[Senate Hearing 110-740]
[From the U.S. Government Publishing Office]
S. Hrg. 110-740
THE EFFECTS OF THE UNDERGROUND ECONOMY ON SMALL BUSINESSES AND WORKERS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 28, 2008
__________
Printed for the use of the Committee on Small Business and
Entrepreneurship
Available via the World Wide Web: http://www.access.gpo/gov/congress/
senate
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan OLYMPIA J. SNOWE, Maine,
TOM HARKIN, Iowa CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana DAVID VITTER, Louisiana
MARIA CANTWELL, Washington ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana JOHN THUNE, South Dakota
MARK PRYOR, Arkansas BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland MICHAEL B. ENZI, Wyoming
JON TESTER, Montana JOHNNY ISAKSON, Georgia
Naomi Baum, Democratic Staff Director
Wallace Hsueh, Republican Staff Director
C O N T E N T S
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Page
Opening Statements
Kerry, The Honorable John F., Chairman, Committee on Small
Business and Entrepreneurship, and a United States Senator from
Massachusetts.................................................. 1
Tierney, The Honorable John F., a United States Representative
from Massachusetts............................................. 4
Witness Testimony
Morrisey, Scott, owner, Red Line Wall Systems, Inc............... 5
Callahan, Francis X., Jr., president, Massachusetts Building
Trades Council, AFL-CIO........................................ 13
Erlich, Mark, executive secretary-treasury, New England Regional
Council of Carpenters.......................................... 21
Noel, George, Director of Labor, Executive Office of Labor and
the Workforce, Massachusetts Department of Labor............... 26
Stark, Jennifer, chief, Policy and Government, Office of the
Attorney General, Commmonwealth of Massachusetts............... 35
Alphabetical Listing and Appendix Material Submitted
Callahan, Francis X., Jr.
Testimony.................................................... 13
Prepared statement........................................... 17
Erlich, Mark
Testimony.................................................... 21
Prepared statement........................................... 24
Kerry, The Honorable John F.
Testimony.................................................... 1
Kennedy, The Honorable Edward M.
Prepared statement........................................... 52
Morrisey, Scott
Testimony.................................................... 5
Prepared statement........................................... 9
Noel, George
Testimony.................................................... 26
Prepared statement........................................... 29
Stafford, Sara A.
Prepared statement........................................... 57
Stark, Jennifer
Testimony.................................................... 35
Prepared statement........................................... 38
Tierney, The Honorable John F.
Testimony.................................................... 4
THE EFFECTS OF THE UNDERGROUND ECONOMY ON SMALL BUSINESSES AND WORKERS
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MONDAY, APRIL 28, 2008
United States Senate,
Committee on Small Business and
Entrepreneurship,
Washington, DC.
The Committee met, pursuant to notice, at 10 a.m., at
Bunker Hill Community College, Chelsea, Massachusetts, the
Honorable John Kerry (Chairman of the Committee) presiding.
Present. Senator Kerry and Representative Tierney.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN,
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A
UNITED STATES SENATOR FROM MASSACHUSETTS
Chairman Kerry. The hearing of the Small Business Committee
of the U.S. Senate will formally come into session. I am
delighted to be here at Bunker Community College, Chelsea, and
particularly happy to have my friend and colleague from the
House of Representatives, Congressman Tierney, with us to
explore what is a very disturbing trend in our economy and an
issue of great concern to businesses and workers alike.
Congressman Tierney has been working on this issue already in
the House and has a piece of legislation which he will talk
about in-a few moments. But this is an issue which over the
course of a couple of decades now has seen a fair amount of
talk and, frankly, not a lot of action.
By some estimates, America's underground economy is as big
as $1 trillion--$1 trillion--contributing to over $100 billion
in lost revenue a year. Think about that, $100 billion in lost
revenue, folks, is an unbelievable amount of taxes that are
lost, as well as income lost to individuals. And so our whole
economy is disrupted as a consequence of behavior that is
fundamentally illegal.
At the heart of the issue is the fact that many companies
are taking short-cuts, sidestepping lawful hiring practices so
that they can gain a competitive edge. This is an issue that
impacts both large and small businesses. Employers across the
United States have found that tax laws and worker protections
can be avoided if they treat workers as independent
contractors. Some companies go to great lengths to avoid paying
employment taxes and providing benefits to workers. Let me give
you an example.
Kellogg Brown & Root, Inc.--KBR, as it is referred to--has
avoided paying payroll taxes by hiring workers through shell
companies in the Cayman Islands, and that has resulted in the
losses of hundreds of millions of dollars in payroll taxes.
Now, when I talk about a shell company in the Cayman Islands,
do you know what I am talking about? I am talking about a
building in which there may be 15,000 or so, or 5,000 similar
companies with little brass plates, maybe a phone number, maybe
a fax number, and that is it. There are no employees. There is
no company. There is nobody working there. This is a pure and
complete shell, a sham, a fraud. And it is there solely for the
purpose of avoiding the law, of avoiding the responsibility
that other people in the country live up to.
Tactics like that are literally inexcusable. All these big
CEOs and folks who run around in fancy suits and expensive
cars, live in nice homes, beat themselves on the chest, often
talk about patriotism and love of country and live off the fat
of the land; it is really inexcusable when you think about how
unpatriotic, in fact, that is because it undermines the
country. It destroys the tax base, not to mention violates the
law.
I recently introduced legislation with Congressman Rahm
Emanuel and others in the House to specifically address the
question of Kellogg Brown & Root. Today we will hear from our
witnesses about these issues.
Tax shelters in the Cayman Islands are not needed to cheat
workers out of benefits, as we will hear today. Right here in
Massachusetts, workers are being harmed by employers who want
to take the easy way out and not pay unemployment insurance,
which is there for a purpose; workers' compensation, which is
there for a purpose; and Social Security taxes--all of which
escape the cost of withholding income taxes, which then gives
them more cash than the other people who are withholding them.
Too many workers are being misclassified as independent
contractors, an arrangement in which the employer is not
responsible for withholding income or paying unemployment
taxes. Employers who erroneously misclassify their workers
stand to save as much 30 percent of their payroll costs. This
puts a law-abiding employer at a disadvantage.
The misclassification of workers is not just a financial
issue. It is a values issue. Employers that wrongly treat their
employees as independent contractors don't have to provide them
with many of the worker protections that are considered to be
fundamental in the country. And for more than a century,
workers in this country have fought hard for these protections.
They are the law of the land. And yet they are now taken for
granted in many parts of the country. Employers should not be
permitted to individually and arbitrarily take away these
protections by simply filing a different tax form.
This morning we are going to hear from Scott Morrisey.
Scott's company, Red Line Wall Systems, is constantly finding
itself on the wrong end of procurement decisions because his
company, which plays by the rules, can't compete with the
pricing bids submitted by competitors who are getting away with
these unscrupulous hiring practices.
We were also going to hear testimony from Sara Stafford,
the sole owner of Stafford Construction Services, a small
business with 65 employees, but unfortunately, an urgent family
matter has prevented Ms. Stafford from being here with us
today. But she has submitted very important testimony about how
difficult it is to compete with companies that don't play by
the rules.
In her testimony, Ms. Stafford tells how Stafford
Construction Services recently bid on and lost a $500,000
contract funded by Federal, State, and local taxes. An
investigation by the Attorney General's Office revealed that
the winning company had employed undocumented workers, as well
as misclassified employees and had failed to pay benefits to
workers in cash as the company had reported in its paperwork.
As a result, her competitor was able to bid 15 percent less on
the contract.
We also have two incredible advocates for workers in the
State of Massachusetts here with us today to give us an idea of
how workers are impacted by this. I want to welcome my friends
Frank Callahan and Mark Erlich, who are two of the best friends
Massachusetts' workers have ever had. Thanks to both of you for
making time to be here.
And finally, we are going to hear about what actions
Massachusetts is taking to end this abusive practice. Governor
Patrick and Attorney General Coakley have done a terrific job
on this issue, establishing a task force to look more closely
at what can be done from a policy standpoint and also stepping
up enforcement efforts for the laws that are already on the
books.
Let me just say, enforcement folks, we are struggling with
the problem of illegal immigration, and we are struggling with
the problem of people who work off the books. A lot of the
folks I just talked about also just get paid cash under the
table. And that has the same impact, undermining everything
else we are trying to do. Enforcement is the key. For all those
people concerned about immigration and immigration reform, the
biggest single missing link in the whole effort is enforcement.
It is illegal to hire people illegally. And you can't tell me--
and all of you know this as a matter of common sense--that
there aren't an awful lot of employers all around the country
who know exactly who they are hiring and how they are paying
them.
We need stronger enforcement so that people believe that in
this country we respect workers, and we are going to pay people
appropriately and have an economy that works above the table,
that is accountable and transparent. Everybody benefits when
this happens. If we weren't paying people illegally in America,
fewer people would decide to come where they can't get a job.
They come because they know they can get the job. And in half
the hotels of many communities--I am not going to name them all
here today--you can go in the back rooms and kitchens and in
the various workplaces of those hotels and find undocumented
people. Everybody knows it--the hotel owners, the mayor, the
law enforcement officials, and others.
So it is time for all of us to get serious with how we
create an economy that works for everybody. As I said, I am
delighted to be joined by John Tierney, who understands these
issues as well as anybody. He has introduced legislation in the
House, the Taxpayer Responsibility, Accountability, and
Consistency Act, and we are very glad to have him here. I also
look forward to hearing the testimony of each of our witnesses
today who can share with us an important perspective on this
problem.
So, without further ado, again, I thank Bunker Hill
Community College for hosting us here today. This institution
understands how important it is to train people for these jobs,
and it matters that their students, when they graduate, go out
and compete in a fair, competitive marketplace.
Congressman Tierney.
OPENING STATEMENT OF THE HONORABLE JOHN F. TIERNEY, A UNITED
STATES REPRESENTATIVE FROM MASSACHUSETTS
Representative Tierney. Thank you very much, Senator. Thank
you for your work on the Small Business Committee especially,
in the Senate, but all the other work that you do there as
well. And thanks for having this hearing and allowing me to
join you, however briefly I will be able to stay. I appreciate
the opportunity in no small part because we have been dealing
with this issue in the House as well, and hopefully we will be
able to work together with the Senate to bring some relief in
fairly short order on this.
You have hit all the high points on this, and I think we
will hear it repeated on down the line from our witnesses here
who have different iterations of the same story. The fact of
the matter is that when people misclassify, there are three
groups of victims.
One, obviously, is the employer who does the right thing,
as you mentioned, Senator, the person that goes and hires
people the right way, makes all the payments, does the
withholdings. And other people have figured out that they can
save up to 30 percent if they don't do the withholdings, if
they hire somebody off the books, and if they cheat. And,
obviously, that becomes a competitive disadvantage. I know Mr.
Morrisey is going to tell us about specific examples of that.
And that has to stop. As a former small businessman myself--a
real small business person who represented a lot of small
business people--I know that aggravation, firsthand, that they
would repeatedly suffer.
But the second group obviously are the workers themselves.
If they get hurt on the job and they don't have any
withholdings on that, no unemployment compensation and no
workmen's compensation, they are really in terrible shape, as
we know. It may even affect their Social Security and their
Medicare benefits on down the line.
So there is a second group of victims, and then obviously
the taxpayers. The taxpayers as a broad group are hurt
seriously by this, and studies show--the Government
Accountability Office, Congress' investigatory arm, did a study
that showed that up to $4.7 billion in Federal income taxes
alone in 1 year can be lost on that. And over a period of
time--Pricewaterhouse did a study showing the tax receipts for
the period 1996 to 2004 could have been increased by $34.7
billion.
So we talk about wanting to make sure people have the
education and the job skills and training that they need to
work in our society to deal with the advances in technology, to
deal with jobs going overseas. We can find the money for these
resources. People want to know how you are going to fund
programs and issues that are there. We are going to find it by
doing the right thing--by having people act in the appropriate
way by paying their fair share, getting on board with the rest
of us who pay our fair share in taxes and withholdings and make
sure that we put those resources to go work to strengthen the
core of our country. We have national security issues abroad.
We have homeland security issues. But part of our security is
making sure that the very core of this country, whether it is
our infrastructure or our human capital, are all moving in the
right direction, that they are trained, they are educated, they
are capable in this competitive international environment that
we have.
So we have in the House, Senator, as you mentioned,
formulated a bill called the Taxpayer Responsibility,
Accountability, and Consistency Act. It is H.R. 5804. Frank
Callahan, I noticed you mentioned it in your testimony, and I
appreciate that. Richie Neal, my colleague from Springfield,
and Jim McDermott, another colleagues from the State of
Washington, spent a lot of time working on that trying to bring
the various groups of people who had an interest in this
together so that we could get a lot of the issues ironed out
ahead of time. It basically amends the Internal Revenue Code so
that there is a clearer vision of what would be a safe harbor
that would be fair for everybody and not let people escape and
use that as a way of avoiding their responsibilities. It moves
forward in the right direction. There is better enforcement,
higher penalties, all the things that I think we need to move
on.
I want to just repeat what the Senator said about the good
work that Governor Patrick is doing here in the Commonwealth;
and George Noel, your group is doing well with the task force,
and we think that is going to have steady progress. We have to
see this happen in State after State. We are going to have to
have a Federal commitment to changing that Internal Revenue
Code to make it work. We have to make it easier for people to
proceed on that. It will make a huge difference for all three
of those groups that I talked about earlier.
Senator thank you for your work on this and for the
hearing, and we look forward to working with you. Hopefully we
can get a bill through that has all the facets on this.
Chairman Kerry. Congressman, delighted, and again, thanks
for being here and taking the time to be with us.
We will go through each of our testimonies now. I will
start down here with Scott Morrisey, and we will run right
across the line. Director Noel, thanks so much for being here.
We really appreciate it. And thank you, Ms. Stark, for
representing the Attorney General's Office. We are glad to have
you also.
So would you lead off, Mr. Morrisey.
STATEMENT OF SCOTT MORRISEY, OWNER, RED LINE WALL SYSTEMS, INC.
Mr. Morrisey. Yes, thank you very much, Senator Kerry and
Congressman Tierney, for the opportunity----
Chairman Kerry. Pull the microphone real close so everybody
can hear you. There you go.
Mr. Morrisey. On behalf of myself and my partner, Brian
Cody, and Charles Doyle and the other 60 employees or so that
we have at Red Line Wall Systems; companies like ours have been
having a difficult time, as you have all just read. And so what
I have said here is that construction has long been an industry
filled with men considered rough around the edges, unable to
sit behind a desk or just good with their hands. And
construction jobs gave these men an occupation that suited
their disposition and still enabled them the opportunity to
provide their families a solid, middle-class lifestyle.
Our company has prided itself on its ability to provide
jobs with good wages and a generous benefit package. We
understand that if a man does not have to worry about taking
care of his family, he will be more productive on the job site.
Cash-paid and 1099 underinsured subcontractors have always been
a negative factor in our industry, but over the last 10 years,
the ranks of these people have been exacerbated by a wave of
illegal underground labor which is able to expand into and
withdraw from any given region, depending on the workload. This
can severely disrupt, or in some cases, destroy a small
legitimate company that has long held ties to the local
communities.
Construction can be a very competitive, labor-intensive
business. Most jobs work on a 5-percent profit markup, leaving
no room for error. In our commercial drywall industry, labor
will typically make up 40 to 50 percent of the total job cost.
In a highly competitive industry like ours, labor tends to be
the prime target when paring down costs for those willing to
break established rules or bend vaguely written guidelines. Our
company, which supplies health, disability, dental insurance,
alongside other benefits like holidays and vacations, make
these expenses a deal breaker when competing against the
underground economy.
Using Red Line as an example and the aforementioned
benefits, you get a feel for what we are up against. We have
Social Security and Medicare at 8 percent that we have to add
to our costs; unemployment, 5 percent; workers' compensation,
11 percent; health insurance, 16 percent; holidays and
vacations, 8 percent--for a 48-percent markup to our base wages
to be able to get our bids out the door.
When we bid against companies who bend or break established
rules of engagement, who are willing to shortchange their
workers in any one or all of these overhead categories, it can
put us at a 20- to 25-percent cost disadvantage. This
disadvantage is impossible to make up in the total project cost
line items.
I would like to now explore some of the other myths and
facts as we see them based upon our experience as a small
company with 50 to 60 employees in the construction business.
Myth number one: Construction is a low-skilled occupation.
Nothing can be further from the truth. It seems to be the
perception today that the more a person sweats and gets dirty,
the less skilled his occupation. As business owners, we
understand that it takes about 5 years of training and field
application to become a qualified commercial carpenter. This is
a significant investment of time and treasure for any business.
Myth number two: Our company needs underground labor to get
the job done. Well, the fact really is that this is yet another
fallacy, many times driven by greed and companies overextending
their abilities and qualifications. Good management is a lot
like being a good farmer. Jobs and manpower have to be tended
to and managed. Good management is hard work, but it is
necessary for a company to succeed in a competitive
marketplace. Good management and oversight is being
supplemented by lower-skilled, higher-volume labor, extending
the survival of inefficient companies, while simultaneously
increasing the ranks of the lower-skilled, less productive
workforce today.
Myth number three: Underground workers fill a void of a
stagnant industry that has no need for innovation or continued
skill development. Well, the fact is, again, underground
workers stymie innovation and productivity gains. If you
oversupply an industry with cheap labor, there is no need to
innovate, as long as a steady supply of cheap, inexpensive
labor can be assessed whenever you need it.
In our industry, alone over the last 20 years, new tools,
products, and equipment have increased labor productivity by up
to 50 percent in certain applications. Going forward, I can
envision an industry that uses more high-tech tools, machines,
and materials making a highly trained and motivated workforce
more desirable than a lower-skilled, more plentiful labor pool.
Myth number four, and this is my favorite: As long as
underground workers pay at least some insurance, we are all
protected, we are covered. Well, the fact is that underground
workers tend to be underinsured and undertaxed, which increases
the burden upon legitimate, fully insured, tax-compliant
companies. Any accident, or incident caused by an underinsured
company will eventually be met with an across-the-board premium
hike. Many of these workers are using personal vehicles with no
commercial underwriting to transport men and materials. Also,
in many cases, under-the-table workers are straining our social
safety nets by double-dipping. Some have no problem working a
full week for cash while collecting an unemployment check that
has been funded by taxed labor.
Some of the worst offenders are criminals, deadbeat dads,
and illegals who only work for cash so as not to get caught up
in a paper trail. Some employers understand this and actually
use it to their advantage to drive down labor costs.
Even one additional point of reflection: We all feel that
the underground economy may possibly be responsible for the
mortgage meltdown we are now experiencing. The ability for some
builders to exploit easily attainable underground workers
fueled an already heated housing market to the point of
overcapacity. Some industry experts estimate that our overbuilt
inventory will last well into the year 2010. Had hot housing
markets used naturally occurring internal labor shifts, much
like we had during the Texas oil boom years, we quite possibly
would not be in the unfortunate situation we find ourselves
currently mired in.
I put together an example of what we are up against in
dollars and cents, and what we have is our company and
companies like ours, if we pay a skilled carpenter, a drywall
carpenter $25 an hour, $200 a day, we pay their insurance and
benefit package of about 48 percent, as we mentioned earlier,
$96, we have a direct cost of $296. Gentlemen, I don't care how
good your men are, but over the course of a year or over a
project's time, the average production for that man is about 20
sheets of drywall a day, is what they are going to hang. This
cost for us would be $14.80 per sheet.
Other companies that use 1099 non-compliant individuals,
they might pay their men the same. They might pay them $25 an
hour, give them $200 a day. But with no benefit package, their
costs on a daily output of 20 sheets would be $10 per sheet. So
if I had a project with 5,000 sheets of drywall, my cost would
be $74,000 and my competitor's cost would be $50,000. That is
certainly a wide spread. I would ask all of you, if you were
the general contractor or the developer and owner, who would
you hire? You are going to save 25 percent. Well, to date, Red
Line Wall Systems' manner of competing with such cost
structures is three-fold:
We find good men with good attitudes who want to go to work
every day. We provide them with the training, tools, and
equipment to safely maximize their own skill levels.
And we take care of our employees and their families the
way we would like it if we were in their shoes.
The result--while not always the rule--is an above average
range of performance. The same men that I told you would
usually hang 20 sheets a day now hang 26, for an average cost
of $11.39 per sheet. So that job I mentioned earlier of 5,000
sheets, we can now become more competitive at $56,900. While
not the low bidder still, we are close enough for some
contractors and owners to consider the best project value, not
the lowest number, which is what we have been doing over the
last decade. Unfortunately, we don't know if that can continue
with the present rate of the economy.
[The prepared statement of Mr. Morrisey follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Kerry. Thank you, Mr. Morrisey. I appreciate it.
[Applause.]
Chairman Kerry. We will come back to questions in a moment.
If I can ask everybody--I forgot to mention this.
Everybody's testimony will be put in the record as if read in
full. So if you want to just summarize, take about 5 minutes,
that helps us, and then we can go from there.
Mr. Callahan.
STATEMENT OF FRANCIS X. CALLAHAN, JR., PRESIDENT, MASSACHUSETTS
BUILDING TRADES COUNCIL, AFL-CIO
Mr. Callahan. Thank you, Senator. Thank you, Congressman
Tierney. For the record, my name is Frank Callahan. I am the
president of the Massachusetts Building Trades Council. The
Massachusetts Building Trades Council is comprised of 74 local
unions and district councils which represent 75,000
construction workers across the Commonwealth who work for
approximately 3,000 subcontractors and general contractors. Our
members work for these contractors, and they earn good pay.
They get good benefits, comprehensive health insurance,
comprehensive retirement, defined benefit pension benefits, and
they pay their taxes, and they play by the rules. That is why I
would like to start by thanking you, Senator, for hosting this
hearing to address this very serious issue.
The Mass. Building Trades Council fully supports the
Committee's efforts to address this issue of the underground
economy and the vast array of problems associated with it. Four
years ago, we played an active role in securing changes in
Massachusetts in the State statutes back in 2004. Currently,
the Massachusetts definition of what an employee is versus what
an independent contractor is,is widely regarded as the best in
the Nation. It is the tightest out there. And when you go to
different labor conferences and conferences of labor lawyers,
that is the model that everybody wants to use.
Since that time, we have worked closely with Governor Deval
Patrick's office, the Executive Office of Labor and Workforce
Development. I see my good friend George Noel is here; Suzanne
Bump's office has been great, and the Attorney General's
Office, Martha Coakley's office, the Fair Labor and Business
Practices has just been outstanding. They have been very
aggressive. They have been very serious about enforcing the
law, and we have already started to see some results.
These efforts were formalized even further back in March.
We were privileged at our convention to have Governor Patrick
sign the executive order which formalized the relationship that
had already been ongoing between all the different agencies of
State government--the Attorney General's Office, Division of
Industrial Accidents, Division of Unemployment Assistance, the
Department of Labor. So they are talking to each other and not
just doing piecemeal efforts on their own behalf. But typically
what we find is we have a contractor who is not paying the
proper wages; chances are they are not paying workers' comp or
unemployment. If they are not paying workers' comp or
unemployment, chances are they are not paying their taxes. It
is usually the bad actors out that we are really after, and we
feel with this combined effort, we can make some great strides.
One of the main reasons we have been involved in this is
not just the direct impacts that were addressed by Mr. Morrisey
earlier, and by other panelists that I know it will be in their
testimony. But this strikes at the very core--you alluded to it
earlier, Senator--of the social contract between workers and
their employers. This has developed over the last hundred
years, largely due to the efforts of labor unions. Many of the
people in this room are still involved in those struggles with
workers' compensation, with unemployment insurance, with the
uncompensated care pool--basically the social safety net. There
is a social contract that if you go to work every day, you put
on your boots; you put in 8 hours of work; you get 8 hours of
pay; and you get treated decently.
As was mentioned by Mr. Morrisey--and I won't repeat a lot
of the things he said--our industry is highly competitive in
the construction industry. I have seen $40-million projects
where the difference in the low bid and the second bid is
$40,000. That is a pretty tight margin. A lot of the
contractors are using the same software, but if you have those
types of advantages that Mr. Morrisey alluded to, the people
that are willing to cheat are going to be the ones who are
going to be able to compete most effectively. And that is not
what we want in our industry.
So the impact that Mr. Morrisey outlined is true. That is a
very serious impact on our contractors. But the impact on our
members is enormous because when those contractors that don't
play by the rules get those projects, our members lose
paychecks. Our members lose the ability to contribute to their
pensions, to their health insurance. Some of them because of
the way our Health and Welfare programs are set up may lose
eligibility for their health insurance. Our apprentices lose
the on-the-job hours that are required to complete their
apprentice training programs. We have the best training
programs in the industry, but they take anywhere from 3 to 5
years to complete. It is in-the-classroom training and it is
on-the-job training for hands-on experience. If they don't get
their man-hours they need to do that training, they will not
progress and achieve journeyman status.
And as serious as the impact on our members is, the impact
on misclassified workers is even worse. As I mentioned, it
strikes at the very core of the social contract between
employers and employees that has evolved over the last hundred
years. Those workers are denied decent wages. They are
ineligible for unemployment insurance benefits. Oftentimes,
they are denied workers' compensation benefits. They don't
accrue Social Security credit. And they almost always lack
health insurance.
They are also responsible for paying employer and employee
side FICA and FUTA taxes, roughly 15 percent of their gross
wages, while people are properly classified as employees pay
only 7.65 percent.
And, most importantly, on the social contract issue that
you addressed, Senator, they lost the protections of a host of
labor laws, including the minimum wage protections, overtime
pay, workplace safety, discrimination, sexual harassment, the
Family and Medical Leave Act, and even the right to join a
union, because you have to be an employee first before you can
petition the National Labor Relations Board for a union
election.
Although the construction industry experiences a higher
incidence of this abuse, this problem is not limited to
construction. The impact on misclassified workers is obvious,
but employees, employers, and taxpayers who play by the rules
also pay a very high price all across our economy for those
employees who seek to avoid their legal responsibilities.
Just a few quick bullet points for the impact on
Massachusetts. Most of these come from a 2004 study performed
by Harvard University and the University of Massachusetts,
which was sponsored by the Center to Protect Workers' Rights.
The Massachusetts General Fund loses an estimated $152
million in unpaid income taxes. The Unemployment Insurance
Trust Fund loses $35 million in revenues. There is $91 million
in unpaid workers' compensation premiums over a 2-year period,
forcing the rest of us to cover injured workers in the Workers'
Compensation Trust Fund. That fund covers workers who might not
normally be covered. In fiscal year 2004, approximately
$4,331,000 was paid to uninsured claimants. That is an
assessment that ends up getting levied on the rest of us and
the responsible employers.
Laid-off or injured workers lacking unemployment or
workers' compensation benefits are forced to turn to public
services, including the uncompensated care pool, now renamed
the Health Safety Net Fund. And those workers show up at
emergency rooms, further draining the Health Safety Net Fund
because they don't have their regular insurance to go see their
primary care doc, and those costs, as we all know, are much
higher when you show up at the emergency room.
The impact on the national level includes three quick
bullet points:
The Federal Treasury loses an estimated $4.7 billion in
unpaid taxes annually. The General Accounting Office estimates
that 10.3 million workers, or 7.4 percent of the total
workforce, were misclassified in the year 2005. And the IRS in
its most recent analysis found that 15 percent of employers
misclassified employees as independent contractors.
While much progress has been made and we are expecting more
progress in Massachusetts, there is still much work to be done
at the Federal level. We urge the Committee and the Congress to
adopt changes that will end or at least curb these abuses of
the underground economy. The Massachusetts Building Trades
Council supports the passage of House Resolution 5804, the
Taxpayer Responsibility, Accountability, and Consistency Act,
which Congressman Tierney addressed earlier and is one of the
lead sponsors.
I won't go through all the main points since they were
already addressed by the Congressman. But we need to tighten up
that definition, and we need to get enforcement. That is what
it is all about. We can't have these games. Currently, the
Social Security Administration has a 20-point test to determine
who is an employee and who is an independent contractor. Many
of those points are legitimate, but a lot of them are,
unfortunately, used as an effort, as I like to say, ``feather
bedding for the Bar Association'' to get around the law as
opposed to finding out how to comply with the law.
We would like to see those definitions tightened up.
Massachusetts has essentially compressed the 20-part test into
a 3-part test, which is very rigorous and we think does the
job. And it has been followed up with responsible enforcement
by the Attorney General's Office and by the Department of
Labor. They are not going after all the groups that you will
hear about. When this law was passed in 2004, we heard about
bike messengers, hairdressers, people delivering water, kids
cutting grass. It is really just a sham that is put out there
by folks on the other side. Those aren't the people that we are
going after. These are legitimate businesses--I am sorry,
illegitimate businesses that have a substantial number of
employees, and they are doing this for the reasons Mr. Morrisey
outlined: just to simply avoid their responsibilities.
Many in the business community will argue that this puts
them in a trap, that they are really just trying to play by the
rules, and the rules are too confusing, and if they break the
law inadvertently, that they will be subject to serious
penalties. This is simply not true. This is a calculated effort
to avoid taxes, to avoid unemployment, to avoid workers'
compensation, to avoid paying proper wages, and to avoid all
the responsibilities that go along with being an employer, and
those rights and responsibilities that transfer to that
individual employee. It is an illegal action. It is tax fraud.
It is workers' comp fraud. It is employment fraud. And it is a
fraud on the American people and a fraud on the American
workforce. It fosters a race to the bottom, and the winners in
that race, unfortunately, are those who are willing to most
aggressively violate the law. The losers are the rest of us--
the taxpayers, the workers, and the honest employers.
I applaud your efforts in this to bring some light onto
this issue at the Federal level. We are willing to work with
the Committee and with the Congress in whatever efforts are
necessary to make this happen, and I thank you for the
opportunity to testify here today.
[The prepared statement of Mr. Callahan follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Kerry. Well, we thank you for coming.
Mark Erlich of the Carpenters.
STATEMENT OF MARK ERLICH, EXECUTIVE SECRETARY-TREASURER, NEW
ENGLAND REGIONAL COUNCIL OF
CARPENTERS
Mr. Erlich. Thank you. My name is Mark Erlich, and I am the
head of the 24,000-member New England Regional Council of
Carpenters. We are partners with over 1,400 union contractors,
most of them small businesses.
Senator Kerry, Congressman Tierney, we thank you for being
willing to shine a light today on our Nation's growing
underground economy and its consequences for workers and
legitimate businesses.
During the recession of the early 1990s, some construction
employers at that point began to label their employees as
``independent contractors,'' thereby avoiding legally obligated
tax payments and costly workers' compensation premiums in order
to cut costs and gain a competitive advantage. We have seen
over time that during recessions, as folks are looking for an
advantage, they will look for new and creative ways of doing
business.
Construction is a straightforward business of labor and
materials. Since materials are generally the same for all
bidders, companies can only undercut one another with higher
productivity or lower labor costs. But if a company can cheat
the State and the Federal Government, as well as insurance
companies--and get away with it--they have successfully gamed
the system.
By the late 1990s, the economic boom increased demand for
workers in the Massachusetts building industry, and our region
witnessed an influx of immigrant workers, many of whom were
undocumented.
The employers who had been willing to cheat through
misclassification now realized that they could take advantage
of this new workforce. They simply began to forget the niceties
of misclassification and just pay in cash, off the books and
under the table. In many parts of our industry, particularly
the private non-union construction sector, this approach has
become standard practice.
How bad is the problem? Well, it is impossible to measure
precisely because so much of this economic activity is
unreported. One study claimed that the shadow or underground
economy in the United States grew by 28 percent between 1990
and 2003. And a 2005 Bear Stearns report that has been referred
to suggested that the overall underground economy was nearly $3
trillion a year, nearly 9 percent of our GNP.
What is the impact? You have obviously heard testimony from
contractors who will explain that they cannot compete on such
an unlevel playing field. Last fall, a local drywall contractor
in this area informed his workers that he was putting them back
on the books after years of misclassifying them as independent
contractors as a result of enforcement activities by the
Government and the Attorney General. As a result, he cut their
wages by 30 percent--a figure that I believe constitutes a
``fraud index.''
The impact on State and Federal revenues is even more
severe. The current estimate of the tax gap is $290 billion,
and an IRS spokesman says that 30 percent of this is
attributable to misclassification. As mentioned, the GAO
suggests misclassification reduces Federal income tax revenues
by up to $4.7 billion.
But these staggering numbers only reflect payments by
employers who are still filing some sort of paperwork. What we
forget is that losses from those who keep a workforce
completely off the books cannot even begin to be measured. So
all of these numbers are really low-ball estimates. At a time
of Federal and State budgets deficits, we are cutting crucial
public services while these dollars go uncollected.
But what I would like to speak about today is the human
side of this public policy crisis. Companies that cheat on
taxes and workers' compensation premiums are more likely to cut
corners and expose their workers to unnecessary risks and
dangers. A New York study reported a 40-percent increase in
construction fatalities in 2006 compared to the previous 5
years, an incredible spike that the authors attributed to
practices in the underground economy.
Oscar Pintado is an example. Last year this 27-year-old
died on a 450-unit residential project in Woburn. The builder,
Avalon Bay Communities, a giant Virginia-based development
firm, had been cited by OSHA for failure to meet fall
protection standards on other projects. Pintado fell 45 feet
down an elevator shaft as he stepped on and broke a piece of
substandard particle board.
Pintado worked for National Carpentry Contractors, a large
framing contractor working for Avalon Bay that claims it has no
employees--just 150 independent contractors. National Carpentry
told OSHA inspectors that Pintado worked for an entity that
actually did not exist and whose alleged owner conveniently
disappeared and has not been located since the fatality.
Pintado was, of course, paid in cash and, therefore his family
was not eligible for any benefits or compensation.
Until this situation is corrected, taxpayers and legitimate
companies will continue to pay an enormous price for wanton
law-breaking. But there are also the thousands and perhaps even
millions of Oscar Pintados working on construction sites in
this country. Most are citizens, some are here illegally, but
all of them are invisible victims of this Nation's shadow
economy.
Those of us who live and work in Massachusetts are
fortunate that we have a Governor and an Attorney General who
understand this issue and have made heightened enforcement of
the Commonwealth's laws a priority. Their sense of urgency has
to be translated to the Federal Government and its enforcement
agencies.
Therefore, we recommend, as Frank said, a clearer and
stronger definition in Federal law of what constitutes a
legitimate independent contractor and what is an employee--as
defined by what is known as the ``ABC'' test that Frank
referred to. In this situation, both employers and employees
are entitled to concise rules of the road.
We also support the repeal of Section 530 of the Tax Code,
the ``safe harbor'' rule as outlined in the House Taxpayer
Responsibility, Accountability, and Consistency Act of 2008
that Congressman Tierney has sponsored, which we appreciate,
and support Senate 2044, the Independent Contractor Proper
Classification Act of 2007.
And, finally, we believe that there should be a creation of
a Federal task force of all the impacted agencies--similar to
what is happening in Massachusetts, New York, New Jersey, and
other States around the country--to root out the underground
economy. It should not be a question of lack of resources. New
dollars spent on enforcement will produce exponentially more
money in recaptured revenues.
Our industry and our Nation need urgent action. We thank
you again for taking this action today.
[The prepared statement of Erlich follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Kerry. Thank you so much, Mr. Erlich. Appreciate
it.
[Applause.]
Chairman Kerry. Director George Noel, we are delighted to
have you here representing the Department of Labor for the
State, and we recognize your good work in this field. Thank
you.
STATEMENT OF GEORGE NOEL, DIRECTOR OF LABOR, EXECUTIVE OFFICE
OF LABOR AND THE WORKFORCE, MASSACHUSETTS DEPARTMENT OF LABOR
Mr. Noel. Thank you, Senator and Congressman. Good morning.
My name is George Noel. I am the Director of the Massachusetts
Department of Labor. I wish to begin my remarks by expressing
my appreciation for the Senator's and the Congressman's quest
for fairness. I have not forgotten your leadership in my former
life supporting the defense authorization Build American
amendments. But today I am here to talk about the underground
economy, its effect on small business and workers.
I want to first talk about defining the underground
economy, then discuss who I believe is harmed by it, and some
of our efforts that the Governor has asked us to undertake.
The underground economy is a plague that has infected not
only the financial system of the Commonwealth of Massachusetts,
but that of the United States as a whole. It consists of
individuals and businesses that willfully avoid labor,
licensing, and tax laws. These individuals and businesses
misclassify employees as independent contractors or deal in
cash or other ``off the books'' schemes to conceal their
activities and their true tax liability from licensing,
regulatory, and tax agencies.
While the precise scale of these extra-legal and illegal
activities is by definition difficult to calculate, we can
reasonably and conservatively estimate the impact on the
Massachusetts economy running into many millions of dollars. We
heard Mr. Callahan talk about the Harvard study, and I am not
going to rehash some of those statistics. But the broader
economic toll, which takes into account lower wages and the
knock-on effects of unfair competition on employers, may well
be impossible to calculate.
The Fiscal Policy Institute, in a study on New York's
construction industry, estimated last year that nearly one-
third of New York City's residential construction workforce is
``off the books'' and working in the underground economy. With
New York City's 8 million residents to the Commonwealth's 6.5
million, we think these numbers are a reasonable reflection of
the scale of the problem here.
In essence, the underground economy is an illegal gray
market which lowers living standards, undercuts wages and
workplace protections, undermines fair competition for
businesses, pitting residents against one another in a race to
the bottom.
Who is affected by the underground economy?
Operating in the underground economy is not a victimless
crime, as some would lead us to believe. Workers, legitimate
business owners, consumers, government, and society in general
shoulder the burden shirked by employers who operate in the
shadows of the underground economy.
Workers, usually the most vulnerable, are exploited by
irresponsible employers who engage in employment fraud. These
workers are usually on the lower wage scale and are often
undocumented workers.
Another set of workers who are adversely affected by the
underground economy are workers who work for employers who play
by the rules. These workers suffer from depressed wages and
benefits or end up in the unemployment line, all because their
employers commit the cardinal sin of playing by the rules. Some
workers have no other choice but to slip into the underground
economy themselves. The same Bear Stearns report that Mr.
Erlich just referenced also says that ``four to six million
jobs have shifted to the underground economy, as small
businesses take advantage of undocumented workers.'' It is safe
to assume that tens of thousands of Massachusetts jobs have
suffered the same fate by that migration. One only has to look
at some of the Home Depot parking lots or Foss Park in
Somerville to find evidence of these ``street corner hiring
halls'' that have spouted around the Commonwealth and the
United States.
The Commonwealth of Massachusetts and the United States
lose tax revenue due to unreported wages. The Internal Revenue
has developed the idea of the tax gap as a way of measuring
taxpayer compliance with Federal tax laws. The General
Accounting Office found that the Federal tax gap in the tax
year of 2001 ranged anywhere from $312 billion to $353 billion.
Consumers are also affected. They are exposed to
unregulated and potentially unsafe goods and services through
the underground economy. Legitimate employers like Mr. Morrisey
face an unfair advantage from employers operating in the
underground economy themselves over legitimate employers and
their workers. These employers pay their workers' compensation
premiums. They pay their unemployment taxes. They pay into
Social Security. They pay their payroll taxes.
What is the task force that you have heard a little bit
about today?
In his efforts for broad economic growth, Governor Patrick
is committed to creating good jobs at good wages, proper
protections for employees and employers, and assurances of
fairness. That is why he signed the executive order that Mr.
Callahan referred to on March 12th.
The Governor asked me to chair this task force, which
unites various State agencies with the goal of surfacing the
underground economy.
The task force is a large-scale, collaborative effort
between State and constitutional offices. The Joint Task Force
brings together the Attorney General's Office of Fair Labor and
Business with a variety of State agencies. We also worked
closely with other partners such as the Office of Refugees and
Immigration and the Insurance Fraud Task Force to achieve our
goals.
It is important to note, just like Mr. Callahan noted
earlier, that we have been working together in an informal
fashion. What this does is codify it. And our partners over at
the Attorney General's Office have been very helpful to us.
The task force's stated goal is to surface the underground
economy in Massachusetts by pooling resources and sharing
information, enforcing licensing, labor, and tax laws. We have
found that working together is the most effective way to
surface the underground economy. We have looked for best
practices in California and New York to help us lay the
foundation for our own task force.
Our task force has six goals: eliminate unfair business
competition; protect workers by ensuring that they receive all
the benefits and protections they are due under the law;
protect consumers by ensuring that businesses are properly
licensed and adhere to consumer protection regulations; reduce
the burden on law-abiding citizens and businesses by ensuring
compliance with the Commonwealth's licensing, regulatory, and
tax laws; reclaim rightful revenue for the Commonwealth through
increased compliance with State tax laws; and continuously
evaluate and improve our own effectiveness by developing new
procedures, promulgating new regulations, and proposing new
legislation.
The task force is managed by a director who coordinates the
activities of the task force from the Department of Industrial
Accidents. He is here with us today--Mr. Michael Bradley.
His job is to coordinate the efforts, primarily by
educating business owners, employees, and the public about
relevant requirements and conducting targeted investigations
and enforcement actions against violators.
The underground economy is most prevalent and target task
force resources accordingly, assess investigative and
enforcement methods, and develop and recommend strategies to
improve these methods.
We are organized into six sub teams. I am not going to go
through all of them. They each have their job. But one thing I
do want to talk about is some of the communications that we
have done.
We have developed a tip line that has been developed with a
general message that can be heard in English and Spanish. That
phone number is 1-877-96-Labor-2267. Additionally, we have
developed a Web site that has a lot of information on how to
report these irresponsible, illegal employers.
Governor Patrick has charged Secretary of Labor and
Workforce Development Suzanne Bump with creating an advisory
panel to engage employer, labor, and community groups to
solicit feedback and input as part of the information-sharing
process.
Once again, I wish to close by expressing my gratitude to
the Committee for taking the time to explore this important
issue. And I believe that we all must work together if we are
to be successful in achieving what I believe is our shared
aspiration of driving this scourge from the Commonwealth of
Massachusetts and our great country.
Thank you.
[The prepared statement of Mr. Noel follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Kerry. Mr. Noel, thank you. Very helpful and very
important.
[Applause.]
Chairman Kerry. Thank you.
Finally, Jennifer Stark, Assistant Attorney General, we
appreciate your being here, and you are testifying on behalf of
Ms. Goldstein.
Ms. Stark. I am. Thank you.
Chairman Kerry. Thank you.
STATEMENT OF JENNIFER STARK, ASSISTANT ATTORNEY GENERAL, POLICY
AND GOVERNMENT RELATIONS DIVISION CHIEF
Ms. Stark. Good morning, Senator Kerry and Congressman
Tierney. For the record, my name is Jennifer Stark. I am the
chief of the Policy and Government Division of the Attorney
General's Office, and I am delivering this testimony on behalf
of the Policy and Government Division. And I am delivering the
testimony on behalf of Joanne Goldstein, who is the chief of
our Fair Labor Division. And on behalf of her and Attorney
General Martha Coakley, I would like to thank you for allowing
us to have the opportunity to comment on this very important
issue.
The Fair Labor Division of the Office of the Attorney
General is statutorily mandated to enforce the wage and hour
laws of the Commonwealth. This includes minimum wage, overtime,
prevailing wage, vacation, commission, and child labor laws,
just to name several of them. We handle over 3,000 complaints
annually, and a vast majority of these can be considered within
the underground economy designation.
The underground economy encompasses a wide variety of
offenses that we enforce, which includes an employer who pays
employees in cash, often below minimum wage; employees who work
hours significantly above 40, but don't get paid the
statutorily required time and a half for all of the hours
worked. Often, employees get a cash payment that covers only
some of the time worked or may get only straight time for
overtime hours worked. It is not uncommon for unscrupulous
employers to pay overtime from a separate account to shield the
overtime payments from scrutiny and taxes.
There are employers who give employees--often minimum wage
workers--checks that bounce, week after week, or
intermittently. A lot of these employees are reluctant to seek
other employment without getting their back wages; but when
they stay in these jobs, it also leaves them vulnerable to
additional weeks without a paycheck.
Even in the public construction arena, the underground
economy issues flourish. Employers fail to pay prevailing wage,
take credit for deductions for health or pension plans, but
never remit the premiums to the plans, or pay less than the
full rate or fail to register apprentices.
Some employers hire undocumented workers despite our
Federal requirements that they confirm immigration status and
then exploit the status of the workers by not paying them, or
paying them less than the law requires, or requiring illegal
offsets for transportation, tools, and other costs, knowing
that these employees are unlikely to report due to their
status.
In one particularly egregious case, an employer never paid
any employee at all. Instead, he hired a crew of undocumented
workers, worked them for several weeks, let them go and kept
cycling through new crews of undocumented workers every few
weeks, never paying any of them at all.
One of the most pervasive practices within the underground
economy is the misclassification of employees, as you have
heard from the other witnesses on this panel. And although this
is commonly referred to as classifying individuals as
independent contractors, not as employees, as they should be
classified, this is somewhat of a misnomer because often these
people are not just misclassified, they are not classified at
all. They are not true independent contractors, running their
own businesses, having independence and autonomy, being paid by
check and then reporting income with the proper documentation.
Instead, they receive a set sum of money, usually in cash,
often below the proper rates of pay with no pay stub or other
record.
And this issue has an impact on employees and small
businesses, as you have heard from Mr. Morrisey today. The
impact on employees is unmistakable. Employees deprived of
their just wages, or any wages, simply cannot live. They cannot
pay rent, utilities, buy food for their families, provide
health care, transportation, or any of the other basic
necessities for their lives and their families. Often, they are
unskilled, perhaps undocumented, frequently uncomfortable
reporting violations. We should not tolerate, in Massachusetts
or anywhere in the United States, the exploitation of workers.
Not only are workers harmed economically, they are demoralized
by being treated so poorly. It is hard enough, especially in
this economy, to live paycheck to paycheck, but when the checks
don't come in, oftentimes lives for these people become
impossible.
The Attorney General recognizes that small businesses face
challenges different than, and probably greater than, larger
businesses. They find it hard to sustain viability. Clearly,
expenses and taxes and the challenges of running a small
business make success more elusive. Some find it tempting to
skimp on employee obligations. Interestingly, we hear from many
legitimate small businesses that they are thrilled that the
Attorney General is vigorously enforcing the wage and hour
laws. They concur with the Attorney General's assumptions that
enforcement of the law will level the playing field within the
small business community and allow them to become more
successful, as they will no longer be undercut by businesses
that are not playing by the rules. And you have heard some of
those examples today.
We have been advised that for the first time in many years,
small businesses are filing complaints against their own
competitors who are not playing by the rules because they know
that the Attorney General's Office is vigorously enforcing
these cases.
In a number of industries, such as car washes, flooring and
drywall, all of which are rife with underground economy
problems, the Attorney General's actions have led to a change
in the culture of the industries, and businesses are being more
receptive to playing by the rules. One noteworthy example of
our success is a small company that employs between 10 and 50
and complies with wage and hour laws. The company has
historically bid 30 to 40 percent higher than many of its
competitors who don't play by the rules. And now that we have
demonstrated our commitment to enforcing actions in the
construction industry, the company in question reports that his
competitors are bidding in the same range as he is, and they
are in greater compliance with the law, so that he is right in
the mix of the bid range with his competitors at this point.
This is certainly a success story in this area.
So looking at the effect of the underground economy on
small business, it is clear to the Attorney General that
continued, meaningful enforcement of wage and hour laws will
have a positive and sustained impact on legitimate small
businesses.
The Attorney General has also made enforcement of wage and
hour laws, as I have said, a priority in her office, and she
has devoted resources and personnel to the issue in about the
year and a half that she has been in office. Some of the
highlights of her first year in office include: Consistent,
visible, and vigorous enforcement of the wage statutes, with a
focus on those businesses and employees who are part of the
underground economy; we have processed complaints more quickly
and efficiently; we have issued citations with orders of
restitution to the workers and fines that are commensurate with
the violations.
We have also obtained criminal complaints against those
businesses whose wage and hour violations meet the criteria for
criminal enforcement. We advise businesses that failure to
comply with our procedures no longer results in a minor fine,
but that these businesses are now subject to significant,
legitimate fines and orders of restitution.
There is also an open-door policy in our office for
businesses, unions, workers, and advocacy groups who want to
discuss issues with us and resolve complaints. And we have also
done outreach to all stakeholders, and we have revised all of
our written materials for distribution.
We have increased our language capacity so that we can
reach more employees, especially those that are in the
underground economy for whom English is their second language.
We have also made presentations and had information sessions to
industry groups, unions, law firms, legal and other
professional associations.
We are in the process of revising our Independent
Contractor/Misclassification Advisory that is going to be
issued very soon, and it hopefully is going to give
stakeholders a better understanding of the enforcement
guidelines. We are participating in the Governor's Underground
Economy Task Force, and we have also assigned two new victim/
witness advocates to the Fair Labor Division. That division has
never had victim/witness advocates before, and they will be
able to assist employees who are victims of wage violations.
And we are hoping that this will also foster trust so that the
word will get out and these workers will report more often.
Thank you for your efforts to address this problem, and we
look forward to working with you toward this effort.
[The prepared statement of Ms. Stark follows:]
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Chairman Kerry. Well, thank you all very, very much.
[Applause.]
Chairman Kerry. The testimony is very, very helpful.
Congressman Tierney has to catch a plane to Washington to
make the city safe for my arrival.
[Laughter.]
Representative Tierney. Thank you very much, Senator. I
want to thank all the witnesses again for this, and I will look
forward to reading the question-and-answer sessions as well.
Thank you.
Chairman Kerry. Thanks for being with us very, very much.
[Applause.]
Chairman Kerry. So now let's flesh the record out a little
bit more, and I appreciate the Congressman being here and his
leadership in the House. Obviously, this is an enormous issue.
I want to try to get at it a little bit in real terms here.
Each of your testimonies have been very candid and very
helpful, and I think it paints a broad picture to hear from
representatives of working folks who have a set of rules by
which they operate and who have helped to improve the workplace
in America; an entrepreneur who is trying to make it work; and
one in absentia, and I put some of her testimony in here. But
she has a very similar story to tell, as Mr. Morrisey's, about
how the construction industry is impacted by this.
I think it is important to emphasize that it is not just
the construction industry, and we; will talk about that a
little bit more in a minute.
Ms. Stark, thank you very much. You know, none of this has
a chance of being fixed unless the enforcement is rigorous, and
we obviously appreciate what the Attorney General is doing to
help make that happen. But let's try to simplify some of this
and see if we can consolidate it.
First of all, the breadth of this, we have talked
specifically about construction, but give us a better sense, if
you will, or sort out the different examples that you are aware
of in the different places where this is having an impact in
the State of Massachusetts or in the country. Do you want to
share--Director Noel, do you want to lead off on that?
Mr. Noel. Sure. In fact, you and Mr. Callahan mentioned one
case in your editorial today, in the Boston Herald, that talked
about a young woman who is a janitor, worked at a nursing home,
and was treated as a franchisee. And, you know, the company
that she worked for, I think, made claims of $90 million of
sales each year, claims only to have 300 or so employees, and
they operate worldwide, but yet they have 8,500 franchisees.
You know, they are really employees. Let's not kid ourselves.
But they seem to exploit the most vulnerable workers.
Chairman Kerry. Well, how do they classify somebody as a
franchisee?
Mr. Noel. What they did was they actually told them that
they were a business unto themselves. They gave them direction,
gave them uniforms, procedures how to clear, but yet they
basically sold this woman the business for $10,500 and made her
buy all the supplies from them, was under their direction, and
only paid her a certain amount of money and had her work an
enormous amount of hours that she had to actually----
Chairman Kerry. And did the company set the hours of work?
Mr. Noel. They told her originally that she only was going
to be working 20 to 25 hours. However, you know, the work that
she did far exceeded--the work they assigned her far exceeded
that, so much so that she had to hire somebody else and pay
them, you know, as if she was her own business. In the end, it
was a losing proposition. She ended up--she couldn't make any
money out of it.
Chairman Kerry. Did she believe she was her own business?
Mr. Noel. I think at first she did, you know, but it really
didn't turn out--and, in fact, that is what brought the case
forward, that when she finally couldn't go on any further, she
filed for unemployment, and that is what generated the case
that you have talked about.
Chairman Kerry. Can any of you tell us from your experience
how many people know that they are actually misclassified? Or
how many people know how they have been classified, that they
have been classified as an independent contractor and then find
out later when there is a problem that that, in fact, is their
status? Are you aware?
Mr. Callahan. I could give you a personal example. My
mother-in-law is working as a home health care aide. She was
working roughly 20 to 25 hours a week. She went through an
agency, and she was told she was an independent contractor.
None of the withholdings were done for her, for her taxes.
There was no workers' comp paid, no unemployment paid. And she
knew she didn't really have a choice. She went to work. She got
her pay. She was told when to be there, what she had to do. She
was under their direction and control. And then when tax time
came, she was responsible for all those--the employer's side of
those taxes. She had to pay the FUTA, the FICA, all the other
employment taxes. I know this because I had to write the check
to cover her taxes come tax time because the IRS was coming
after her.
Chairman Kerry. Did she think originally she was a full-
fledged employee?
Mr. Callahan. For the purposes of the law, I think she
thought she was an employee, but she knew she didn't have a
choice. That is part of the problem here. People work there;
they are working under the table for cash. They know what the
deal is.
Chairman Kerry. But they can't get the job otherwise.
Mr. Callahan. They can't get that job otherwise, and that
is really what it comes down to.
Chairman Kerry. What about in terms of enforcement, Ms.
Stark. What is the biggest restraint on our ability to be able
to enforce adequately?
Ms. Stark. Well, I don't know if there are restraints at
this point. I mean, we have been spending the past year
analyzing all of these complaints that have come into the
office and actually doing the enforcement. The wage and hour
laws we are happy with, and we are using them wisely and
properly. It is just a matter of having that commitment to
actually do the enforcement.
Chairman Kerry. Well, there has to be some restraint,
because if you have all of these companies that are doing this,
either there aren't enough people, or there isn't enough
insight, or there isn't enough effort, or something is
happening. Companies ought to be living in total awareness that
if they do it, they are probably going to get caught, and it is
going to be costly.
Ms. Stark. Yes. I think maybe one of the restraints is
there are folks out there that aren't reporting it to the
Attorney General's Office, so we can't enforce something that
we don't know----
Chairman Kerry. The reason they don't report it, Ms. Stark,
in my judgment, is that they don't fear it is a deterrent. It
is the absence of deterrence.
Ms. Stark. Right.
Chairman Kerry. They don't worry about it because the
chances of getting caught aren't great. Am I wrong? If you have
$312- to $353-billion worth of taxes that are not being
collected, what would happen if we took $3 million--$10 million
of that per State--I mean, what is that? That is $150 million,
maybe, out of $312 billion, and said go do this, enforce this,
wouldn't that make a difference? Suppose you had a larger
division in your office.
Ms. Stark. Yes, it would make a difference. But I think,
you know, we are seeing changes already over just 1 year of
having this focus. Of course, it would make a difference.
Chairman Kerry. Mr. Morrisey.
Mr. Morrisey. Senator, I can speak very frankly about that.
We have seen almost immediate changes over the last 6 months
where individuals that were coming down seeing the grass being
greener in Massachusetts, specifically even some New Hampshire
contractors. Now they are not so quick to come over the State
line because the grass isn't so greener, because they have all
been called in to the Attorney General's Office. From what I
understand, the conversations are all very nice, but they have
been given notice that the procedures cannot continue and must
be changed. These individuals are not quick now to bring their
workforce down here, which by and large, are those underground
workforces.
So now they are staying back there, and it is opening up a
new field for others now that I was having trouble trying to
compete against. Now the competition is becoming more fair.
Chairman Kerry. How prevalent is the disadvantage to you in
terms of the competition? Give me a percentage.
Mr. Morrisey. Well, I will tell you that it used to be
years ago I could get 50 percent of the jobs I quote. Now I am
probably 25 percent, and it has been that way, you know, for
the last 7 or 8 years. So it is tough.
Chairman Kerry. And do you see who the people are who get
the jobs you quoted?
Mr. Morrisey. Yes, and you have one of those things in your
mind. If, you know, Company ABC is good competition, hey, they
got us on one, they beat us fair and square. But when you hear
about these others, you know, it really--it gets you pretty
upset.
Chairman Kerry. But you know how they are competing.
Mr. Morrisey. Yes, we do.
Chairman Kerry. In other words, you are very aware--you can
see who won, and depending on who won, you know whether they
competed on a fair basis or on an unfair basis.
Mr. Morrisey. Right. And what you had for a long time is
you had that gray area. Even legitimate companies would
overextend themselves. Maybe the project was mismanaged by an
owner or a developer, and so now they had too many going at
once. Their 50 or 25 or 30 payroll employees couldn't keep up,
so now they could go to this other resource and maybe even hire
a legitimate guy, but knowing in the back of their minds--the
old ``Don't ask, don't tell''--knowing that they were bringing
in these other workers. To be able to get this job done and
meet the schedules, they just said, well, I will deal with the
consequences if I have to when they continue on.
Chairman Kerry. And what is the greatest deterrent in your
mind to their doing that or being willing to do that?
Mr. Morrisey. The greatest deterrent is knowing now that
there is an accountability. With all due respect to everyone
here, there really didn't seem to be an accountability. We
always heard about, quote-unquote, people being fined or having
difficulties. You saw that in the insurance industry. If you
didn't have workers' compensation, there was a fine or a
penalty. But now, when we hear that the offices of the Attorney
General are taking things much more seriously and they are
looking into all of this, people now are waking up to the fact
that, you know, there is going to be a reaction for their
actions.
Chairman Kerry. Now, give me a good, hard list of the
readily identifiable, tangible consequences, and then maybe
some of the unintended consequences--or collateral
consequences. Shall we call it that? Direct consequences.
Mr. Noel. Well, I can speak to one just while we are on the
subject of workers' comp. One of the departments I oversee is
Industrial Accidents. One of the offices of investigation
ensures that employers have workers' comp premiums. Just this
past month alone, they issued 177 stop-work orders, which was
unheard of. And it is due to a commitment that we have
instilled in that office. And it is about commitment to
enforcing the laws. Like our partners over at the Attorney
General's Office, we have agencies--the Division of
Occupational Safety oversees asbestos and lead abatement, and
they have the power to issue stop-work orders.
One of the things that we are looking for now through the
legislature is civil fines that we find would probably be a
greater deterrent, because our only other resource would be to
make it a criminal matter and overburden our already
overburdened Attorney General's Office. But it is about
commitment. It is about enforcement.
Chairman Kerry. But what I am trying to get at is in terms
of unemployment compensation--or workers' compensation--you
have the potential of employee injury and they are not covered.
Mr. Noel. It is also--they may be covered, but there is a
workers' comp--the trust fund would then pick up the payments.
Chairman Kerry. So citizens wind up paying more for other
things than they should.
Mr. Noel. The legitimate businesses pay into that, and they
would be----
Chairman Kerry. That is number two. What else? Health care.
People don't have a health care benefit.
Mr. Noel. Right.
Chairman Kerry. People get injured, no compensation.
Mr. Noel. You have unemployment.
Chairman Kerry. Shoddy work. Work may be less safe.
Mr. Morrisey. Doesn't get done on time. You have to have
someone come out then to finish it up because they tried to go
with the low-ball guy. He can't keep up. It doesn't----
Chairman Kerry. It may wind up costing more.
Mr. Morrisey. I can give you a case-by-case scenario where
we profit because the guy that they chose didn't fulfill his
obligation.
Chairman Kerry. And you wind up doing it.
Mr. Morrisey. So we come in at the end and finishing,
anyway. Chairman Kerry. What else?
Mr. Morrisey. Increased fatalities.
Chairman Kerry. Increased fatalities.
Mr. Callahan. A chilling effect on bidding. Mr. Morrisey
mentioned the drop in the number of projects that he has been
successful in winning. What he didn't mention was the number of
contractors that tell us that they simply didn't bid the job.
Chairman Kerry. They won't even bid.
Mr. Callahan. They walked in and they saw XYZ Construction.
Chairman Kerry. I have heard that.
Mr. Callahan. And they said, ``I can't even compete; I am
not going to spend $30,000 in 2 weeks to put together an
estimate for a project I know I simply cannot win.''
Chairman Kerry. Any other consequences?
Mr. Morrisey. If you look at the long-term effects,
Senator, you have these aging individuals that are 1099s. In my
industry, you had it for years. Guys would go out. They would
get the nice house, the nice truck. They would raise their
children. But now all of a sudden they are at the age of 45 or
so----
Chairman Kerry. And their income is going down.
Mr. Morrisey. They have nothing. They are beyond their
piecework prime years. They can't produce what they used to.
And so now they are coming to folks like us to try to get them
jobs. In some cases, we are able to put them on. But now you
have that they have not saved for that rainy day. They don't
have anything to back them up toward their retirement. So you
are having this back-end issue. We put them on, and now they
have got bad knees or the bad shoulder. Now you have a medical
issue that has to be addressed because they couldn't do it when
they were younger.
Chairman Kerry. How effectively is the Governor's task
force working right now with the AG's Office in that
collaboration? Is that working well?
Mr. Noel. Actually, we have been working together since
both administrations came into office. This more or less
codifies it. We have, I believe, about 16 or 17 joint
investigations, not just with the Attorney General's Office,
but between the other government agencies. We have yet to
perform a full sweep. You know, we are just starting to get
underway, and there is a lot of stuff that we have to do before
we get to the full sweeps. But there is a good partnership
there.
Chairman Kerry. What do you think is the most important
step that can or should be taken at the Federal level to
augment what is happening in a few of the States?
Mr. Noel. I think Mr. Callahan touched upon it as far as
tighten up the definition of an employee.
Chairman Kerry. The classification.
Mr. Noel. Classification. One of the----
Chairman Kerry. Of independent contractor.
Mr. Noel. One of the obstacles that we face working
together is--it is actually twofold: One is information that we
can legally share with one another, and that is something that
we are going to have to tighten up either through legislation
or regulation. The other thing is different agencies have
different definitions of what an employee is. You know, you
have the Department of Revenue, which relies upon the 20-point
test that the IRS has. And then, you know, some of us rely upon
the 3-point test as defined under Massachusetts law.
Mr. Erlich. Senator, if I may, one thing about this problem
is it actually is a problem that can be fixed, as opposed to so
many problems that folks in Congress are constantly banging
their heads against the wall. The actions of the Attorney
General and the announcement of the Governor's task force, as
Mr. Morrisey has said, has already--the word is on the street,
and, I mean, it is early and it is premature, but just the fact
that there seems to be a heightened focus has meant that
companies are starting to say, ``Should I continue; am I now
taking a risk by continuing to do business this way?'' And some
are beginning to change the way they do business. It is
really--and that is at a very early stage.
Chairman Kerry. That is the whole purpose of law
enforcement deterrence?
Mr. Erlich. Exactly.
Chairman Kerry. You get the word out there that you are
serious about something, people take note of it.
Mr. Erlich. It is a business calculation.
Chairman Kerry. Absolutely.
Ms. Stark. And just to mention, there are two cases that we
brought. One is still ongoing so I can't talk about it in too
much detail, but one is--there is an action against FedEx,
which you know, when you have a higher profile case going on,
the word does get out a lot quicker; it is an independent
contractor misclassification case. And we also have the issue
with Wendy's where a Wendy's franchise had closed, and a ton of
workers were just not paid. The Wendy's closed in western
Massachusetts, and our office worked with the owner of Wendy's
Corporate, and all of those workers were paid. And I think when
people see those higher profile cases--the FedEx case--it also
helps with deterrence.
Chairman Kerry. What about the argument that is made--and,
Frank, you know this, Mr. Callahan, and Mr. Erlich, about the
pushback we get on the prevailing wage argument, that people
say we can't compete; we are not able to make this work because
of the overall cost of the project is going to be too great, so
we are not going to be able to do that, or we are not going to
be able to make that improvement to the building. There is
always that pushback.
What is your comment about that?
Mr. Erlich. Just quickly, that is a discussion that
actually is going on with folks in the housing community,
especially in the affordable housing community, because they
are strapped for money, and they see every rise in the cost of
labor being one less affordable unit that is being built. And
when we point out to them that--this isn't even about
prevailing wage. This is simply about playing by the rules.
From my perspective, one of the reasons why we are seeing a
lot of groups come together around this, including groups that
have historically been opposed around labor issues, is that I
think it is almost impossible--this is like apple pie and
motherhood. This is just playing by the rules. This is not a
question of prevailing wage. It is really not a question of
other--it is simply cheating or not cheating. And I think it is
very difficult for anybody to make a logical and concise
argument that there is any reason not to make everybody play by
the same set of rules, which is why I think that there is a
reasonable chance of success here.
Chairman Kerry. Yes, Mr. Morrisey.
Mr. Morrisey. To the point of prevailing wage, Senator,
depending on which set you are working with, whether it be HUD
or whatnot, it is not that big a step anymore. If you are
paying all of your things that you need to pay, the step is not
as great as some people will make you think it is. It is really
not.
Chairman Kerry. And it is made up in the productivity, as
Mr. Morrisey alluded to earlier. You are not getting some kid
who is home from college for the summer, wearing a pair of
sneakers and a baseball hat, pretending to be a carpenter so he
or she can go back to school in September. You have people that
have completed an apprentice program that takes anywhere from 3
to 5 years, where their skills and their productivity and
quality of their work more than makes up for any differential
in the wage scale.
Chairman Kerry. Has this had an impact on the numbers of
workers you hire?
Mr. Morrisey. Well, interestingly enough, we talked about
that on the way in today, my partner and I. We could hire
numbers of more individuals. We have applications coming in,
you know, probably 12 or 16 every week. But you know, unless we
get the jobs, you can't put them on.
In the short term, the past couple of years, we have been
maxed out. We couldn't put anyone else on because we couldn't
get enough work to sustain them all. We kind of had capped out
a little bit. Although we have grown every year, we kind of
capped out a little bit. So we would like to, but we are hoping
this will make the other opportunity change.
Chairman Kerry. Is there any aspect, in terms of
enforcement, that we have not been able to discuss thus far? Is
there anything that is not on the table as to how we approach
this problem? I just want to make sure there is nothing left
unsaid. My sense is we have got a pretty good understanding of
it.
The classification issue, is there some simplified way you
would make that classification in your judgment so that we just
don't have these crazy arguments?
Mr. Erlich. There is what is called the ABC test. That is
what Frank referred to.
Chairman Kerry. You think that is the simplest way to
approach it?
Mr. Erlich. It is simple, it is clear, the least confused,
yes.
Chairman Kerry. Right, OK. Do you think that--and what
about the illegal immigration component of it, is that somehow
compounding the issue? Would the issue exist even if we didn't
have that? It would?
Mr. Erlich. It would exist, but I think not to the same
degree.
Chairman Kerry. Not to the same degree.
Mr. Erlich. And, you know, I think the State agencies that
we are dealing with are taking the right approach, which is
that is a Federal issue, it seems to be not being forthrightly
addressed these days, but whoever is working out----
Chairman Kerry. If it were more directly addressed these
days----
Mr. Erlich. Clearly the problem would disappear. If
everybody had to be treated legally as a--you know, then
everything----
Chairman Kerry. You think that would signal the----
Mr. Erlich. Absolutely. But the State has taken the
position that everybody needs to function under the State laws,
in any case, and that is good enough for us.
Chairman Kerry. All right. Well, this is very helpful, and
I am going to make sure that this record gets appropriately
distributed to our colleagues on the Committee, and we are
going to try and press forward and see what we can do, both on
the definition as well as the enforcement side. I am convinced,
and I have been convinced for some time--this is sort of a part
of our discussion now about tax reform. We need to do the tax
reform and the tax piece would help it, but it is not going to
cure it. The enforcement is perhaps the most critical thing of
all, and we need to empower you. I am going to talk to the
Attorney General about how we might augment those efforts,
because I think that would be as significant as anything in
making a profound impact.
You have already commented on the impact that is being had
by virtue of what is going on. So I think if it gets more
visibility, if more people are aware of it, and if the hammer
comes down more rapidly on more people, boom, you are going to
start to solve this problem significantly.
I tell you, every citizen in this room and everyone who is
not here--every citizen--is negatively impacted by this. And
every citizen would be better off if we were able to be out
there collecting the taxes that are uncollected, the billions
upon billions of dollars of taxes. I was driving today on some
roads. I don't know how many of you--I mean, our roads in this
State are in shocking disrepair. And that is true nationally,
not to mention bridges and tunnels and buildings and all kinds
of things that need repair. We could be putting people to work.
But part of it is everybody is saying, ``Well, how are we
going to pay for it?'' Well, one of the reasons we are
struggling with that is that people are avoiding their fair
share of paying that burden. So we need to do it.
I appreciate everybody's----
Mr. Noel. Excuse me, Senator, if I could just add one
comment. You talked about the Attorney General's Office. Also
some of the Governor's agencies, also there is enforcement
involved there. There are enforcement components. Some of those
are federally funded. One I can think of is the Division of
Occupational Safety. So if there is any help there that you
could provide, it would be in that regard.
Chairman Kerry. I see a number of folks in this audience
who I know are union either leaders or members, and I greatly
appreciate their being here today to help focus on this issue.
I greatly appreciate their leadership and efforts in this
regard.
I want to just mention Steve Tewksbury, who is in the back
here--he was, anyway. Where is he? There he is. He just came
back in here. I just want to call attention, he is a union
carpenter, the only guy I know who has had a town named after
him here in the city.
[Laughter.]
Chairman Kerry. But he is deployed to Iraq, I guess four
times already.
How many times have you been to Iraq? You have been how
many?
He has been twice, but he is going in June again, folks,
and I just want everybody here to acknowledge him and say thank
you for his service.
[Applause.]
Chairman Kerry. Thank you.
So I thank you. I think that is a great note, people are
willing to serve their country and willing to go abroad to do
it. We have got to serve our country right here at home and do
a better job of making things happen.
So thank you all for contributing to this record, and I can
promise you we will try to take some actions on this down in
Washington.
We stand adjourned. I appreciate it.
[Applause.]
[Whereupon, at 11:28 a.m., the Committee was adjourned.]
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