independent contractors.
    I play by the rules, and I work with a union that makes sure that 
is the case. Don't be mistaken, I'm not complaining. We have a common 
interest in having a market where high standards and fair competition 
are the rule. And a basic rule is abiding by the law. My company's 
employees are all on the payroll. They get overtime pay and workers' 
compensation coverage and we pay federal and state unemployment, Social 
Security and Medicare taxes and we withhold state and federal income 
taxes. That is okay, because that is the law. But it becomes difficult 
when I have to compete against other companies that routinely 
misclassify their workforce and do none of those things. Automatically, 
they get a least a 30 percent advantage on labor costs.
    Another rule, basic to many responsible companies like mine, is to 
provide employees with a good family medical and retirement plans--a 
foreign concept to companies that misclassify workers.
    The results of that kind of conduct are not difficult to fathom. 
More of the insurance and tax burden is put on responsible employers 
(union and non-union) that play by the rules because less people are 
paying into the system. Also, my company has lost work, and my 
employees have lost income because bids were won by employers that 
misclassify workers. There are whole market segments, like residential 
construction, that are almost impossible for legitimate interior 
companies like mine to work in. That is not fair, and more concern 
needs to be shown to law-abiding companies. Otherwise; they will either 
go out of business or join the cheaters.
    And what about the workers? Misclassified workers don't have the 
benefits of union protection. They do not have a cop-on-the beat, so to 
speak, that will make sure their employer plays by the rules. If they 
want union representation their irresponsible employer will make them 
jump through hoops to prove that they are employees. That is a driving 
force behind the continuing misclassification problem harming our 
industry.
    As I said earlier, I have a common interest with the union to 
promote high standards and to make sure competition in the construction 
industry is fair. When union representation is made more difficult by 
misclassification then misclassification becomes an ever bigger problem 
threatening the existence of employers like me who play by the rules.
                                 ______
                                 
    Ms. Woolsey. Thank you, Ms. Stafford.
    Ms. Walters?

   STATEMENT OF CHRISTINE WALTERS, CONSULTANT, FiveL COMPANY

    Ms. Walters. Thank you, Madam Chair, Chairman Andrews, 
Ranking Members Wilson and Kline, and distinguished members of 
the committee. Thank you for this opportunity to testify on the 
issue of misclassification of employees and independent 
contractors. And I do commend your two subcommittees for 
holding this joint hearing on this important issue.
    My name is Christine Walters, and by way of introduction, I 
would share with you that I have over 20 years of experience in 
human resources or H.R. administration, management law, and 
teaching.
    Today, I work as an independent human resources and 
employment law consultant with FiveL Company. And I served as 
an adjunct faculty member of the Johns Hopkins University 
teaching graduate, undergraduate and certification level 
courses from 1999 through 2006.
    Today, I appear before you on behalf of the Society for 
Human Resource Management, or SHRM.
    Today, as organizations compete in an everchanging global 
marketplace, labor costs are never far from mind. In addition 
to managing these costs, many employers in a variety of 
industries are also facing a lack of talented, skilled people 
to compete in today's economy.
    With this changing landscape come new challenges for human 
resource professionals and employers to reach out and find new 
employment relationships that may not mirror the traditional 
models, including part-time employment, flex-time, and 
telecommuting schedules. Employers may also use leased 
employees, direct hire temps, per diem workers, as well as 
independent contractors to meet a particular workforce need.
    While these types of working relationships are of value to 
employers, they help meet the individual employees' and 
workers' needs, as well.
    Sandwich-generation workers--those caring for their own 
children, as well as their parents--seek working hours that 
meet their demanding personal needs. Entrepreneurs seek a work 
situation that gives them mobility and an opportunity to engage 
in multiple working relationships. And some workers just like 
the flexibility that the independent contractor status 
provides.
    With the increased interest in these various working 
relationships, more employers are faced with making the 
sometimes complicated classification analysis. In my 
experience, employers do, on occasion, unwittingly misclassify 
employees as independent contractors.
    Much of the difficulty in making an accurate determination 
lies with the fact that there is not a single definition of an 
employee. Rather, there are numerous definitions and statutes 
which apply, depending upon the context in which you are asking 
the questions, including the IRS's 1099 rule, or 20-factor 
test, National Labor Relations Act, Americans with Disabilities 
Act, in addition to federal court interpretations under the 
Fair Labor Standards Act, Title VII of the Civil Rights Act of 
1964, the Family Medical Leave Act, and the Age Discrimination 
in Employment Act.
    The problem with much of the above, however, is that the 
tests applied come after the working relationship has been 
established. There is little guidance for employers to use, 
other than the IRS guidance, to apply when the working 
relationship is first formed. So the dilemma arises when an 
employer properly uses the IRS guidance, but is later 
challenged, and when a different test is used, is held to have 
misclassified a worker.
    Finally, add to the above state definitions, such as in 
each state's unemployment insurance code, where you will likely 
find yet another definition of employee.
    The use of independent contractors is a common practice in 
some industries. Health care, particularly hospitals, often 
uses per diem or contract nurses to supplement emergent 
unforeseen staffing shortages, such as in the case of an 
external disaster.
    Or consider a small business owner with 10 employees that 
provides audio-visual support services to clients. Of its 10 
employees, the organization employs just one sound engineer, 
who is a highly skilled and valued employee.
    One day, that employee tells the business owner that he 
wants to start his own business. The employee offers that, ``In 
lieu of resigning, I will continue to work for you on an as-
needed, part-time basis, as an independent contractor.''
    The parties agree, and both are delighted, until that 
business owner is advised by legal counsel of the possible 
pitfalls of proceeding with this type of relationship. And the 
relationship does not proceed.
    While my experience demonstrates that the vast majority of 
employers are trying to comply with the law, I recognize that 
there may be some employers and perhaps some industries in 
which there are deliberate attempts to skirt the law. I do not 
think, however, that additional legislation attempting to 
clarify the law would provide the intended benefit.
    Additional law in this area is likely to only add to the 
existing confusion. And I think we need to focus on 
clarification, education and enforcement.
    Thank you.
    [The statement of Ms. Walters follows:]

Prepared Statement of Christine V. Walters, MAS, JD, SPHR, Independent 
Consultant, FiveL Company, On Behalf of the Society for Human Resource 
                               Management

Introduction
    Chairpersons Woolsey and Andrews, Ranking Members Wilson and Kline, 
distinguished members of the committee. Thank you for this opportunity 
to testify on the issue of misclassification of employees as 
independent contractors (IC). I commend your two subcommittees for 
holding this joint hearing on this important topic. My comments today 
will focus on my experience with employers who have faced challenges 
during or after this classification process
    My name is Christine Walters. By way of introduction, I have over 
20 years combined experience in HR administration, management, law and 
teaching. Today I work as an independent human resources and employment 
law consultant with the FiveL Company and served as an adjunct faculty 
member of the Johns Hopkins University teaching a variety of courses in 
graduate, undergraduate and certification level programs from 1999 to 
2006.
    I appear today on behalf of the Society for Human Resource 
Management (SHRM). SHRM is the world's largest association devoted to 
human resource management. Representing more than 225,000 individual 
members, the Society's mission is to serve the needs of HR 
professionals by providing the most essential and comprehensive 
resources available. As an influential voice, the Society's mission is 
also to advance the human resource profession to ensure that HR is 
recognized as an essential partner in developing and executing 
organizational strategy. Founded in 1948, SHRM currently has more than 
550 affiliated chapters within the United States and members in more 
than 100 countries.
    SHRM is well positioned to provide insight on how employers 
classify individuals as employees or ICs. HR professionals are 
responsible for applying the law to the situation in their workplace 
and properly determining, through a mix of factors, whether a person 
should be classified as an employee or an IC.
The Workplace of the 21st Century
    As organizations compete in today's ever changing global 
marketplace, labor costs are never far from mind. In addition to 
managing these costs, many employers in a variety of industries are 
also facing a lack of talented, skilled, people to compete in today's 
economy. With this changing landscape come new challenges for human 
resources professionals and employers to reach out and find new 
employment relationships that may not mirror the traditional models. 
Depending on the needs of employers and employees, these working 
arrangements may include part-time employment, or flex-time and 
telecommuting schedules. In some instances, employers may also use 
leased employees, direct-hire temps, agency temps, per diem workers, as 
well as IC's to meet a particular workforce need. Employers may hire 
contingent workers for a variety of reasons including filling temporary 
absences, dealing with workload fluctuations, meeting employee requests 
for part-time work, and continuing to utilize the skills of an employee 
who has left employment.
    While these types of working relationships are of value to 
employers, they help to meet individual employees and workers needs as 
well. Sandwich generation workers, those caring for this own children 
as well as their parents, seek working hours that meet their demanding 
personal needs; entrepreneurs seek a work situation that gives them 
mobility and opportunity to engage in multiple working relationships; 
and some workers just like the flexibility that the IC status provides. 
Regardless of the motivations, however, every new working relationship 
brings with it the challenge of asking the right questions to ensure 
the working relationship is being properly classified as an employee or 
non-employee worker.
Classification Challenges
    With the increased interest in these various working relationships, 
more employers are faced with making the sometimes complicated 
classification analysis. In my experience, employers do on occasion 
unwittingly, misclassify employees as independent contractors.
    Much of the difficulty in making an accurate determination lies 
with the fact that there is not a single definition of an employee; 
rather, there are numerous definitions and statutes which apply 
depending on the context in which you are asking the question. Section 
825.105 of the federal Family and Medical Leave Act (FMLA) regulations 
provide, ``The courts have said that there is no definition that solves 
all problems as to the limitations of the employer-employee 
relationship under the Act; and that determination of the relation 
cannot be based on ``isolated factors'' or upon a single characteristic 
or ``technical concepts'', but depends ``upon the circumstances of the 
whole activity'' including the underlying ``economic reality.''
    In 1992, the U.S. Supreme Court reiterated its position that, where 
a statute contains the term ``employee'' and does not ``helpfully 
define it, this Court presumes that Congress means an agency law 
definition unless it clearly indicates otherwise.'' The Court then 
reiterated the following factors, ``In determining whether a hired 
party is an employee under the general common law of agency * * *''
    1. the hiring party's right to control the manner and means by 
which the product is accomplished. Among the other factors relevant to 
this inquiry are the;
    2. skill required;
    3. the source of the instrumentalities and tools;
    4. the location of the work;
    5. the duration of the relationship between the parties;
    6. whether the hiring party has the right to assign additional 
projects to the hired party;
    7. the extent of the hired party's discretion over when and how 
long to work;
    8. the method of payment;
    9. the hired party's role in hiring and paying assistants;
    10. whether the work is part of the regular business of the hiring 
party;
    11. whether the hiring party is in business;
    12. the provision of employee benefits; and
    13. the tax treatment of the hired party. Nationwide Mutual Ins. 
Co. v. Darden, 503 U.S. 318 (1992)
    Then in 2003, the U.S. Supreme Court, in a separate decision, 
citing guidance from the U.S. Equal Employment Opportunity Commission, 
used a different test when trying to assess whether a managing partner 
of a firm (physician practice) should be counted as an employee for 
purposes of the Americans with Disabilities Act These factors include 
whether:
    1. The organization can hire/fire the individual or set the rules 
and regulations of the individual's work
    2. And, if so, to what extent organization supervises the 
individual's work;
    3. The individual reports to someone higher in the organization;
    4. And, if so, to what extent the individual is able to influence 
the organization;
    5. The parties intended that the individual be an employee, as 
expressed in written agreements or contracts;
    6. The individual shares in the profits, losses, and liabilities of 
the organization (Clackamas Gastroenterology Associates, P.C. v. Wells 
(April 22, 2003).)
    The Internal Revenue Service (IRS) historically has used another 
test, the s 1099-Rule or 20 factor test to ensure the working 
relationship is being properly classified as an employee or non-
employee worker. Those 20 factors include:
    1. Is the individual, who is providing services, required to comply 
with instructions concerning when, where and how the work is to be 
done?
    2. Is the individual provided with training to enable him or her to 
perform a job in a particular manner?
    3. Are the services that are performed by the individual integrated 
into your business' operations?
    4. Must the services be rendered personally by the individual?
    5. Does your business hire, supervise or pay assistants to help the 
individual performing the services under contract?
    6. Is the relationship between the individual and the person for 
whom he or she performs services a continuing relationship?
    7. Does the employer/company set the hours of work for the 
individual?
    8. Is the individual required to devote full time to the person for 
whom he or she performs services?
    9. Does the individual perform work on your business premises?
    10. Does the employer/company direct the order or sequence in which 
the work must be done?
    11. Are regular oral or written reports required?
    12. Is the method of payment at set intervals of regular amounts?
    13. Are business or traveling expenses of the individual 
reimbursed?
    14. Does the employer/company furnish tools and materials necessary 
for the provision of services?
    15. Does the individual performing services lack a significant 
investment in resources used to perform services?
    16. Is the individual providing the services without realizing a 
profit or loss from his services?
    17. Is the individual restricted from providing services for a 
number of firms at the same time?
    18. Has the individual not made his/her services available to the 
general public?
    19. Is the individual who is providing services, subject to 
dismissal for reasons other than non-performance of contract 
specifications?
    20. Can the individual providing services terminate his or her 
relationship at any time without incurring a liability for failure to 
complete a job?
    Still other situations may require review under the National Labor 
Relations Act.
    Then you have the federal courts. When assessing a working 
relationship under the federal Fair Labor Standards Act the ``Right to 
Control'' or ``Manner and Means'' tests are usually applied. When 
assessing a working relationship under Title VII of the Civil Rights 
Act of 1964, the FMLA or the Age Discrimination in Employment Act, the 
``Economic Realities'' test is usually applied. While slightly 
different, all three of the tests have four common factors:
     Who had power to hire and fire?
     Who supervised and controlled employees' work schedules 
and conditions of employment?
     Who determined rate and method of payment?
     Who maintained employee records?
    The problem with much of the above, however, is that the tests 
applied come after the working relationship has been established. There 
is little guidance for employers to use, other than the IRS guidance to 
apply when the working relationship is first formed. So the dilemma 
arises when an employer properly uses the IRS guidance but is later 
challenged and, when a different test is used, is held to have 
misclassified a worker.
    Finally, add to the above, state definitions such as in each 
state's unemployment insurance code. There you will likely find yet 
another definition of employee.
    The use of independent contractors is a common practice in some 
industries. Health care, particularly hospitals often use per diem or 
contractors nurses to supplement emergent, unforeseen staffing 
shortages, such as in the case of an external disaster. These health 
care workers often work two, three or more different jobs, choosing 
their preferred shifts and work schedules at each health care 
institution.
    Consider a small business owner with ten employees that provides 
audio-visual support services to clients. Of its ten employees, the 
organization employs just one sound engineer. The engineer is highly 
skilled, quick and remarkably adept at assessing a problem and fixing 
it. He is a highly valued employee. One day that employee tells the 
business owner that he wants to start his own business specializing in 
sound engineering only. They agree this would not be direct 
competition. The employee needs significant periods of time off from 
work to begin marketing and setting up his new business. The employer's 
policies do not provide for the kind of time off that this employee 
wants. The employee then offers that in lieu of his resigning, his 
willingness to be available to work on an independent contactor on an 
as-needed basis. The employer is delighted to be able retain access to 
this worker's skills and agrees to the relationship. They then agree to 
a part-time on-call work schedule, agree the (former) employee may 
continue to use and have access to company equipment, will be paid on 
the same basis but as an independent contractor. Both parties are 
delighted to have worked out an arrangement that is amenable to both. 
That is, until the business owners is advised by legal counsel of the 
possible pitfalls of proceeding with this type of relationship. The 
business owner now has to decide, does he risk a possible determination 
that he may have misclassified this worker in order to keep this highly 
skilled worker or does he take no risk but keep the worker and both are 
happy?
    There are many other similar stories to share: workers who want or 
need income while they are between jobs; mothers returning to the 
workforce after a number of years and seeking a flexible or occasional 
opportunity to gain working experience before returning to full time 
status; and more.
SHRM and FiveL Educational Efforts on the Issue
    As the largest association for human resource professionals, SHRM 
provides extensive resources and educational opportunities to help our 
members comply with workplace laws. Understanding how to properly 
classify workers is an issue in constant demand by SHRM members. Last 
year, our knowledge center received approximately 1, 485 calls about 
independent contractors--questions ranging from ``I have a former 
employee that I would like to keep on in an independent contractor 
status, how do I do it?'' to ``What forms do I need to file with the 
IRS and DOL?'' .SHRM hosts several educational conferences a year and 
we offer educational sessions on the topic of worker classification. In 
addition, our online products are constantly updated and include our 
``Independent Contractor Toolkit'' containing articles, frequently 
asked questions, links to IRS and DOL resources, checklists and sample 
agreements. In my experience and that of SHRM, employers are sincere in 
their attempts to comply with the law. Similarly, in my capacity as a 
consultant, I have given numerous educational presentations to 
audiences comprised from industry groups, local chambers of commerce 
and professional associations, like SHRM, on this topic. I have also 
posted IRS publications 1779 and 15-A on my website and direct new 
clients and other to these for guidance, and in some cases IRS Form SS-
8.
Possible Solutions to Problem of Misclassification: Unintentional and 
        Intentional
    While my experience demonstrates that the vast majority of 
employers are honestly trying to comply with the law, I recognize that 
there are some employers and perhaps some industries in which there are 
deliberate attempts to skirt the law. I do not think, however, that 
additional legislation attempting to clarify the law would provide the 
intended benefit. Instead, additional law in this area is likely to 
only add to the existing confusion. Instead, solutions need to focus on 
the education and the enforcement aspects of the problem.
    In many ways, the confusion created by the multiple agency and 
statutory jurisdiction over the issue of who qualifies as an 
independent contractor is similar to confusion and overlap created by 
requirements under the Health Insurance Portability and Accountability 
Act. In this situation, the Departments of Labor, Health and Human 
Services and the Internal Revenue Service were faced with issuing 
guidance on this new, and complex law. The agencies working together, 
issued joint guidance to the regulated community on the various 
requirements of the law. The same needs to be done with worker 
classification. Joint guidance from the various agencies on the 
classification of employees would greatly assist employers in complying 
with the law.
    Secondly, increased and targeted education should be combined with 
increased and targeted enforcement. I concur with the general consensus 
that emerged from the March 27 Workforce Protection Subcommittee 
hearing that additional legislation is not needed and the focus should 
be on improved enforcement, clarification and information-sharing. 
Enforcement of existing law should not only be increased, it should be 
coordinated among the relevant federal agencies.
    Employers need a one-stop shop for guidance on employee 
classification. This combined with enhanced and targeted enforcement 
would go a long way toward addressing current problems with 
misclassification.
    Again, I thank the subcommittees for listening to our perspective 
on the issue of misclassification of employees and SHRM looks forward 
to working with you on this issue. I will be happy to answer any 
questions you may have.
                                 ______
                                 
    Ms. Woolsey. Mr. Socolow?

  STATEMENT OF DAVID SOCOLOW, NEW JERSEY COMMISSIONER OF LABOR

    Mr. Socolow. Thank you, Chairwoman Woolsey, Chairman 
Andrews, honorable members of the subcommittees. Good morning. 
It is my honor to appear before you to discuss this problem of 
independent contractors.
    And before I begin, I want to recognize some of the other 
wonderful New Jerseyans here. Not only Congressman Andrews, 
Congressman Payne, Congressman Holt who was here before, and 
even the minority counsel, Mr. Paretti.
    So I wanted just to send greetings to all of you----
    Chairman Andrews. We should strike the rest of his 
testimony. [Laughter.]
    Mr. Socolow [continuing]. Send greetings to all of you, 
from New Jersey and from Governor Corzine.
    Companies that misclassify workers as independent 
contractors in order to lower their labor costs hurt their 
workers, hurt the public, and unfairly gain an advantage in the 
marketplace.
    And much has been said already. I will not reiterate all 
that is in my written testimony on how workers are, in fact, 
harmed by misclassification.
    Governor Corzine of New Jersey has led our state in an 
important initiative to protect workers by fighting independent 
contractor misclassification and rooting out the abuses of the 
underground economy.
    Our governor has recognized that the misclassification of 
employees as independent contractors, in addition to putting 
workers at risk and unfairly disadvantaging honest employers, 
costs the state millions of dollars in foregone tax revenue. 
And my full testimony does lay out the prevalence of this 
problem.
    Let me just say briefly that, even in our random audits of 
this problem, 38 percent of employers were found to be 
misclassifying their workers and much, much higher rates of 
misclassification found in certain industries. And so our 
auditors will tell you, and I will testify today, that this 
cannot possibly all be merely unwitting or inadvertent 
misclassification.
    And also, by and large, this is not the request of the 
employee coming to their employer asking to be treated as a 
1099 contractor or misclassified. This is something done to 
workers by their employers.
    We are addressing the challenge, as I said.
    The governor directed me, when I took office in January of 
2006, to form a task force, which included our Unemployment 
Insurance Tax group, our Wage and Hour Division in the 
Department of Labor, Workers' Compensation, and also our State 
Division of Taxation, which is in the Treasury Department, to 
identify the common areas of concern and develop a process to 
jointly refer cases and share information. By leveraging the 
resources and findings of each agency, one agency's findings 
can be used by the other without the need to duplicate the 
entire investigative process.
    And following up on Governor Corzine's initiative, a new 
law now provides that New Jersey's gross income tax law, wage 
and hour laws, unemployment insurance law, temporary disability 
insurance law, all use the same legal test to distinguish 
between an independent contractor and an employee: the ABC 
test. And, again, therefore, by using the same legal 
definition, Division of Taxation staff can use the audit 
findings of our labor unemployment insurance tax auditors 
without the unnecessary duplication of effort.
    We have also begun cross-matching audit data with workers' 
compensation data to identify employers who are not properly 
providing workers' compensation coverage for their employees.
    And, most recently, just on July 13, 2007, Governor Corzine 
signed into law the Construction Industry Independent 
Contractor Act, which provides even stronger enforcement tools 
and, for the first time in our state, criminal penalties for 
employers who cheat their employees, the government, and their 
competitors by misclassifying workers as independent 
contractors in the construction industry.
    I have included in my testimony five recommendations for 
action by the Congress and for your consideration to reduce the 
misclassification of workers as independent contractors.
    The first one is, as I mentioned, we recently amended our 
statutes to have a unified ABC test, a strong test to determine 
the employer-employee relationship and whether or not an 
employee is, in fact, an employee or an independent contractor. 
We recommend that the federal law should also use that test.
    The second recommendation that I made is to enhance 
collaboration. And I want to say, particularly, we heard the 
testimony earlier of the federal Department of Labor Wage and 
Hour Division that they are still thinking about whether or not 
to implement the GAO's recommendation that they refer potential 
cases of misclassification to their sister agencies.
    In this regard, I want to urge that they stop thinking and 
start actually referring those cases in all cases. If not to 
the IRS--and they made some points about whether there might be 
a chilling effect of referring to the IRS--then, at a minimum, 
to their sister agency within the Department of Labor, which is 
the Employment and Training Administration, which has 
jurisdiction over unemployment insurance.
    Because we certainly in the state U.I. agencies could use 
those referrals to collect unpaid tax contributions to the U.I. 
trust funds, and certainly then in states like New Jersey where 
we are sharing all those referrals, we could use them to 
collect state income tax. We could use them to insure that Wage 
and Hour Division rules were followed.
    By increased data sharing, joint enforcement efforts, 
unified definition of the employer-employee relationship, and a 
collaborative approach, you really can bring a broad array of 
resources to bear on this problem.
    Another comment that I had made related to the safe harbor 
provision, we certainly think that it is well past time to 
reform that provision, which really, in the IRS test, lets a 
lot of employers get away with misclassifying their workers.
    And I also want to just say about the comment that was made 
by the U.S. Department of Labor Wage and Hour Division 
mentioned something----
    Ms. Woolsey. Mr. Socolow?
    Mr. Socolow. Yes.
    Ms. Woolsey. Somebody will ask you that question.
    Mr. Socolow. Sure. Absolutely. And then----
    Ms. Woolsey. We are actually going to have votes in a few 
minutes, so even if you are Mr. Andrews's brother-in-law----
    [Laughter.]
    Mr. Socolow. Then let me just quickly finish my final 
point, Madam Chairwoman, with your indulgence, is that we do 
believe that if the USDOL expanded the types of unemployment 
insurance tax audits that could count toward the statistics, 
that would provide an incentive to state U.I. tax agencies to 
increase their enforcement.
    Thank you very much.
    [The statement of Mr. Socolow follows:]

   Prepared Statement of David J. Socolow, Commissioner, New Jersey 
             Department of Labor and Workforce Development

    Chairman Andrews, Chairwoman Woolsey, honorable Members of the 
Subcommittees: good morning. I am David J. Socolow, New Jersey's 
Commissioner of the Department of Labor and Workforce Development. I am 
honored to have the opportunity to appear before you today to discuss 
the problem of misclassification of workers as independent contractors.
    Our state and national labor laws are designed to protect all of 
the nation's workers. Unfortunately, it has become all too common for 
unscrupulous employers to find loopholes in order to unfairly reduce 
their tax burden and increase their profits, while risking their 
workers' future health, safety, and security. Companies that 
misclassify workers as independent contractors to lower their labor 
costs hurt their workers, hurt the public, and unfairly gain an 
advantage in the marketplace.
    New Jersey Governor Jon S. Corzine has led our state in an 
important initiative to protect workers by fighting independent 
contractor misclassification and rooting out the abuses of the 
underground economy. Our Governor recognizes that the misclassification 
of employees as independent contractors, in addition to putting workers 
at risk and unfairly disadvantaging honest employers, costs the state 
millions of dollars in foregone tax revenue.
Employer Avoidance of the Obligations of the Employer-Employee 
        Relationship
    There are two related employee practices by which employees are 
improperly classified: (1) those workers who should get a W-2 form from 
their employer but instead are given a 1099 form and treated as if they 
were self-employed: and (2) those workers paid in cash ``off the 
books.'' In both of these situations, workers are denied their rights 
as employees, including the right to organized representation, safety 
and health protections on the job, family and medical leave, 
whistleblower protections, vital social insurance benefits and health 
insurance and retirement benefits offered to employees.
    When employers misclassify their employees, those workers and their 
families are left vulnerable when they are in greatest need of the 
benefits routinely accrued through employment. The practice not only 
threatens the ability of honest businesses to effectively compete, but 
it also leads to reduced tax revenue and less funding for benefit 
programs.
    In our experience in New Jersey, employee-employer relationships 
are being deliberately severed by employers driven by the quest to 
improve their bottom line. Many employers are intentionally, and 
illegally, cutting their legitimate business costs by choosing to treat 
bona-fide employees as if they were self-employed contractors. In so 
doing, these employers leave it to their employees to pay for social 
insurance programs and take on their own tax withholding liabilities. 
While some misclassification may be due to legitimate misunderstanding 
of the law, the primary reason that most employers choose to 
misclassify employees is a desire to avoid the employer costs of 
payroll taxes for social security, unemployment and disability 
insurance as well as worker's compensation insurance premiums.
    Deliberate misclassification of employees as independent 
contractors is not the benign issue that offenders engaging in this 
practice would have us believe. Even if, as several have argued, some 
workers voluntarily participate and find this practice advantageous, it 
still does not remove any of the injuriousness of misclassification. 
Many employees who find themselves misclassified are ill-prepared and 
undereducated as to the responsibilities of self-employment.
    A report released by Cornell University in April of this year 
indicated that ``[w]ith less tax revenues flowing into government 
coffers, public resources are strained. State unemployment insurance 
systems, for example, are forced to compensate by raising contribution 
rates for employers who comply with the regulations. According to the 
Government Accountability Office, underpayment of Social Security, 
unemployment insurance, and income taxes in 2006 due to 
misclassification amounted to an estimated $2.72 billion; the 
researchers here argue that the real cost is substantially higher, 
particularly when losses at the state level are factored in.''
    Employers who pay workers in cash ``off the books'' create 
additional difficulties. When an employer issues a 1099 form to an 
individual, enforcement agencies at least have a paper trail to follow. 
Individuals who work ``off the books'' for cash payment are hidden 
still further in the underground economy. Sometimes these workers are 
exploited because they are undocumented residents. Other times 
employers hire a worker for a short time without keeping proper 
records, paying insurance premiums, or arranging for withholding.
How prevalent is the problem?
    In the New Jersey Department of Labor and Workforce Development's 
recent yearly audits of 2.2 percent of employers--around 6,000 
annually--we have found either independent contractor misclassification 
or workers being paid in cash ``off the books'' in 42 percent of cases. 
Even among the more than 750 employers selected totally at random for 
an audit, 38 percent of these firms violated the law by misclassifying 
their employees. The Department also conducts approximately 1,500 
targeted investigations annually. Some of these investigations are 
triggered when misclassified workers apply for unemployment insurance, 
temporary disability, or workers' compensation benefits that they 
assumed their employers were paying on their behalf. When these workers 
attempt to file for benefits, their claims are often initially denied 
because they are not recorded in the system as an employee. In most 
cases, subsequent investigations show that the individual was 
misclassified and should have been treated as an employee.
    Overall, in 2006, our audits found nearly 25,000 workers 
misclassified and uncovered more than half-a-billion dollars in 
misclassified or unreported wages ($565 million). In 2005, New Jersey's 
audits found 28,286 misclassified workers, with misclassified or 
unreported wages of $644 million. In calendar year 2004, these audits 
turned up more than 26,000 workers whose employers misclassified their 
employment and failed to provide these workers with New Jersey 
unemployment and disability insurance coverage.
    We find an even greater level of non-compliance when we target our 
investigations to industries known to have widespread abuses. This 
practice first attracted our attention as a result of audit patterns 
and complaints about building contractors filed with the Division of 
Wage and Hour Compliance, which led the Department to uncover a 
significant number of misclassification violations in the construction 
industry. In 2006, out of 871 audits and investigations in the 
construction industry, 41 percent found misclassification of employees, 
identifying nearly 3,000 misclassified construction workers, $78.2 
million in under-reported gross wages and $2.1 million in under-
reported contributions. However, the misclassification of employees is 
no longer primarily limited to the construction industry. We have also 
found significant patterns of violation in food processing plants, 
courier services, dental assistants, waitresses, nail salons, nurses, 
secretaries and landscaping.
    For example, the New Jersey Department of Labor and Workforce 
Development recently conducted a program of unannounced investigations 
of nail salons and found workers not properly classified as employees 
in more than two-thirds of all establishments examined (350 
investigations, 240 assessments). Field investigations of several 
hundred landscapers disclosed failure to classify worker as employees 
in nearly 62 percent of all businesses examined. Our investigations of 
dentists found that 53 percent of the employers improperly treated 
their dental assistants as independent contractors and not employees. 
The Department has also greatly benefited from data-sharing with the 
Internal Revenue Service (IRS). Investigations initiated as the result 
of analysis of 1099 information provided by the IRS since 2003 resulted 
in findings of non-compliance in 75 percent of cases (111 cases, 84 
assessments).
    In another example, for unemployment insurance tax purposes, New 
Jersey law treats an employee leasing company as the employer of the 
workers of its various clients. The tax accounts of the client 
companies are then recorded as inactive accounts while the leasing 
company reports the payroll for the workers. Our examination of 
inactive client company records, however, has disclosed that many of 
these companies continue making payments for services, generally to 
``independent contractors'' or other temporary workers not included on 
the new payroll reports from the employee leasing company. Our recent 
investigations have found this type of non-compliance in 61.5 percent 
of all these investigations (367 investigations, 226 assessments).
    The New Jersey Department of Labor and Workforce Development also 
has uncovered significant patterns of employers' misclassification of 
workers through monthly enforcement sweeps by our State Division of 
Wage and Hour Compliance. These enforcement efforts are targeted in the 
residential and commercial construction sectors, the garment and 
apparel industry and large-scale farming operations. Employers who 
refuse to provide timesheets or payroll records are issued subpoenas. 
Employers who ignore the subpoenas are subject to prosecution as 
disorderly persons for a first offense and even more serious criminal 
penalties for subsequent or egregious violations. During the first six 
months of 2007, the Wage and Hour Compliance Task Force has made 158 
referrals to the New Jersey Division of Workers' Compensation and 228 
referrals to the Unemployment Insurance Division of Employer Accounts 
for suspected misclassification of workers.
    We find that employees who are misclassified rarely feel that they 
are in a position to demand that they be correctly classified as an 
employee. By contrast, true independent contractors choose to be self-
employed. They not only receive a 1099 form that they use to declare 
their income for taxes but also must assume much of the tax and 
insurance liabilities normally paid by employers, including paying both 
the employer and employee portions of Social Security taxes, 
contributing to unemployment insurance, and providing their own 
workers' compensation insurance. True independent contractors set their 
compensation at levels high enough to cover payroll taxes, insurance 
and other expenses for which they are responsible. This is not possible 
for employees who are expected to work for their employer as 
independent contractors while receiving relatively the same pay as an 
hourly worker.
How we are addressing the challenge
    In April 2006, soon after taking office, New Jersey Governor 
Corzine directed the Treasury Department's Division of Taxation and the 
Department of Labor and Workforce Development to work together to 
combat the practice of misclassification of employees. We formed a task 
force that included the Divisions of Employer Accounts, Wage and Hour 
Compliance, Workers' Compensation, and Taxation to identify common 
areas of concern and develop a process to exchange information. By 
leveraging the resources and findings of each agency, findings from one 
department could be used by the other without the need to duplicate the 
entire investigative process. The sharing of information among agencies 
and programs is an important part of this initiative, which aims to 
break down ``silos'' within government and have the various agencies of 
government cooperate on tips, leads, and investigations.
    Following up on the Governor's initiative, last summer the 
Legislature sent a bill to the Governor's desk to support our efforts. 
This law, P.L. 2006, Chapter 85, now provides that New Jersey's Gross 
Income Tax law, wage and hour laws, Unemployment Insurance law, and 
Temporary Disability Insurance law use the identical legal test to 
decide whether an individual is an employee or an independent 
contractor--the ``ABC test.''
    Under the ``ABC test,'' an individual paid for services is presumed 
to be an employee unless he or she meets all three characteristics of a 
self-employed, independent contractor. These are: (A) that the 
individual has been and will continue to be free from control or 
direction over the performance of such service, both under his contract 
of service and in fact; (B) The service provided is either outside the 
usual course of the business for which service is performed, or that 
the service is performed outside of all the places of business of the 
enterprise for which such service is performed; and
    (C) The individual is customarily engaged in an independently 
established trade, occupation, profession or business, so that the 
individual would not routinely become unemployed when his or her 
relationship with this particular employer ended.
    Because these sister state agencies use the same legal definition 
of a true independent contractor, Division of Taxation staff, for 
example, can use the Labor Department's findings to enforce the income 
tax law without the unnecessary duplication of effort. The Division of 
Taxation is also able to use the findings of compliance audits by Labor 
Department auditors to pursue income taxes owed to the state. The Labor 
Department also can follow up on audits by the Division of Taxation to 
ensure that employees are properly paid and covered for Unemployment 
Insurance and Temporary Disability Insurance benefits.
    Additionally, we have recently begun a cross match of audit data 
with Workers' Compensation data to identify employers who are not 
properly providing Workers' Compensation coverage for their employees. 
This innovative data-sharing procedure has led to more than 75 
investigations of employers involving more than 1,300 workers. 
Investigators from both Wage and Hour and Employer Accounts now check 
for Workers' Compensation Insurance coverage. In addition, by sharing 
tax-audit information with the Compensation Rating and Inspection 
Bureau that oversees Workers' Compensation insurance premiums, the 
State can better identify employers who are underpaying Workers' 
Compensation premiums.
    New Jersey was also an original volunteer, one of four states, to 
join a partnership with the Internal Revenue Service in dealing with 
Questionable Employer Tax Practices, or QETP. This federal-state 
partnership is developing and implementing a federal/state approach to 
addressing worker misclassification and other attempts to avoid 
employment taxes. Our State has gained positive results from previous 
exchanges of information from the IRS. As mentioned above, 75% of the 
leads from these IRS 1099 data have found non-compliance. We anticipate 
similar results under the QETP federal-state partnership, which has 
been designed to enhance enforcement of tax laws, protect accurate 
worker classifications and discover and address tax avoidance schemes 
through the sharing of information and by leveraging federal and 
individual state resources.
    Most recently, on July 13, 2007, Governor Corzine signed into law 
the Construction Industry Independent Contractor Act (P.L. 2007, c. 
114). This law provides even stronger enforcement tools and more 
effective penalties, including criminal penalties for the first time, 
for employers who cheat their employees, their government and 
competitors by misclassifying workers as independent contractors. Under 
this law, a contractor that has knowingly misclassified workers can be 
guilty of a crime of the second degree. Such a contractor can be held 
liable to make up any loss to the employees if they were underpaid in 
connection with the misclassification. The law also authorizes the 
Commissioner of Labor and Workforce Development to assess and collect 
administrative penalties, up to $2,500 for a first violation and up to 
$5,000 for each subsequent violation. Contractors that engage in this 
practice can be made ineligible to receive public contracts.
Recommendations for Federal Action
    The Congress should address five areas that can be improved to 
reduce the misclassification of workers as independent contractors:
    1. Establish a strong, universal federal definition of employee: As 
I mentioned, New Jersey recently amended its statutes to have 
enforcement agencies use the strong ``ABC test'' to determine the 
employee-employer relationship. Similarly, federal laws should adopt 
the ``ABC test,'' as used in New Jersey, to distinguish an employee 
from an independent contractor. A strong, consistent test for 
independent contract status would enhance federal enforcement of such 
laws as the National Labor Relations Act, the Civil Rights Act, the 
Internal Revenue Code, the Fair Labor Standards Act, the Occupational 
Safety and Health Act, and the Employee Retirement Income Security Act.
    2. Enhance collaboration: New Jersey's aggressive multi-agency 
approach to addressing the problem of employee misclassification 
provides a model for improved coordination among federal enforcement 
agencies. New Jersey's increased data sharing, joint enforcement 
efforts, unified definition of the employee-employer relationship, and 
our collaborative approach bring a broad array of resources to bear on 
this problem. Similarly, federal agencies should adopt universal 
standards for all investigators that clarify the procedures for 
referring misclassification cases to the other appropriate federal and 
state agencies charged with enforcement. This recommendation was also 
made in May 2007 by the GAO in its testimony on employee 
misclassification to the Subcommittees on Income Security and Family 
Support and on Select Revenue Measures, which referenced GAO's finding 
that USDOL district offices have varying referral procedures and 
inconsistently referred misclassification cases.
    3. Amend Section 530 of the Revenue Act of 1978: Section 530, 
commonly referred to as the ``safe harbor'' provision, prevents the IRS 
from reclassifying workers prospectively as employees, contains 
deficient reporting requirements on employers who make payments to 
independent contractors, and establishes insufficient penalties for 
employers who pay their workers under the table and fail to file 
1099's. Section 530 also allows employers to misclassify workers as 
independent contractors in certain industries, regardless of the 
employment relationship, if, in a particular industry, there is a 
``long-standing recognized practice'' of classifying the workers as 
independent contractors or if the employer underwent an IRS audit 
anytime in the past. Reforms to Section 530 are long overdue and both 
the GAO and the IRS are on record urging reforms that would increase 
the effectiveness of compliance programs and increase collection of tax 
revenue by the US Treasury.
    4. Empower workers to assist in ensuring proper classification: 
Workers and their representatives should have the option of receiving 
an employee status determination from the IRS to ensure their proper 
classification. When requesting a determination, the workers should 
have their confidentiality maintained to the greatest extent possible, 
should be protected from retaliation by employers when requesting a 
determination, and should be afforded appeal rights. Also, the Fair 
Labor Standards Act workplace poster should be revised to include 
information that informs workers how and where to file complaints.
    5. Increase enforcement: The USDOL should expand the types of 
unemployment insurance tax audits that states may count in the 
statistics reported to USDOL, including those audits that fail to find 
a source document (such as a cancelled check or an original time 
sheet). This would provide state unemployment insurance agencies with 
an incentive to pursue audits in cases where employers fail to produce 
or maintain payroll records. Additionally, enforcement by USDOL's Wage 
and Hour Division could be improved by establishing adequate 
administrative penalties for the knowing and willful misclassification 
of workers and for record-keeping violations. The New Jersey Division 
of Wage and Hour Compliance has enjoyed the statutory authority to 
assess and collect administrative penalties since 1991 and this has 
proven to be a useful compliance tool. Lastly, the USDOL should be 
urged to target enforcement in industry sectors known to have high 
rates of misclassification and to assist states in their enforcement 
efforts through supplemental funding.
    I thank you for the opportunity to testify and I would be happy to 
answer any questions you may have.
                                 ______
                                 
    Ms. Woolsey. Thank you very much.
    We are going to have votes soon. But we are going to have 
questions until we get down to the last minutes of having to 
run, and then we will come back.
    Ms. Walters, I, too, am a human resources manager for over 
20 years. Now, I have been here for 15, so I have been away 
from it for a while. But it was always clear to me--I mean, my 
company had 800 employees. We started with 12, and I grew up to 
800 before I started my own independent consulting firm. And I 
could always tell when my clients knew the difference between 
an independent contractor and not. And I would guide them to do 
the right thing.
    It is complex. And it is more complex now when we have--
just about any kid that has parents, if they are lucky to have 
two--are in the workforce. And we have to do things so that 
parents can bridge work and family. But we don't have to, at 
the same time, take away the protections that these employees 
need and deserve.
    And they might be glad to have flex-time, absolutely. But 
if that means when they have an accident, they don't have any 
kind of health protection, what good is that?
    So what we are trying to do here is ask you--I am going to 
ask you what your association is doing to--I mean, do you have 
a task force that would be working on how to help the federal 
government make clear what would be a part-time employee that 
is misclassified? How are you doing that?
    That is what your association needs to be working on. Not 
telling us we shouldn't do it, that we should leave it just as 
complicated as it is. That is ridiculous.
    Have you looked at Mr. Socolow's five actions? Those are 
great actions. I would love to have your association's opinions 
on those.
    Ms. Walters. A flight of ideas in response.
    One, for example, the society absolutely doesn't mean to 
just leave things the way they are. And I don't want you to 
hear that as my testimony today.
    As an example, guidance on HIPAA compliance: The Department 
of Labor, Health and Human Services, and the Internal Revenue 
Service worked together to provide guidance to the regulated 
community on various aspects of HIPAA compliance. I think that 
was a great move. It was a multi-agency initiative to, again, 
provide clarification, education on how employers can best 
comply.
    That is, day to day, every day the commitment of the 
society is to serve the professional and advance the 
profession. And we do that when we provide education and 
information to help employers comply with the law, not skirt 
the law.
    It is trying to figure out with when there is, you know, 
economic realities test and a manner and means test, an IRS 
1099 rule, how do I know, you know, it is difficult to comply. 
Which test do I use?
    Ms. Woolsey. But if you would yield to me just a little 
bit. I am asking you, are you looking at providing some 
information that would streamline this so that, indeed, you 
don't have--I mean, like Mr. Socolow has?
    Ms. Walters. The society today--SHRM provides on its Web 
site--I think not dissimilar from what I heard perhaps the 
representative from the Department of Labor describe provides--
we actually have an independent contractor toolkit that our 
members can go to the Web site and receive guidance and 
information. We post the IRS Publication 1779, Publication 15-
A.
    So, again, trying to be proactive to provide as much 
education and information as we can on this topic.
    Ms. Woolsey. So, Mr. Socolow, would you like to finish that 
one thought I cut off before I pass the microphone?
    Mr. Socolow. Yes, Chairwoman Woolsey. Thank you very much.
    The final point I had wanted to make was about this point, 
which was made repeatedly, by the U.S. Department of Labor Wage 
and Hour Division that misclassifying an employee is not, in 
and of itself, a violation of any of the 70-plus laws that they 
enforce.
    In New Jersey, we have a statutory authority under our wage 
and hour laws to assess administrative penalties for 
essentially failing to keep records. And if you are not 
counting somebody on your payroll books as an employee, you are 
not keeping records on them. That, in and of itself, is a 
violation of wage and hour laws.
    And if the Congress sees fit, it seems that that would be 
an area to give the Wage and Hour Division, which is going to 
be probably the first line of defense against these problems, a 
new tool--a tool we enjoy in New Jersey and have since 1991--to 
go after the employers that are willfully and wrongly doing 
this.
    Ms. Woolsey. Thank you so much.
    Mr. Wilson?
    Mr. Wilson. Thank you, Madam Chairman.
    And, again, thank you for being here today.
    In particular, before I was selected, I served as a real 
estate attorney. I worked with the construction industry, Ms. 
Stafford, very closely. And in our region, construction is just 
the basis, I believe, of the sound economy we have, the booming 
economy we have. It is the tax base for the schools. Just 
everything comes together.
    And so I want to make sure that what we are doing is 
beneficial to the people working and to the economy--and again, 
that is why I appreciate drywall--everything that you do.
    And so keeping that in mind, Ms. Walters, what would be the 
impact on the construction industry if Congress were to get it 
wrong or legislate a solution that threatens the viability of 
bona fide independent contractor status?
    Ms. Walters. I think I wouldn't want to respond to a 
particular industry. But I think there is a potential for 
multiple industries that if there is legislation, as you put 
it, that doesn't quite get it right, the impact could be then 
for those that are today properly classified as independent 
contractors may lose that status, may walk away from the status 
not wanting to do so, for fear of, I guess, being reclassified 
as an employee and not wanting that relationship either.
    Mr. Wilson. And, again, I want your input on that because 
construction, hospitality, landscaping, all of these are 
extraordinary opportunities for people at ground level. And 
then they can, as Ms. Stafford, own their own business. So that 
is great.
    At our last hearing, we heard from one representative of a 
trade association that those efforts of his association were 
made to assist its members in compliance with the wage and hour 
classification laws.
    Can you expand, in your testimony, Ms. Walters, as to the 
activities of the Society for Human Resources Management in 
helping its members ensure that the laws are being followed 
correctly?
    Ms. Walters. Sure, yes. Again, as I mentioned, on the 
society's Web site there is actually an independent contractor 
toolkit. That toolkit provides a variety of resources, 
including links to governmental agencies, government 
publications.
    The society also sponsors conferences every year, 
throughout the year, multiple conferences. I have had the 
honor, as have others, in presenting and providing educational 
programs and information on managing your contingent workforce, 
the different types of working relationships, how to determine 
whether a working relationship is or is not an employment 
relationship--some of the factors to consider there.
    Mr. Wilson. And, Ms. Walters, the question was asked at our 
first panel and now I am going to ask you, and that is that at 
a Workforce Protections Subcommittee hearing earlier this year, 
one person noted that the question of whether an individual 
worker is a contractor or an employee isn't that complex. Based 
on your 20 years of experience as a human resources 
professional, do you agree?
    Ms. Walters. I think it is nice we have heard consensus 
here this afternoon--or at least I have heard consensus--that 
it can be simple and it can be complex. And it is always a 
case-by-case analysis.
    And what can appear today to be a very straightforward, 
appropriate independent contractor relationship may in 4 
months, 6 months evolve into something that looks very 
different than what we intended today. Some are clearcut, and 
some are not.
    So I think it can be very complex.
    Mr. Wilson. Thank you very much.
    Ms. Walters. Thanks.
    Ms. Woolsey. Mr. Andrews?
    Chairman Andrews. Thank you very much. I appreciate that.
    Thank you, first of all, everyone, for their testimony.
    Ms. Walters, early in your statement, you talk about the 
problem of a lot of the complexity coming from the fact that 
there is not one definition of what an employer is; many 
different statutes, many different definitions.
    Then on page nine of your statement, you say that you do 
not think that additional legislation attempting to clarify the 
law would provide the intended benefit.
    I have trouble reconciling those two points. What is wrong 
with Mr. Socolow's suggestion that there be a single, strong, 
clear, unitary definition of what an employer is? Why shouldn't 
we do that?
    Ms. Walters. I think part of the concern would be one, I 
think it would be a fascinating process to watch for Congress--
I guess the question is, what would supersede what?
    If we were to abolish--and I am not sure that is what I am 
hearing today is a suggestion to take ERISA and ADA and FMLA 
and all the different federal statutes, abolish every 
definition federal and then state also, and have one definition 
that would apply to everything.
    Chairman Andrews. I am going to let him speak to it 
himself. I don't think that is the proposal. I think that the 
idea was to have a uniform definition without abolishing 
something.
    Mr. Socolow, what exactly are you proposing?
    Mr. Socolow. I think that the difference is between a 
definition of an employee versus a definition of independent 
contractor, right?
    The ABC test that we have in New Jersey, that a number of 
other states use as well, and that, as I said, we now use for 
taxation and for unemployment and a number of other things, the 
ABC test is just about distinguishing whether or not someone is 
an independent contractor.
    There are plenty of other definitions you can have about 
what is covered by FMLA and what isn't. But it seems to me that 
for the purposes of defining an independent contractor, the ABC 
test is clear. It has got lots and lots of case law that now is 
behind it. And it works.
    Chairman Andrews. I think under the ABC test Mr. Williams 
probably wouldn't be sitting here today. I think that his facts 
were crystal-clear that he would have been treated as an 
employee.
    Mr. Socolow. As is evidenced by the fact that he received 
unemployment compensation, which was determined, I am almost 
certain, by the ABC test.
    Chairman Andrews. So I think, as a practical matter, for 
Mr. Williams's case, it would have given him more justice more 
quickly, which, I think, is what we want to accomplish.
    And, Ms. Stafford, if I can ask you, would a single 
definition of employer under these various statutes be easier 
for you to deal with as a businesswoman?
    Ms. Stafford. Absolutely. I think that it seems to me that 
it centers so much around the 1099. If I were this committee, I 
would be looking hard at the 1099 and what employers really use 
that as a tool for.
    It seems to me that that is the disconnect between people 
that pay taxes and make sure that they withhold taxes from 
employees to people that hand out 1099s like they are 
irrelevant pieces of paper that people never pay taxes on. And 
it is not followed up, apparently not, not at 38 percent, as 
Mr. Socolow----
    Chairman Andrews. Mr. Williams, you were about to say 
something. What I wanted to ask you was, did you ever doubt in 
your ordeal that your employer intended to misclassify you, or 
do you think the employer was just mistaken in interpreting 
what the law was?
    Mr. Williams. No, I think the whole intent of the operating 
agreement was to classify us as independent contractors and to 
keep us as independent contractors, thereby shifting all the 
costs to us and making us pay, you know, having to pay for the 
entire situation.
    In Massachusetts, there are three simple situations: the 
123 test they call it in Massachusetts, which is if you control 
the employee, or if the employee is not allowed to work for 
others, or if the employee is in a different business or if the 
employee is in the same business, then you can't classify him 
as an independent contractor.
    All three of those tests, very clearly in the FedEx model, 
have proven to be employees.
    Chairman Andrews. And, Commissioner Socolow, if you had to 
just take an educated guess at the percentage of enforcement 
actions your department has engaged in that are intentional 
misclassifications versus confused or inadvertent ones, what is 
your estimate of that breakdown?
    Mr. Socolow. Congressman, it is hard to put an exact number 
on that. But I will say that when you see the industries in 
which 60, 70 percent of the employers are routinely and 
continually engaging in this practice, when you see, 
furthermore, unfortunately that when we do follow-up audits of 
those who we have found violating it and go back and look at 
them 2 and 3 years later, that 60 and 70 percent continue to 
misclassify their workers, I would say that a very substantial 
share of employers are doing this intentionally.
    Chairman Andrews. Do you have any reason--I see my time is 
up. Thank you very much.
    Ms. Woolsey. Mr. Kline?
    Mr. Kline. Thank you, Madam Chair.
    I want to thank the panel for being here with us today, for 
their testimony and for answering the questions. I have a 
couple of different directions I want to go, because I am 
finding this to be still fairly complex.
    Just for the record, Mr. Williams, I want to make sure that 
I understand the status of your cases. You have a hearing 
scheduled before the National Labor Relations Board later this 
fall, is that correct?
    Mr. Williams. That is correct, sir.
    Mr. Kline. And you have some action in state court with a 
lawsuit, is that correct?
    Mr. Williams. That is also correct.
    Mr. Kline. And neither of those have been resolved yet, is 
that correct?
    Mr. Williams. No, sir.
    Mr. Kline. So those are pending. All right. Thank you.
    Ms. Walters, I want to go back to this issue of definition. 
We have, in the previous hearing and in this hearing today in 
the discussion with the administrator on the first panel, 
recognized that there is a lot of confusion over this 
definition. And it does seem that it would be helpful if we 
didn't have so many definitions, if we could make it simpler.
    And yet, as you said in your testimony and your discussion 
with Mr. Andrews, that you don't think that we should try to 
change the statutes, and, as I understand your answer, that is 
because, as Mr. Andrews said, there are various statutes. There 
are many statutes, and just the process--knowing how we work or 
don't work here in Congress--that could be pretty problematic 
as we went in and tried to fix these definitions for all the 
statutes.
    But you discuss something in your testimony called joint 
guidance. Can you tell us how that might help this problem?
    Ms. Walters. Sure, I would be happy to.
    Just giving consideration to, again, multiple agencies that 
have purview in administering and enforcing some of the laws 
where this issue comes up--again, Title VII, ADA, Family 
Medical Leave--so perhaps the Department of Labor, the EEOC, 
the IRS coming together, as they did in the example we gave 
with regard to HIPAA compliance, coming together to try and 
develop guidance for employers in how to, you know, clarify 
applying the different tests, is there guidance that would be 
and it is the society's position that could be extremely 
helpful to employers to move toward some consistency in the 
application of the different interpretations.
    Mr. Kline. So this guidance, then, would not require a 
statute change? But it would do a couple things. It would make 
it easier for employers, presumably, to understand. But it also 
would make it easier for employees and others to understand if 
there was a willful misclassification. Is that correct?
    Ms. Walters. That is correct. That is what we believe.
    Mr. Kline. And so it would achieve, presumably, both goals: 
make it less likely that there would inadvertent 
misclassification, and certainly make it easier for other 
members of the panel and employees across the country to 
understand if they are being taken advantage of.
    Ms. Walters. I believe so, yes.
    Mr. Kline. Okay. Thank you.
    I yield back.
    Ms. Woolsey. Mr. Kildee?
    Mr. Kildee. Thank you, Madam Chair.
    Mr. Williams, when you were injured in 2002, you did not 
file for workman's compensation benefits. Why not? And who paid 
for your medical bills at that time?
    Mr. Williams. Eventually, the medical bills were paid by 
the person that caused the accident, by that particular 
company's--that person is insured, as he was found to be at 
fault and be at fault in a major situation.
    The only income I had at the time was for the worker's 
accident policy, which was provided in the contract in FedEx, 
which I paid for every week. But that is the only thing I had 
to live on at that time. I had no other income coming in.
    I was ineligible for workman's compensation. FedEx would 
not--did not--contribute to workman's compensation. Therefore, 
I was ineligible. The only thing I had was this worker's 
accident policy, for which I paid.
    Mr. Kildee. And that was a private worker's accident 
policy?
    Mr. Williams. Yes, provided through FedEx through an 
insurance company.
    Mr. Kildee. But you did not qualify for the regular 
workman's compensation benefits?
    Mr. Williams. No. I was told I could not qualify.
    Mr. Kildee. So eventually, because the other party was at 
fault, you eventually collected from----
    Mr. Williams. Recouped for the hospital expenses, et 
cetera, yes.
    Mr. Kildee. Were you told you that you could not file for 
workman's compensation?
    Mr. Williams. Yes. It is very specific in the FedEx 
operating agreement and also in the policy that the protective 
insurance company provides for you. It says, ``You are not, 
under any circumstances, covered by workman's compensation.''
    Mr. Kildee. Thank you very much.
    Thank you, Madam Chair.
    Ms. Woolsey. Thank you.
    Mr. Hare?
    Mr. Hare. Thank you, Madam Chair.
    Mr. Williams, just a few other questions about it. I am 
assuming your van was damaged in the accident?
    Mr. Williams. Yes, sir.
    Mr. Hare. And who paid for that?
    Mr. Williams. Well, it was my van. It was totaled in the 
accident. And it was paid for by the other party's insurance 
company. My insurance company paid for it first.
    Mr. Hare. And then at some point you went back to work and 
you were required to replace your P400 vehicle----
    Mr. Williams. Yes.
    Mr. Hare [continuing]. With another one selected. And what 
happened to that vehicle?
    Mr. Williams. Well, when I was terminated in December of 
2005, I was on the hook for that vehicle, if you will. I was 
liable for the payments. It was a leased vehicle that was set 
up through FedEx. And when they terminated me, I had to get rid 
of the vehicle.
    I was one of the few fortunate ones to be able to get rid 
of the vehicle through the leasing company. I called them the 
day after I was terminated, told them what had happened. They 
told me to take it to a certain location. I took it to that 
location and turned it in. And then approximately 6 months 
later, my vehicle was sold.
    In the meantime, I had to make all those monthly payments. 
I did not make them because I told them I didn't have the 
income to make them. But they did eventually sell the vehicle.
    Mr. Hare. Ms. Stafford, just a couple of questions for you. 
You said that in residential construction it is impossible for 
companies like yours to compete. Is misclassification rampant 
in that industry? And, if so, why do you suppose that is the 
case?
    Ms. Stafford. It certainly--it is rampant.
    And the difficulty we have is the market supporting our 
prices to do the work because we are paying--when you talk 
about the difference in percentage from one company to another, 
my federal, state, Medicare and all the employee contributions 
run about 16.2 percent to my company.
    But if you are misclassifying an employee, and you are also 
skirting a workman's compensation payment that should be made, 
that is another 10 to 15 percent, depending on what the 
classification that you are using, if you have an insurance 
policy.
    If you don't have either of those two things, you are 
talking about somewhere in the neighborhood of a 30 percent 
price advantage.
    Mr. Hare. Well, in your experience, what happens to the 
workers when they are misclassified as independent contractors? 
In other words, you know, how do they cope when they are 
injured, and how do they handle the cost of being an 
independent contractor?
    Ms. Stafford. There have been a lot of documented cases of 
what happens in the housing industry. And basically, there have 
been cases when there has been a major accident and the person 
goes on the payroll that day. And all of a sudden shows up 
under the employer's workers' compensation policy. However, 
prior to that, he was never on the employer's records and was 
being paid cash under the table.
    Mr. Hare. Chairman Andrews, I would like to yield to you. 
You had a question that you didn't get to finish.
    Chairman Andrews. Thank you.
    I did want to ask Mr. Socolow if the experience he has had 
in New Jersey, if he has seen any evidence that it is atypical 
of states across the country; in other words, this prevalence 
of intentional misclassification.
    Mr. Socolow. Yes, Chairman Andrews. The colleagues in the 
other U.I. tax agencies in the other wage and hour divisions of 
state governments collaborate. There are conferences. And this 
topic is topic number one at both of those conferences. All the 
states are seeing the same patterns.
    Chairman Andrews. I thank my friend for yielding.
    And I thank the commissioner.
    Ms. Woolsey. Mr. Bishop?
    Mr. Bishop. Thank you, Madam Chair.
    Ms. Walters, you have indicated that you don't believe that 
this is an issue that suggests new law ought to be passed on 
the part of the federal government, but that you do believe 
that the way to approach this problem is through improved 
enforcement and clarification of existing law and information-
sharing.
    That is essentially the position of your organization?
    Ms. Walters. It is. Just the one point of clarification is 
adding a new federal law to those that already exist I think 
would not be the best approach to enhancing clarification.
    Mr. Bishop. But would enforcement and clarification be 
enhanced if there were this automatic referral notion that has 
been recommended by the GAO? How would you feel about that?
    Ms. Walters. My first impression in response to that is I 
think that would not help with clarification because it is 
still going to come after the fact.
    Mr. Bishop. Would it not help with enforcement?
    Ms. Walters. It could help with enforcement. But I am not 
sure how it would help with the initial appropriate----
    Mr. Bishop. Would not enforcement ultimately yield 
clarification? I mean, wouldn't people, in effect, get the 
message?
    Ms. Walters. They would. But, again, I would think 
everyone's goal here is to what can we do to prevent this from 
happening in the first place, proactively to get clarification, 
education so that there is--rather than needing the increased 
need for enforcement because there is more misclassifications 
than there used to be--what can we do proactively to prevent 
the misclassifications in the first place?
    That is the society's goal is to try and, you know, get 
this, nip it in the bud, if you will and----
    Mr. Bishop. And in an ideal world, I would agree with you. 
I think you would also agree that none of us live in that ideal 
world. I mean, if I were to follow that logic, the IRS's 
function would be to simply provide information to help people 
fill out the forms. [Laughter.]
    Ms. Walters. You know, I would go back to, with regard to 
the multi-agency guidance that was given out before, I don't 
know if there is statistics to measure the number of alleged 
violations before and after that, but, you know, it is an 
effort that I think is well worth consideration.
    Mr. Bishop. I guess the point I am trying to make is--what 
I am struggling to understand is, in the absence of a unitary 
definition, which I think I would support a unitary definition, 
but it seems as if you do not--but in the absence of a unitary 
definition, and in the absence of mandated or automatic 
referral, I don't see how we can be effective in terms of 
targeted enforcement. I just fail to understand how we would 
have sufficient tools to target enforcement if we didn't have 
those two tools.
    Ms. Walters. SHRM supports the idea of enforcement. 
Absolutely. Absolutely.
    And I think the other question on the table is--and, again, 
I think a point of clarification is I don't know the answer to 
the question, but what comes to my mind, what the society is 
considering is if there is consideration of one definition, how 
is that applied when a claim comes up under ERISA, when a claim 
comes up--I don't know the----
    Mr. Bishop. I am not suggesting for a moment that to divine 
a definition would be easy. It wouldn't be. But we step up to 
the plate on lots of complex issues. And I think simply because 
this is complex, we ought not to allow that to deter us.
    Mr. Socolow, if I may? In New Jersey, it is considered a 
violation of the law to misclassify an employee, correct?
    Mr. Socolow. Yes, Congressman.
    Mr. Bishop. And have you found that to be a deterrent?
    Mr. Socolow. Yes, we have. We have been doing a lot of 
education and information and clarification. And we have found 
over time that having a strong enforcement process, in fact, 
does complement those compliance assistance efforts, as well.
    Mr. Bishop. Thank you very much.
    Thank you, Madam Chair.
    Ms. Woolsey. Mr. Payne?
    Mr. Payne. Thank you very much.
    Mr. Socolow, you mentioned that in your testimony you 
highlighted New Jersey's new law, known as the ABC test.
    Although the law has not been in effect for long, do you 
believe it has been effective in determining whether an 
individual is an employee or an independent contractor? And do 
you know if other states use the same test? And if so, what 
states? And do you believe that it is effective, as well, with 
them?
    Mr. Socolow. Congressman Payne, thank you.
    The chief thing that happened a year ago last summer was 
that our taxation division adopted--or the statute was changed 
so that the taxation division has the same ABC test that we 
have had for many, many years in unemployment insurance.
    And what that has been effective over the last 12 months--
or 7 months, because it took effect in January of this year--it 
has given us the opportunity now that, when one agency does an 
audit or an investigation, those findings can be used by the 
other agency to double up on the enforcement without having to 
double up on the work.
    So that is the chief--from an enforcement perspective, it 
just streamlines and breaks down those silos between agencies 
of state government.
    As to the ABC test, it is widely used by unemployment 
insurance programs--you know, prong C, the third prong of the 
test, which goes to whether or not the worker would be able to 
survive the loss of that client as an independent contractor or 
whether they would be unemployed, obviously comes from the 
question of whether somebody should get unemployment benefits.
    And, yes, I would advocate that every state use it for 
their income tax, as well.
    Mr. Payne. Let me ask another question in regard--and you 
may not have the answer at hand. But, as you know, FedEx and 
UPS are the big competitors in the whole delivery system. 
Actually, you know, FedEx used to keep up with UPS's benefits 
to, I guess, show that unionization is not necessarily 
necessary to get benefits and so forth and so on.
    However, there is a new guy on the block--not so new--but 
they are DHL. And I don't know if you have taken a look at that 
operation. One, as you know, it is part of the Federal Republic 
of Germany's subsidized mail system. Therefore, indirectly, 
they have unfair advantage. But secondly, they make it, I 
believe, mandatory that every driver is an independent 
contractor.
    And I wondered, do you know of that situation?
    Mr. Socolow. Congressman Payne, I guess I would have to get 
back to you specifically about that situation.
    I do know that we found in that industry certain instances 
where drivers were misclassified as independent contractors. We 
have one of them here today on the panel. And we have found 
that, as well, in New Jersey. And we are enforcing to make sure 
that that is corrected.
    Mr. Payne. It is probably even a little more difficult one 
at this time.
    Our federal post office--I should have asked our federal 
witness--had begun in the last year or so to hire independent 
contractors, can you believe it? They are hiring people to--if 
you have got a pickup truck, you can just go and we will 
contract with you to pick up mail and, you know, deliver it to 
a sub-post office.
    And it seems to me like the federal government is violating 
the law. It would appear to me that they are overreaching. It 
appears to me that they are trying to break the union--postal 
workers union--by this contracting out. As a matter of fact, 
even in the post office delivery system, there is the same kind 
of situation happening.
    And so I would really like to get together with your 
department and see whether we need to sue the federal 
government about the state of New Jersey. [Laughter.]
    But I am serious about these practices, once again, of the 
federal government coming in, as they did in our----
    Mr. Socolow. Rodino Building.
    Mr. Payne. Right. And now it is in the new federal building 
where I moved next door when the new building was built.
    But I would certainly like to talk about and see whether 
there is some serious violations by the federal government.
    Mr. Socolow. I look forward to following up with you on 
that, Congressman. Thank you.
    Mr. Payne. Thank you very much.
    Ms. Woolsey. Mr. Holt?
    Mr. Holt. Just as the bells ring.
    Thank you, Madam Chair.
    And I welcome the witnesses, particularly Commissioner 
Socolow, whose career has shown that intelligence, competence 
and skill can be rewarded.
    I think New Jerseyans can take pride on this subject, as 
Mr. Andrews and Mr. Payne have pointed out. I think this is one 
area where we have shown ourselves, our state, to be 
progressive.
    Let me follow up on two subjects. One is the declaration 
that this is unlawful behavior: misclassification. What do you 
say in response or do in response to those employers who say, 
``Well, this is really by mutual agreement,'' or, ``This is 
what the employee wanted?''
    Mr. Socolow. Like with any labor standard, you often have 
that thrown back at you. People say, you know, the worker 
agreed and didn't want to be paid overtime for working more 
than 40 hours in a work week. People say that the worker didn't 
want to be paid the minimum wage.
    Well, that is really not relevant. I mean, you cannot 
contract, you cannot voluntarily, even in a mutual agreement, 
give up the rights that are there for workers. And that is 
because it is arguable that such an agreement really would be 
voluntary. It would almost certainly have elements of coercion.
    And so, that is really not a matter. The law is very clear 
as to whose call that is. That is the call of the enforcement 
agency and, if we are challenged, up ultimately to the courts. 
But it isn't between the employer and the employee to go ahead 
and break the law.
    Mr. Holt. And that is not difficult to uphold in the 
courts.
    Mr. Socolow. No, not at all. Again, there is lot of case 
law on that test.
    Mr. Holt. Now, to the definition, Ms. Walters and others 
have suggested that it might be very hard to come up with a 
definition. As I understand it, you are proposing, or you would 
propose, a definition that is similar to the ABC test that is 
applied in New Jersey.
    Mr. Socolow. Yes.
    Mr. Holt. That test, you say, has been used in various 
agencies, is now used uniformly across agencies. When you 
adopted it for these new applications, was there wrangling over 
the wording?
    Mr. Socolow. No, Congressman, not at all.
    And I just want to point one thing out. Just because you 
use this test to define an independent contractor doesn't mean 
that other tests can't be elsewhere in those laws.
    It was mentioned on page three of the U.S. Department of 
Labor's testimony that in certain of their statutes individuals 
performing work are covered even if they are classified as an 
independent contractor.
    So you can do that. You can have all different definitions 
of who is covered, but still say, nonetheless, covered or not, 
this is what an independent contractor is. And, again, what 
that does is it provides ease of training of the auditors and 
investigators because they all know they are using the same 
test.
    Mr. Holt. Do you happen to know how close your language is 
to the language of other states? You mentioned that a number of 
states--I don't think you gave the number, and maybe you don't 
know the number--use a uniform test.
    Mr. Socolow. Well, Congressman, I don't know how many use 
the ABC test. I do know that many of the state unemployment 
insurance programs--I believe it is the vast majority of them--
use the ABC test, with all three prongs being required, to 
distinguish whether someone is or is not an independent 
contractor.
    Again, whether that has been adopted beyond unemployment 
insurance by those states, I don't know. I know that we have 
now done it beyond that.
    Mr. Holt. And the commonality of the language that you are 
familiar with, how close is that?
    Mr. Socolow. It is identical. That ABC test, you know, has 
essentially been codified almost identically in many, many 
state unemployment compensation programs.
    Mr. Holt. Well, I think you have made our decision here on 
a couple of these issues easier. Thank you.
    Chairman Andrews [presiding]. Does the gentleman yield back 
his time?
    Mr. Holt. Yes.
    Chairman Andrews. I want to thank all the witnesses today.
    Mr. DeCamp, thank you for your contribution and for staying 
for the second panel. So we appreciate very much the fact that 
you stayed and listened. And we look forward to working with 
you further.
    Mr. Williams, your story was compelling and well-told. And 
I think we have a shared consensus to prevent this from 
happening to other people in the future.
    Ms. Stafford, it was refreshing to hear from someone who is 
actually running a business every day and dealing with these 
issues. And your contribution was quite notable.
    Ms. Walters, your association has been a valued advisor to 
this committee for a long time. And we hope that continues to 
be the case.
    And, Commissioner Socolow, we very much appreciate the fact 
that you brought some specific ideas as to how to fix this 
problem, as well as simply a description of it.
    So we are very grateful to everyone who participated today.
    As previously ordered, members will have 14 days to submit 
additional materials for the hearing record, without objection. 
And any member who wishes to submit follow-up questions in 
writing to the witnesses should coordinate with the majority 
staff within 14 days.
    Without objection, the hearing is adjourned.
    [The prepared statement of LIUNA, submitted by Mr. Andrews, 
follows:]

   Prepared Statement of the Laborers' International Union of North 
                            America (LIUNA)

    The Laborers' International Union of North America (LIUNA) is 
submitting this statement on behalf of the 520,000 workers it 
represents who are employed in many of the industries which are 
particularly impacted by the misclassification of workers as 
independent contractors, including the construction industry.
    LIUNA commends the Subcommittee for seeking solutions to the severe 
and ``growing problem for the public and private sector'' of worker 
misclassification which has now been conclusively established to have 
``direct and significant impacts on workers, employers, insurers, and 
tax revenue basis'' \1\.
The Growing Problem of Worker Misclassification
    Worker misclassification is an important public policy issue with 
broad implications. Employers who play by the rules are put at a 
competitive disadvantage with companies that misclassify their 
employees. In cases of misclassification, employees are unable to 
access basic worker protections, such as unemployment insurance, social 
security benefits, overtime payments, and workplace injury benefits. 
Insurance companies are deprived of workers compensation premiums 
requiring legitimate employers to bear those costs. Law-abiding 
citizens bear the taxes of others as they are forced to make up for 
unscrupulous companies that evade their legal responsibilities.
    The practice of worker misclassification occurs when employers 
label workers on their payrolls as independent contractors in order to 
illegally lower labor costs. An employer who misclassifies a worker as 
an independent contractor evades his obligation to withhold any pay to 
the federal government for income tax Social Security, Medicare and 
unemployment (FUTA) tax on behalf of that worker. In addition, the 
employer is evading similar requirements under state law, including the 
failure to pay workers compensation premiums on behalf of that worker 
and fringe benefits to which the worker might be entitled if he or she 
were properly classified. Moreover, misclassification deprives workers 
of a wide variety of labor and employment protections, most 
particularly the right to receive minimum wages and overtime payments. 
The practice not only seriously harms workers, many of whom are low-
wage and minority workers, but it constitutes tax and insurance fraud.
    These and previous hearings have established the scope of severity 
of the problem.\2\ The testimony presented thus far confirms the 
conclusions of a growing number of studies which establish the impact 
of independent contractor/worker misclassification abuse.\3\ 
Misclassification negatively impacts both the federal and state 
governments and all of our citizens in the following ways:
             Impact upon workers
    Workers who are incorrectly classified as independent contractors 
lose the protection of a wide variety of labor and employment laws, 
including the overtime provisions of the Fair Labor Standards Act, 
Social Security, Unemployment Insurance and Workers Compensation.\4\
    If misclassified workers need to apply for workers compensation or 
unemployment insurance benefits, they are denied those benefits. 
Workers who are misclassified rarely receive pensions. It is also well 
established that workers who are misclassified do not receive health 
insurance benefits at the same rate as properly classified workers. GAO 
Report at p. 14. The Illinois Study found that the ``lack of health 
insurance coverage exacts a large toll on the uninsured--avoidable 
deaths, poorly managed chronic conditions, and underutilizes life-
savings medical procedures.'' Illinois Study at p. 11.
    In addition, when workers are deprived of employer--provided health 
insurance or workers' compensation coverage, taxpayers bear the 
economic costs of the uninsured and under-insured. Federal, state, and 
local governments support care of the uninsured through public clinics, 
and payments to health care facilities that care for the uninsured.
             Impact upon fair, law-abiding employers
    The conditions for a fair and competitive marketplace are 
undermined because firms that misclassify workers illegally lower their 
labor costs as much as 30%. This places employers who play by the rules 
and properly classify their employees at a competitive disadvantage by 
shifting costs to them from the violating employers. Recent studies 
have documented the harm done to responsible honest employers by worker 
misclassification:
    ``[T]he conditions for a fair and competitive are sabotaged [by 
misclassification]. Firms that misclassify can bid for work without 
having to account for many normal payroll-related costs. This illegal 
practice can decrease payroll costs by as much as 15 to 30%. This 
places employers who correctly classify their employees at a distinct 
competitive disadvantage * * * [T]he violating employer will have been 
able to gain business illegally by exploiting their competitive 
advantage during the bidding process and they will have profited by 
avoiding other payroll related expenses * * * Employers can avoid the 
high cost of paying workers' compensation premiums by mandating that 
persons who work for them have an exemption. This allows employers who 
misclassify to underbid the legitimate employers who provide coverage 
for their employees. In the construction sector, the workers' 
compensation effect from misclassification further destroys the 
fairness and legitimacy of the bidding process.'' The Economic Cost of 
Employee Misclassification in the State of Illinois, supra at note 1 at 
pp. 2-3.
             Impact upon Federal and State Revenue
    Studies at the federal income level have established that 
``misclassification can reduce tax payments, Medicare payments, and 
Social Security payments. At the state level, misclassification can 
affect payments into state tax, workers' compensation and unemployment 
insurance programs.'' GAO Report at p. 8.
    According to published data, income is reported on Form 1099's at a 
31% lower rate than that of income reported on Form W-2's; as a result, 
both the federal and state governments suffer a loss of income tax 
revenue when employers misclassify workers, thereby pushing them out of 
wage-earner tax status. Illinois Study at p. 6. The studies have 
estimated that millions in federal and state income taxes are lost 
annually due to misclassification. For example, in Massachusetts, lost 
state tax revenues due to misclassification for all industries in 2001-
2003 was $91 to $125 million.
             Impact upon State Unemployment and Workers 
                    Compensation Systems
    State workers' compensation and unemployment insurance systems are 
adversely affected as well. Businesses that misclassify employees as 
independent contractors pay no unemployment insurance nor do they 
obtain workers' compensation coverage on those workers. Employers who 
correctly classify workers pay both federal tax under FUTA and state UI 
tax. In 2000, a federal DOL study found that nearly $200 million in 
Unemployment Insurance tax revenue was lost per year through the 1990's 
due to misclassification of workers as independent contractors. In 
Illinois, for example, it is estimated ``that the unemployment 
insurance system has lost an average of $39.2 million annually from 
2001-2005 in unemployment insurance taxes that are not levied on the 
payroll of misclassified workers as they should be. For 2005, [it is] 
estimate[d] that the unemployment insurance system in Illinois lost 
$53.7 million in unemployment insurance taxes.'' Illinois Study at p. 
6.
Misclassification is Endemic in the Construction Industry
    Recent studies have confirmed that ``the moderate rate of 
misclassification [of workers in all industries] was from 13-23%.'' In 
certain industries such as the construction industry, the rate of 
misclassification of workers is at the high end of the spectrum and it 
is safe to say that misclassification has become all but endemic in the 
construction industry: ``In two states, Massachusetts and Maine, the 
incidence of misclassification in the construction industry is higher 
than all other industries in their states. For Massachusetts, the 
moderate statewide rate is 19%, while the rate of misclassification in 
the construction sector is 24%; * * * In a report by the General 
Accounting Office (1996), it was reported that the percentage of 
misclassified workers * * * in the construction sector was 20%. 
Illinois Report at p. 3.
    Because the misclassification problem is especially severe in the 
construction industry, a growing number of states are using targeted 
industry enforcement as a way to most effectively utilize scarce 
governmental resources to focus on sectors where the practice is 
widespread.
    For example, Illinois has recently enacted the Illinois Employee 
Classification Act of 2007 (HB 1735) which provides new remedies and 
penalties to address construction contractors who misclassify their 
workers. It gives new enforcement authority to the state Department of 
Labor and creates an Employee Classification Fund from penalties 
collected under the new law to provide for additional investigators. 
Important anti-retaliation procedures are included to protect workers 
who utilize the law's new remedies to file a complaint. The law 
specifically directs cooperative information sharing among Illinois' 
Labor, Employment Security, Workers Compensation and Revenue Agencies. 
Most important, the new law ``presumes'' employee status for an 
individual performing service for a construction contractor.
    In his recent testimony before this Subcommittee, New Jersey's 
Labor Commissioner described targeted audits and investigations in 2006 
in the construction industry which revealed that there were instances 
of misclassification in 41% of construction audits and investigations 
revealing $78.2 million in under-reported wages in one year alone. 
Statement of New Jersey Commissioner of Labor David J. Socolow at p. 3.
    Other states have focused their resources in the construction 
industry as well. For example, California's Labor Code 2819 creates a 
presumption of employee status in several industries including 
construction. New Mexico creates a presumption of employee status for 
workers in the construction industry as well. New Mexico Stat. 60-13-
3.1.
    The public construction contracting system is particularly 
undermined by independent contractor abuse because misclassification 
allows unfair contractors to sabotage the competitive bidding process 
by underbidding contractors who comply with the law. As a result, 
several states have specifically included misclassification violations 
as a basis for debarment from state construction contracts, including 
Massachusetts (Massachusetts Gen. Laws Ch. 149, section 14B (d); 
Illinois (Illinois Employee Classification Act of 2007, HB 1735) and 
New Jersey (PL 2007, chapter 114).
New Policies and Practices to Address the Growing Problem of Worker 
        Misclassification
    New Policies and practices to address the growing problem of 
misclassification of workers as independent contractors should be 
considered in the following areas:
             Close the Section 530 ``Safe Harbor'' Loophole
    Closing the so-called ``safe harbor'' loophole will allow the IRS 
to collect employment taxes from violating employers and to require the 
proper reclassification of workers in the future. Without closing this 
loophole, the impact of misclassification cannot be effectively 
addressed at the federal level and there is simply no credible 
justification for retaining this tax loophole.
             Reevaluate Federal Law Regarding Presumptive 
                    Employee Status
    Impediments to joint agency enforcement which has worked 
successfully in many states will be removed if employee status is 
presumptively established under the IRC. This will allow scarce 
investigatory resources to be leveraged when relevant investigatory 
agencies begin at the same starting point of presumptive employee 
status. See GAO Report at pp. 25 & 33. For example, the New Jersey 
Commissioner of Labor identified the importance to his state's new 
enforcement measures of having ``an individual paid for services [to 
be] presumed to be an employee.'' Statement of New Jersey Labor 
Commissioner at p. 5.
             Strengthen Current Federal Enforcement Mechanisms 
                    and Penalties for Violators
    Additional penalties and remedies to deter employers who engage in 
misclassification should be considered. In this connection, innovative 
approaches in several states can provide guidance. For example, 
Illinois amended its code to make the classification of workers as 
independent contractors a separate statutory violation. Other states 
have separate reporting, licensing and registration requirements for 
independent contractors, including:
    California http://www.edd.ca.gov/taxrep/txicr.htm;
    Kansas http://kdor.org/misclass/mcfaq.htm;
    And Montana http://erd.dli.mt.gov/wcregs/iccu.asp.
    The Subcommittee should consider whether the Department of Labor 
requires increased authority to investigate and remedy 
misclassification in addition to addressing its need for increased 
resources to initiate routine and targeted audits; an increased number 
of investigators to conduct field and job-site inspections and audits 
designed to uncover the misclassification of workers.
             Promote Information Sharing Among Federal and 
                    State Agencies
    Procedures can be established to coordinate and promote federal 
agency sharing of information regarding the misclassification as well 
as procedures to strengthen and coordinate federal and state agency 
enforcement efforts. These efforts should include establishing 
interagency collaboration on worker misclassification enforcement among 
the Department of Labor, IRS and state workers compensation, 
unemployment security, labor and revenue agencies. See GAO Report at p. 
33-34.
             New Procedures for Targeted Investigations in 
                    Construction
    New procedures for targeted investigations, increased audit 
capacity and field inspections in industries such as construction 
should be established. This approach conserves resources and focuses 
limited staff on investigations which will expose endemic problems.
Conclusion
    Worker misclassification reform will not only benefit workers, but 
also fair employers, insurers, taxpayers, and federal and state tax 
authorities. It will ensure fair and competitive markets and it will 
protect the integrity of the public works bidding process. LIUNA urges 
the Subcommittee to strongly consider new practices and policies as set 
forth above and presented by many witnesses which not only protect 
workers, but also promote the ``administration of many federal and 
state programs, such as payment of federal taxes and pension benefits'' 
harmed misclassification.\5\
                                endnotes
    \1\ The Economic Costs of Employee Misclassification in the State 
of Illinois, Michael P. Kelsay, PhD; James I. Sturgeon, Ph.D.; Kelly D. 
Pinkham, M.S.; Department of Economics, University of Missouri--Kansas 
City (December 6, 2006) (Illinois Study at p. 9 & 1"; see also The Cost 
of Worker Misclassification in New York State, Linda H. Donahue, James 
R. Lamare and Fred B. Kotler, Cornell University ILR School (February 
2007); The Social and Economic Costs of Employee Misclassification in 
Construction, Elaine Bernard, PhD Robert Herrick, ScD, Francoise Carre, 
Ph.D.; Randall Wilson, University of Massachusetts, Boston; 
Construction Policy Research Center Labor & Work Life Program, Harvard 
Law School and Harvard School of Public Health, (December 17, 2004); 
The Social and Economic Costs of Employee Misclassification in the 
Maine Construction Industry, Elaine Bernard Ph.D., Robert Herrick, ScD, 
Francoise Carre, Ph.D. and Randall Wilson, University of Massachusetts, 
Boston Construction Policy Research Center Labor & Work Life Program, 
Harvard Law School and Harvard School of Public Health (April 25, 
2005).
    \2\ Statement of Kelly D. Pinkham, University of Missouri-Kansas 
City, Assistant Director, Center for Full Employment, House 
Subcommittee on Income Security and Family Support, Hearing on the 
Effects of Misclassifying Workers as Independent Contractors, (May 8, 
2007); see also House Workforce Protections Subcommittee Hearing on 
Providing Fairness to Workers Who Have Been Misclassified as 
Independent Contractors, (March 27, 2007).
    \3\ Supra at note 1.
    \4\ Employment Arrangements: Improved Outreach Could Help Ensure 
Proper Worker Classification, US Government Accountability Office No. 
06656 (July 11, 2006) (``GAO Report at pp. 21-22 '').
    \5\ GAO Report at p. 7.
                                 ______
                                 
    [Additional statements submitted by Mr. Kline follow:]
    [Statement of the Associated Builders and Contractors, 
Inc., follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    [Statement of Travis Boardman follows:]

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    [Statement of Randy Eystad follows:]

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    [Statement of Michael P. Mannion follows:]

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    [Statement of the National Association of Home Builders 
follows:]

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    [Statement of William Vazquez follows:]

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                                ------                                

    [Whereupon, at 12:56 p.m., the subcommittees were 
adjourned.]

                                 
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