[Senate Hearing 113-818]
[From the U.S. Government Publishing Office]
S. Hrg. 113-818
PAYROLL FRAUD: TARGETING BAD ACTORS HURTING WORKERS AND BUSINESSES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON EMPLOYMENT AND WORKPLACE SAFETY
OF THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING PAYROLL FRAUD
__________
NOVEMBER 12, 2013
__________
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Pensions
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COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
TOM HARKIN, Iowa, Chairman
BARBARA A. MIKULSKI, Maryland LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington MICHAEL B. ENZI, Wyoming
BERNARD SANDERS (I), Vermont RICHARD BURR, North Carolina
ROBERT P. CASEY, JR., Pennsylvania JOHNNY ISAKSON, Georgia
KAY R. HAGAN, North Carolina RAND PAUL, Kentucky
AL FRANKEN, Minnesota ORRIN G. HATCH, Utah
MICHAEL F. BENNET, Colorado PAT ROBERTS, Kansas
SHELDON WHITEHOUSE, Rhode Island LISA MURKOWSKI, Alaska
TAMMY BALDWIN, Wisconsin MARK KIRK, Illinois
CHRISTOPHER S. MURPHY, Connecticut
ELIZABETH WARREN, Massachusetts
TIM SCOTT, South Carolina
Pamela J. Smith, Staff Director and Chief Counsel
Lauren McFerran, Deputy Staff Director
David P. Cleary, Republican Staff Director
__________
Subcommittee on Employment and Workplace Safety
ROBERT P. CASEY, JR., Pennsylvania, Chairman
PATTY MURRAY, Washington JOHNNY ISAKSON, Georgia
AL FRANKEN, Minnesota RAND PAUL, Kentucky
MICHAEL F. BENNET, Colorado ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island TIM SCOTT, South Carolina
TAMMY BALDWIN, Wisconsin LAMAR ALEXANDER, Tennessee (ex
TOM HARKIN, Iowa (ex officio) officio)
Larry Smar, Staff Director
Tommy Nguyen, Republican Staff Director
(ii)
CONTENTS
__________
STATEMENTS
TUESDAY, NOVEMBER 12, 2013
Page
Committee Members
Casey, Hon. Robert P., Jr., Chairman, Subcommittee on Employment
and Workplace Safety, opening statement........................ 1
Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia... 3
Franken, Hon. Al, a U.S. Senator from the State of Minnesota..... 24
Witnesses
Anderson, Matthew, Residential Construction Trim Installer, Ira
Township, MI................................................... 5
Prepared statement........................................... 7
Odom, Daniel, Chief Operating Officer and Vice President, Odom
Construction Systems, Knoxville, TN............................ 8
Prepared statement........................................... 9
Ruckelshaus, Catherine K., Legal Co-Director, National Employment
Law Project, New York, NY...................................... 12
Prepared statement........................................... 14
MacKrell, Chris, President and Chief Operating Officer, Custom
Courier Solutions, Rochester, NY............................... 20
Prepared statement........................................... 21
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.:
American Trucking Associations, Inc.......................... 35
Campaign for Quality Construction............................ 37
Coalition to Promote Independent Entrepreneurs, Russell
Hollrah, Executive Director................................ 39
Forest Resources Association, Inc., Deb Hawkinson, President. 42
Home Care Association of America............................. 43
Private Care Association, Inc., James Mark, President........ 43
National Association of Home Builders (NAHB)................. 47
Snack Food Association....................................... 48
American Society of Travel Agents (ASTA), Zane Kerby,
President and CEO, letter.................................. 49
(iii)
PAYROLL FRAUD: TARGETING BAD ACTORS HURTING WORKERS AND BUSINESSES
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TUESDAY, NOVEMBER 12, 2013
U.S. Senate,
Subcommittee on Employment and Workplace Safety,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:30 p.m. in
room SD-430, Dirksen Senate Office Building, Hon. Robert Casey,
chairman of the subcommittee, presiding.
Present: Senators Casey, Franken, and Isakson.
Opening Statement of Senator Casey
Senator Casey. The hearing will come to order.
Thank you, very much for being here this afternoon. I want
to thank Senator Isakson, our Ranking Member, and our witnesses
for being here.
This is a subcommittee hearing this morning, which is a
subcommittee of the Health, Education, Labor, and Pensions
committee. This subcommittee work is critically important. We
are grateful that people would be here to hear the testimony.
I wanted to provide an opening statement and then I will
turn to our Ranking Member for his statement or comments,
following that I will introduce the witnesses, and after that
we will take witness testimony.
Payroll fraud is a problem that is cheating workers,
employers, and taxpayers through the loss of worker
protections, the loss of business due to an uneven playing
field, and the loss of revenue. When an employee is wrongly
classified as an independent contractor, that worker loses
vital rights like payroll protections, workers' compensation,
unemployment compensation, and other basic safeguards.
The vast majority of employers that follow the rules are
placed at a significant disadvantage when competing against a
business that is breaking the law and not paying employment
taxes; lower costs for those breaking the rules means less
business for those who follow the rules. This also places
downward pressure on wages paid to workers and leads to other
problems as well. Taxpayers are also shortchanged through the
loss of revenue by Federal and State Governments.
Independent contractors serve a valuable role in our
economy, and there is no intent on my part--nor anyone
advocating the legislation we will talk about today--to use an
overly broad brush to point fingers at companies that are
following the law or pointing fingers at law abiding
independent contractors.
While there are employers that mistakenly identify an
employee as an independent contractor, there is no doubt that
intentional misclassification is a widespread occurrence and a
problem that must be addressed.
A June 2013 Treasury Department Inspector General for Tax
Administration report stated, in part,
``The misclassification of employees as independent
contractors is a nationwide issue affecting millions of
workers that continues to grow and contribute to the
tax gap,''
so said the Inspector General for the Treasury.
Employees wrongly classified as independent contractors do
not enjoy the same worker protections. A 2009 GAO report cites
the example of,
``A construction worker who fell three stories, was
severely injured, and incurred hospital expenses of
over $10,000 related to the injury. Because the worker
was misclassified as an independent contractor, his
employer did not provide workers' compensation coverage
for the employee,''
according to the GAO.
While some progress has been made at the Federal and State
level to combat payroll fraud, much more needs to be done; more
tools and more enforcement are needed to stop the intentional
misclassification of workers. That is why I intend to introduce
legislation to hold accountable employers and to give greater
scrutiny to employees and their families.
With my colleagues, Chairman Tom Harkin, chairman of the
Health, Education, Labor, and Pensions committee, and Senator
Sherrod Brown of Ohio, I will be introducing the Payroll Fraud
Prevention Act of 2013, which will protect workers from being
misclassified as independent contractors, thereby ensuring
access to safeguards like fair labor standards, health and
safety protections, and unemployment and workers' compensation
benefits. The Act would also prohibit employers from using
misclassification to avoid paying their fair share of taxes.
This is not a new problem, as I mentioned before. In 1984,
the Internal Revenue Service found that 3.4 million employees
were misclassified as independent contractors. At that time,
this cost taxpayers $1.6 billion in income taxes, unemployment
taxes, Social Security taxes, and Medicare taxes. That is 19
years ago.
That report 19 years ago found that 15 percent of employers
had misclassified employees. A new review is being undertaken.
Unfortunately, we will not see the results of that new review
for some time.
In 2009, a Treasury Inspector General's report on misclass-
ification acknowledged the lack of comprehensive new
information while saying that the lost revenue would be,
``Markedly higher than the $1.6 billion,'' of course, referring
then to the 1984 IRS report.
Why would an employer intentionally commit payroll fraud? I
think that is an important question to ask. A June report,
again by the Inspector General at Treasury, summarizes the
reason as follows.
``The IRS estimates that employers misclassify
millions of workers as independent contractors instead
of employees. The misclassifications allow employers to
avoid paying a significant amount of money in
employment taxes, which adversely affects employees and
tax administration. . . . On average, an employer can
save approximately $3,710 per worker per year in
employment taxes on an annual average salary of $43,007
in income paid per employee when the employer
misclassifies a worker as an independent contractor.''
That is all quoted from the Inspector General.
There is a clear financial incentive for bad actors--not
all, we are talking about bad actors here--but there is an
incentive for those actors to defraud taxpayers. This has a
clear impact on Federal and State taxpayers and obviously on
the so-called tax gap.
I am also a member, as Senator Isakson is, of the Finance
Committee, but we will not spend much time on the tax issue
today. I will note that my friend and former Health, Education,
Labor, and Pensions committee member, Senator Brown, intends to
introduce legislation dealing with the tax issue that I will
support and cosponsor.
Finally, an aspect of the financial incentive for fraud
that we will discuss is the impact on the overwhelming number
of businesses that play by the rules and do the right thing.
Put simply, law abiding businesses are put at a disadvantage
when they bid against an unscrupulous operation that is paying
$3,710 less per employee per year in employment taxes. So I
look forward to a productive process here at the hearing to
target the bad actors who are hurting workers and hurting
businesses.
I would also like to add for the record, I will introduce
for the record a report entitled, ``Campaign for Quality
Construction.'' It is a report dated today and this statement
will be admitted as part of the record.
[The information referred to may be found in additional
material.]
Senator Casey. Now, I will turn to our Ranking Member,
Senator Isakson.
Statement of Senator Isakson
Senator Isakson. Thank you, Senator Casey.
This is an important subject, and I am delighted to have
the chance to participate in the hearing with you.
I want to compliment you on the differentiation between
intentional and unintentional in your opening remarks and in
your closing paragraph, to talk about the people that play by
the rules because there are rules in the IRS tax code, the
labor laws of the United States of America that clearly
identify what is a legal, independent contractor by
designation, and we all know what they are. We are focusing on
the people who are intentionally disobeying those laws and
those standards, not the people who are willfully obeying by
those laws.
I was one of them. I ran a company for 22 years that had
800 independent contractors and 200 employees. Almost every one
of my independent contractors was a second career or a divorced
woman, because there were very few job opportunities for them.
In that career, I had a real estate brokerage company.
By working as an independent contractor, they had flexible
hours so they could pick up their kids from school. They could
be sure dinner was prepared. They could work some days and not
work other days. They could not do things you would have to do
if you were working for an employer and were an employee
status. So I want to point out there are meaningful jobs that
provide jobs to people in need of those jobs, where the
independent contractor status fits the situation and the
circumstance.
Ironically, our witness for the minority, Mr. MacKrell and
I, had not met until about an hour and a half ago. So this is
not a preplanned plug, but when I was asking him about his
business, which is specialized delivery by truck and a delivery
service and the last mile delivery service, if you will. Last
Christmas, I ordered my wife's Christmas present from a company
in New Jersey. It was delivered to my house by a last mile
trucking delivery system who, on his truck, had everything from
my wife's present to probably a hundred other wives' presents,
and other things that were on the truck, delivering each one
individually; something that somebody for an employer never
could have afforded to do from New Jersey to Atlanta.
So there are perfectly good, legitimate reasons for
independent contractor status to exist, and perfectly good
companies who are around, obeying by those laws and producing
employment and opportunities for American workers. I think it
is clear that we understand the difference between intentional
and unintentional, those playing by the rules and those who are
not.
To make that point, I have letters to introduce for the
record of support for the independent contractor status from
the following organizations: the National Association of Home
Builders; James Mark, the president of Private Care Association
of America; Zane Kerby, the president and CEO of American
Society of Travel Agents; the American Trucking Association;
and Russell Hollrah, the executive director of the Coalition to
Promote Independent Entrepreneurs.
[The information referred to may be found in additional
material.]
Senator Isakson. And with that, I will look forward to the
testimony from our witnesses and appreciate the opportunity to
co-chair this with you today.
Senator Casey. Thank you, Senator Isakson. What I will do
is provide an overview of the backgrounds of our witnesses.
They will not be complete, but they will be given introduction
for each and then Mr. Anderson, we will start with you, and we
will go from my left to right.
First of all, Matthew Anderson, who is joining us today
from the State of Michigan, we are grateful you are here, has
his own experience of being injured on the job and the real and
lasting impact misclassification can have on a family. Mr.
Anderson, we are grateful you are here today, and we will start
with you in a couple of moments.
Daniel Odom is chief operating officer of Odom Construction
in Tennessee and has firsthand experience as a victim of unfair
competition. Odom Construction is primarily an interior systems
contractor. In good times, Mr. Odom has about 200 employees and
has bid and performed construction work in a number of States.
Mr. Odom, we thank you for being here.
Cathy Ruckelshaus, from the National Employment Law
Project, NELP, is also here to discuss the impact of payroll
fraud. She joined NELP in 1995 after working for the Employment
Law Center in San Francisco. For over 20 years, she has
litigated and advocated for policy reforms promoting the
workplace rights of immigrant and nonstandard workers,
enforcement of wage and hour in workplace laws, and
antidiscrimination in family and medical leave laws. We are
grateful that Cathy is here. She testified in 2010 as well.
Finally, we will hear from Chris MacKrell, president and
COO of Custom Courier Solutions based in Rochester, NY who, I
understand, has an office in my hometown of Scranton. We
appreciate that. Senator Isakson also mentioned the discussion
you had today.
Custom Courier Solutions is a full service transportation
organization based in Sarasota Springs, NY. It provides a full
range of logistic services to the less than 24-hour delivery
market.
So we will start with you, Mr. Anderson, and then we will
go to Mr. Odom and others.
Thank you very much.
STATEMENT OF MATTHEW ANDERSON, RESIDENTIAL CONSTRUCTION TRIM
INSTALLER, IRA TOWNSHIP, MI
Mr. Anderson. Chairman Casey, Ranking Member Isakson, and
members of the subcommittee, my name is Matthew Anderson. I am
a resident of St. Clair County in the State of Michigan where I
live with my wife and two wonderful children. Thank you for
this opportunity to speak with you today about how payroll
fraud has harmed my family and thousands of other families
across this country.
Currently, I am an estimator for a construction company,
but previously, I was a working carpenter. I made cabinets,
installed interior trim, lay crown molding. My employer was
Rush Construction Services, Incorporated. Rush had a contract
with the carpenter's union and they paid me an hourly wage,
health, and pension benefits. There was training and daily
instructions. I was supplied with building materials, power
tools, and other construction equipment. When I made mistakes
or did not meet production quotas, I got a tongue-lashing.
Rush deducted income taxes. They paid employment taxes and
they paid unemployment contributions. They paid time and a half
for overtime and they provided me with workers' compensation
protection. In other words, I and my fellow workers were
employees. That is how it was for 6 years, but things changed
for the worse.
We were told the recession cut into Rush's bottom line and
they were having problems competing to get jobs. Mr. Marty
Steudle was the owner of Rush. Mr. Dave Marracco was his right
hand man. They told us they wanted to switchover to another
company they jointly owned, Dave and Marty, Incorporated, DMI.
We were given a choice, work for DMI as independent
contractors or do not work at all. My fellow workers and I had
families to support. We saw how bad the economy was, so we went
along with it.
Mr. Steudle and Mr. Marracco directed us to register as
DBA's, Doing Business As persons. I passed these instructions
onto my wife, and she did the registration. I was never
incorporated. I never had a business card. I never operated a
business. Still, the simple DBA registration would come back to
haunt me because DMI knew what they were doing.
DMI's official address was Mr. Marracco's house. The actual
business office was still Rush's. I worked for DMI for 2\1/2\
years. There was training, daily instructions. I was supplied
with building materials, power tools, and other construction
materials. When I made mistakes or did not meet production
quotas, I received a tongue lashing. So I was still treated the
same as before, but instead of being an employee and receiving
a W-2 at the end of the year, I received a 1099 form. There
were no more deductions from my pay. I paid my portion of
employment taxes and I paid DMI's as well. There were no more
health and pension benefits, and we did not get time and a half
for overtime.
Then on February 9, 2011 my life changed forever. My left
hand slipped into a table saw, severing my ring finger and
severely damaging three others. I was rushed to the hospital
for emergency surgery for them to try to save my hand. While I
was at the hospital, I was told that my medical bills would not
be covered because I was an independent contractor.
My medical treatment was long and painful. So far, I have
had eight surgeries and still need one more. The damage was so
bad, they had to take bones from my wrist and hip, and the
doctors also needed to take bones from a cadaver to do the
reconstruction. During this time, I could not work and my
medical bills piled up. And in a short time, they were in the
range of $100,000. That is more than I and my wife make in an
entire year.
I filed a workman's compensation claim. DMI claimed I was
an independent contractor and they refused to pay. I was
pressured to settle with DMI and their insurance carrier. In
the end, my family and I were left with our credit ruined and
still owe $25,000 in medical bills.
This has been a nightmare for my family. A few years ago,
my family and I felt secure. We were a middle-class family
paying our bills, playing by the rules, and living a
comfortable life. Now, we live paycheck to paycheck just to
make ends meet. I struggle to hold onto a job and I struggle to
pay my medical bills. In the meantime, DMI continues to bid,
and get work, and make money.
I work now as an estimator and I see firsthand how
companies like DMI, who force their employees to become
independent contractors, then they underbid law-abiding
companies who pay their taxes and protect their workers.
I am here today to tell my story about what happened to my
family so it does not happen to any other families.
I respectfully urge you to end this unfair practice that
has harmed my family and thousands of other families across
this country.
Thank you.
[The prepared statement of Mr. Anderson follows:]
Prepared Statement of Matthew Anderson
Chairman Casey, Ranking Member Isakson and members of the
subcommittee, my name is Matthew Anderson. I am a resident of St. Clair
County in the State of Michigan, where I live with my wife and two
wonderful young children. Thank you for the opportunity to speak with
you today about how payroll fraud has harmed my family and thousands of
families across the country.
Currently, I am an estimator for a construction company.
Previously, before my injury, I was a working carpenter. I made
cabinets, and installed interior trim like crown molding.
My employer was Rush Construction Services, Inc. Rush had a
contract with the carpenters union, and they paid me an hourly wage
with health and pension benefits. There was training and daily
instructions. I was supplied with building materials, power tools and
other construction equipment. When I made mistakes or didn't meet
production quotas, I got a tongue-lashing. Rush deducted income taxes.
They paid employment taxes and unemployment contributions. They paid
time-and-a-half for overtime and provided workers' compensation
protection. In other words, I and my fellow workers were employees.
That is how it was for 6 years.
But things changed for the worse. We were told the recession cut
into Rush's bottom line and they were having problems competing for
jobs. Mr. Marty Steele was the owner of Rush and Mr. Dave Marracco was
his right hand man. They told us they wanted to switch over to another
company they jointly owned, called Dave & Marty, Inc. (DMI). We were
given a choice: work for DMI as independent contractors or don't work
at all. My fellow workers and I had families to support. We saw how bad
the economy was, so we went along with it. Mr. Steudle and Mr. Marracco
directed us to register as D/B/A's (doing-business-as persons). I
passed the instructions on to my wife and she did the registration. I
was never incorporated. I never had a business card or operated a
business. Still that simple D/B/A registration would come back to haunt
me. DMI knew what they were doing.
DMI's official address was Mr. Marracco's house. The actual
business office was still Rush's. I worked for DMI for 2\1/2\ years.
There was training and daily instructions. I was supplied with building
materials, power tools and other construction equipment. When I made
mistakes or didn't meet production quotas, I got a tongue-lashing. So,
I was still treated the same as before, but instead of being an
employee and getting a W-2 at the end of the year, I got a 1099 form.
There were no more deductions from my pay. I paid my portion of
employment taxes and I paid DMI's as well. There were no more health
and pension contributions. And we didn't get time-and-a-half for
overtime.
On February 9, 2011, my life changed forever. My left hand slipped
into a table saw blade, severing one finger and severely injuring three
others.
I was rushed to the hospital for surgery to save my hand. I was
told that the bills would not be covered by workers' compensation
insurance because I was an independent contractor. My medical treatment
was long and painful. I've had eight surgeries and I need one more. The
damage was so bad that bones had to be taken from my hip. The doctors
also needed to take bones from a cadaver for reconstruction.
I couldn't work and medical bills piled up. In a short time, we
owed in the range of $100,000. That's more than my wife and I make in
an entire year. I filed a workers' compensation claim. DMI claimed I
was an independent contractor and refused to pay. I was pressured to
settle with DMI and their insurance carrier. In the end, my family and
I were left with our credit ruined and $25,000 in bills to pay.
This has been a nightmare for my family. A few years ago, my family
and I felt secure. We were a middle-class family paying our bills,
playing by the rules and living a comfortable life. Now we live
paycheck to paycheck to make ends meet. I struggle to hold down a job.
I struggle to repay my medical bills. In the meantime, DMI continues to
bid and get work and make money. I work now as an estimator so I see
first-hand how companies like DMI force workers to become independent
contractors, then underbid law abiding companies that pay taxes and
protect their workers.
I'm here today to tell my story so what happened to me and my
family doesn't happen to anyone else. I respectfully urge you to end
this unfair practice that has harmed my family and thousands of others
across the country.
Thank you.
Senator Casey. Thank you, Mr. Anderson. Appreciate your
testimony.
Mr. Odom.
STATEMENT OF DANIEL ODOM, CHIEF OPERATING OFFICER AND VICE
PRESIDENT, ODOM CONSTRUCTION SYSTEMS, KNOXVILLE, TN
Mr. Odom. Chairman Casey, Ranking Member Isakson, and
subcommittee members, my name is Daniel Odom, and I am the
chief operations officer and vice president of Odom
Construction Systems. I welcome the opportunity to talk to you
today about how payroll fraud or misclassification is
undercutting my company and crippling the construction
industry. It is with great passion that I am testifying here
today against this practice.
Odom Construction is a family owned and run company
purchased by my father in 1982. We are primarily an interior
systems contractor, meaning we do carpentry, drywall,
plastering, and acoustical ceilings. We also do masonry and we
do some prefabrication of walls and trusses as well.
Almost everything we do is self-performed. We are based in
Knoxville, TN and we have offices in Kentucky and Austin, TX.
We have a couple hundred employees and in the last year, we
worked on projects in Tennessee, Virginia, Kentucky, Georgia,
Alabama, Texas, Michigan, Louisiana, and Florida. So we have
seen payroll fraud in a lot of places.
Payroll fraud happens when an employee is called an
independent contractor and is sent a 1099 form. Also, employees
are paid off the books, something that is extremely common in
the construction industry.
In our business, it is not too hard to figure out who is an
employee. When you supply building materials, tools, and
equipment, training and daily instruction, and set hours of
work, you have an employee. Still, people misclassify their
workers because benefits can be worth the risk.
Payroll fraud is a hammer used to underbid law abiding
employers by avoiding taxes, workers' compensation premiums,
and overtime. It allows our competition to bid their labor
costs 20 to 30 percent lower than those of us that play by the
rules. In construction, the value of labor can be 50 percent of
a total project. So the cheaters compete at a level that no law
abiding contractor can reasonably touch even by better buyout
of materials, or training, or productivity. Also, even when
caught, the cheaters often prosper. Let me give you an example.
We frequently find ourselves in competition with a
contractor, some say, uses payroll fraud tactics through
brokers that supply labor. The Tennessee Department of Labor
collected over $61,000 in unpaid unemployment contributions and
interest from that contractor for three or more projects
spanning many years. Some of those projects were publicly
financed.
One of those projects, a new student housing for a
secondary education institution in Tennessee, our bid was close
to $1 million. The usual markup for a bid of profit and
overhead to cover office salaries and expenses is around 15
percent. When you consider markup on that one job at $150,000
the $61,000 delinquency payment collected by the Tennessee
Department of Labor for multiple projects was less than half
the markup for just this one project alone.
The payment was essentially just a fine that took a small
bite out of an overall profit margin. It was just the cost of
doing business and arguably well worth the risk. There were no
limits placed on this contractor bidding future public work. We
have competed against them many times ever since and, in most
cases, they beat us.
Many States have begun the hard work of eliminating payroll
fraud from the construction industry. Tennessee, for instance,
enacted new laws this year with business support to fight back
against workers' compensation premium fraud. But it will take
sensible comprehensive action by the Federal Government to put
this issue to bed for a number of reasons.
Not all States understand the issue, some do understand and
they have enacted new laws, but effective enforcement is still
uneven. The Federal Government can look at the various State
laws, find out what is working and what is not, make
enforcement plans and pass legislation that is enforceable
across all States.
One of the worst offenders we know is based out of Georgia,
but regularly prices work in Tennessee and elsewhere. It uses
labor brokers that are sometimes based out of Florida who, in
the end, there are three States involved on a single project
for just this one contractor.
Interstate regulation is a Federal function, and it applies
to this problem. U.S. Attorneys could help by prosecuting
egregious cross border offenders. Also, the Federal Government
already has E-Verify in place and it, too, can be part of a
sensible solution.
The bad news for us is that violating the law has become an
established business plan. Today, the profitability of breaking
the law, fueled by reduced opportunities due to the recession,
creates the danger of phasing out law abiding businesses until
there is nothing left but the bad operators. This has also
resulted in tradesmen leaving the industry en masse to seek
employment in safer industries with wages that have not been
beaten into the ground by the criminal operators. We cannot let
that continue.
Payroll fraud is shutting down a whole industry of
contractors that believe in building middle-class jobs and
making a reasonable profit by doing things the right way.
Businesses like ours deserve your protection.
Thank you.
[The prepared statement of Mr. Odom follows:]
Prepared Statement of Daniel Odom
introduction
Thank you for the opportunity to testify before this committee. My
name is Daniel Odom, and I am the chief operations officer and vice
president of Odom Construction Systems Inc. We are based in Knoxville,
TN, and we have offices in Lexington, KY, Nashville, TN, Kingsport, TN,
and most recently in Austin, TX. We have hundreds of employees
throughout our work area which consists of the entire southeast and, in
certain circumstances, other areas of the country. In the last year, we
have completed projects in Tennessee, Virginia, Kentucky, Georgia,
Alabama, Texas, and Michigan. We are currently involved in those States
plus Louisiana and Florida, and are actively pursuing work in other
areas.
I would like to deal with the payroll fraud, or misclassification
issue. Payroll fraud happens when a worker is an employee and is called
an independent contractor and sent a 1099 form. It also happens when
employees are paid off the books, something that is extremely common in
the construction industry. Payroll fraud has stolen jobs from our
company and employees and is crippling the construction industry. Our
company's regional experience, as well as lengthy history, allows us to
have a comprehensive perspective on how payroll fraud threatens
companies like ours that provide decent middle-class jobs by doing
business in a fair, honest, and legitimate way.
company and personal history
The parent company of Odom Construction, Gilbert Plastering and
Painting, started in Knoxville in 1883. In 1982, it was purchased and
incorporated as Odom Construction Systems by my father Bill Odom. It
has been operating in Tennessee, and expanding into the areas noted
above, ever since. A now third-generation family business, my brother
William Odom (CEO), and Melinda Sands (CFO) also have spent their
entire working lives in this business.
Odom Construction is a specialty contractor focusing on interior
systems trades (carpentry, drywall, plastering, acoustical ceilings,
etc.) as well as masonry. We also have a very technology-driven
prefabrication operation for walls and trusses. Almost everything we do
is self-performed.
Odom Construction, like many family businesses, has as its roots,
strong values and high business ethics. We believe in treating our
employees well, compensating them fairly for the tremendous work they
do on our behalf, and caring for their well-being and that of their
families. As such, we have employees that have been with our company
for their entire careers, several spanning 25 years-plus. Seeing the
well-being of those families jeopardized by fraudulent business
practices is the primary reason I am here today.
We have existed as 100 percent open shop, and 100 percent union
shop in our past, and we currently exist as a hybrid operation. Many of
our carpenters are represented by the Carpenters' Union. Other trades
are open shop. Payroll fraud does not affect only union or only non-
union aspects of our business. It is crippling to all our field
personnel, and by association, their families as well, regardless of
their affiliation with any labor or trade organizations.
Personally, I have grown up in this business. As did my brother, I
started working summers during school as the lowest man on the totem
pole, cleaning up as a general laborer. I worked up through the
plasterer's trade as I completed my degree at the University of
Tennessee, Knoxville.
My experiences in the office began shortly after I graduated in
1997, and I have worked as an assistant estimator, estimator, project
manager, vice president, chief operations officer, and I am also now
the president of OCS Steel, our prefabrication division. As such, I
believe my experience is varied and fairly extensive in this industry
that I love, and it is with great passion that I testify to try and
protect it.
the problem of payroll fraud
The payroll fraud problem has been documented and testified to
before, but it has gotten pervasively worse as a function of the severe
recession our country faced. As I am sure you are aware, the
construction industry was profoundly affected by the recession. To make
matters worse, the construction industry was also being decimated from
within by the problem of payroll fraud.
At its most basic definition, payroll fraud is a method used to
misclassify workers, construction trades people in this case, as
independent subcontractors or off-the-books employees for the sole
purpose of underbidding law-abiding employers by avoiding paying
employment taxes, withholding tax, workers' compensation premiums and
overtime. When deployed, this method allows our competition to show up
on bid day with a cost basis for their labor that is 20 percent-30
percent lower than those of us that play by the rules. In our line of
work, the value of labor on a total project can be 50 percent of the
project value, and so these methods allow those companies to compete at
a level that no law-abiding contractor can reasonably touch.
Moreover; in our business it is not too hard to figure out who is
an employee. When you supply building materials, tools, equipment,
training and daily instruction and set hours of work, you have an
employee. The notion that the problem is mostly negligence or confusion
does not wash. Much of the abuse we see is intentional.
how payroll fraud hurts law-abiding companies
Payroll fraud destroys companies like ours because the savings a
company can achieve by using illegal tactics is so significant that we
cannot overcome it by legal means. While we have a huge, best in class,
focus on training and productivity in our organization, there comes a
point where you reach the limit to the efficiencies you can reasonably
expect to achieve. We also cannot erase this gap through better buyout
of our materials. Materials in construction are predominantly
commodity-based goods, and within certain variances, we all pay
essentially the same prices for the products we use. We cannot overcome
payroll fraud even by more Draconian methods of slashing the hourly
wages of field employees. It is difficult enough to staff projects with
wages having been beaten down as much as they have been in the last 5
years without having to do so at rates we haven't seen since the 1990s.
Even at those rates, to which our markets have been pushed as a direct
result of payroll fraud, we still wouldn't be on a level playing field.
an example of payroll fraud in the real world
We frequently find ourselves in competition with a contractor that
some say uses payroll fraud tactics through brokers that supply its
labor. The Tennessee Department of Labor collected over $61,000 in
unpaid unemployment contributions and interest from that contractor for
three or more projects spanning many years. Some of those projects were
publicly financed.
One of those projects, new student housing for a secondary
education institution, we priced close to $1,000,000. Allowable profit
margins and overhead for office salaries and expenses are pretty well-
defined in our industry, and 15 percent is a reasonable total markup.
If you consider the total markup of that job at $150,000, the $61,000
delinquency payment for three or more projects was less than half for
just one.
The payment was a fine that, for all practical purposes, took a
small bite out of an overall profit margin. It was essentially just a
cost of doing business and arguably well worth the risk. There were no
limits placed on this contractor against bidding future publicly funded
work, as we have competed against them many times ever since. In most
cases they beat us, and they beat others that price the work with all
taxes and premiums included in their proposals.
how the federal government can help
Many of the parameters for successfully eliminating payroll fraud
from the construction industry are in place, but I feel it will take
comprehensive, yet sensible, action by the Federal Government to put
this issue to bed for a couple of reasons.
Several States, including now my home State of Tennessee, have made
attempts at addressing this issue on their own. While it is very
encouraging that a State like Tennessee has listened to the issue and
enacted some positive legislation to try and proactively address the
issue, what we find regionally is that not all States understand it,
and the ones that do are enacting legislation with varying focus and
levels of enforcement. The end result is the offenders scurry from
State to State, manipulating the system in increasingly sophisticated
ways, and then concentrating in other less-savvy States until they
decimate the local construction economies, and then moving on only to
repeat the cycle.
The Federal Government can look at the various State plans, and
find out what is working and what is not working to create a plan that
is enforceable across all States.
Second, this is an issue that crosses State borders. One of the
worst offenders against which we compete is based out of Georgia, but
regularly prices work in Tennessee and other States in the region.
Since those types of companies are using labor brokers that are
sometimes based out of Florida or other regional States, there could be
three States involved on a single project. As such, no single State is
able to fully take charge of a prosecution across State lines.
Interstate regulation is a primary function of the Federal Government,
and certainly applies to this problem. Additional focus by U.S.
attorneys would certainly help here by prosecuting egregious cross-
border violators.
Last, the Federal Government already has functional systems in
place that could be part of a sensible comprehensive treatment of this
issue. One example is E-Verify. Our company has been E-Verify compliant
for years, and while it is actually very easy to use, reliable, and
accurate, it is also probably the easiest Federal system to circumvent
in our industry. The project I noted above was an E-Verify project. We
see notorious operators in our industry function without interruption
on publicly funded projects (including projects with ARRA funding)
simply because there is no enforcement of this provision. However, the
system is in place, and with intelligent modifications to the
implementation of it, could be used as an effective tool.
conclusion
I noted in the introduction that this devastating issue has gotten
worse during the recession. Back in the 1990s when the entire labor
broker payroll-fraud phenomena really hit the Southeast, the bad apples
gained a poor reputation within the industry. In many cases, when
general contractors would receive bids from the questionable
contractors, and those prices looked artificially low, they would toss
those bids into the trash, because the risk just wasn't worth it.
However, as opportunities dried up, and there wasn't always 10 other
jobs that could be bid if you lost the last one, suddenly the generals
starting using those numbers out of fear that, if they didn't, the guy
across the street would, and there just wasn't that much else out there
to bid.
What that means now is that the prevalence of those players in the
market, coupled with reduced opportunity overall due to recession, is
phasing out law-abiding businesses like ours until there won't be
anything left but the bad operators. If we wait until that happens,
then when action comes, it will be too late. Trades people are leaving
our industry in mass to seek employment in other safer industries with
wages that haven't been beaten into the ground by the criminal
operators. This is not going to be a light switch we can turn back on
and fix once the workforce disappears. Without action, construction
stands to go the way of many elements of manufacturing in our country's
history. Yet, this time, it is not being sent overseas. It is happening
right under our noses on our soil, and it is hurting workers and their
families, as well as shutting down a whole industry of contractors that
believe in building middle-class jobs and who are just trying to do
things the right way and make a reasonable profit to support their own
families.
Senator Casey. Thank you very much, Mr. Odom.
Ms. Ruckelshaus.
STATEMENT OF CATHERINE K. RUCKELSHAUS, LEGAL CO-DIRECTOR,
NATIONAL EMPLOYMENT LAW PROJECT, NEW YORK, NY
Ms. Ruckelshaus. Thank you, Chairman Casey, Ranking Member
Isakson, and members of the subcommittee.
I appreciate the opportunity to testify today on the
important subject of payroll fraud. I am Cathy Ruckelshaus and
I am general counsel of the National Employment Law Project,
NELP. We are a nonprofit that promotes good jobs, access and
opportunities for work.
It has been a little over 3 years since I appeared before
the HELP committee to talk about independent contractor
misclass-
ification, and I am disheartened to say that the problems have
exacerbated despite some State activity to combat the problems,
and the problems call for Federal leadership and activity.
At NELP and in my practice, we see low-wage workers in our
economy's growth sectors being forced to sign contracts saying
they are an independent contractor as a condition of getting a
job. We also see employers changing the status of their workers
from employee into independent contractor without any change in
the underlying relationships at work. We also see employers
call their workers ``franchisees,'' of one in the janitorial
industry and we see workers being paid off the books. All of
these practices, unfortunately, have been on the rise,
especially in this period of high unemployment when workers are
willing to take a job under almost any circumstance.
These janitors, homecare workers, construction workers,
cable installers, and even restaurant servers are not running
their own business by any definition. They want to work and
they, too often, accept whatever arrangement gets them a job.
And these same occupations with high payroll fraud suffer from
high violations of other workplace laws, so it means these jobs
are not paying well and they suffer high rates of health and
safety violations, among other things.
As Senator Casey mentioned, this hurts not only the
workers, but it also hurts law abiding employers and it hurts
our Government's coffers, and I will talk about that in a
little bit. Today, I am just going to briefly describe payroll
fraud and its impacts. It is the impact on State and Federal
Government coffers and on law abiding employers, and then I
will talk a little bit at the end about why I think the Payroll
Fraud Protection Act is an important first step to combat this
problem.
As Senator Isakson mentioned, every day employers
legitimately contract with other independent businesses
typically to perform jobs that the contractor performs for a
variety of customers. These routine practices are not the
subject of payroll fraud reforms. Genuine independent
contractors constitute a small proportion of the American
workforce because, by definition, an independent contractor is
in business for him or herself.
What is happening today is that companies have become
increasingly emboldened in the ways they seek to skirt basic
labor standards, insurance, and tax laws that apply to
employers. We have heard about some of the practices today.
The problem of workers being required to sign boiler-plate
contracts attesting to their independent contractor status is
especially galling even when the functional relationships do
not reflect true independence.
These practices are called payroll fraud because they are
intentional and they are aimed at evading the law. Legitimate
business-to-business transactions are not payroll fraud because
true independent contractors bring a specialized skill. They
typically invest a capital in their business against which they
can earn a profit. And they can pass on increased costs to
their customers as any business does, like higher gas prices or
an increase in the cost of safety equipment. So companies
orchestrate these relationships to avoid labor and employment
protections, and because they can underbid competitors, as we
have heard.
So how prevalent is this? In my testimony, I detail that it
is quite prevalent. The 2000 U.S. Department of Labor study
that is being updated found that up to 30 percent of employers
that misclassify their workers state studies have shown
percentages as high as 47 percent of employers. It rises during
periods of high unemployment.
The cost to the States and the Federal Government are
literally in the billions of dollars. They are staggering and
it is typically unemployment insurance, workers' compensation,
income tax, and payroll taxes.
There has been State activity across a wide variety of
States: Delaware, Maryland, Minnesota, Nebraska, New Mexico,
New York, Pennsylvania, Wisconsin have construction-specific
laws. Over 20 States have established task force to study the
problem. The interesting thing is that these State task force
and the U.S. Department of Labor report that most of the
complaints that come in to them come from competitors; not from
workers, but from competitors like Mr. Odom's business.
So we need Federal leadership and reform. The Department of
Labor's task force has established some important first steps.
The Payroll Fraud Prevention Act that Senator Casey mentioned
would provide important transparency for workers and employers
about the status of workers and would enable workers to
question that status if they think it is incorrect.
In addition, there is a Fair Playing Field Act that was
introduced by Senator Kerry that would fix the tax code. I
realize that is not the topic of this panel, but that would
have a huge impact on narrowing the safe harbor that is
currently enabling hundreds of thousands of businesses to take
advantage of misclassifying their workers, and then never
having to repair or correct the mistake. This is causing,
again, billions of dollars of unpaid revenues for the
Government.
I appreciate the opportunity to testify today. I am happy
to answer your questions in the intervening period.
Thank you.
[The prepared statement of Ms. Ruckelshaus follows:]
Prepared Statement of Catherine K. Ruckelshaus
Senator Casey and members of the subcommittee, thank you for this
opportunity to testify today on the important subject of payroll fraud
and its impacts on workers and their families, law abiding employers,
and the broader economy.
My name is Cathy Ruckelshaus, and I am a general counsel of the
National Employment Law Project (NELP), a non-profit organization that
promotes policies and programs that create good jobs, strengthen upward
mobility, enforce hard-won worker rights, and help unemployed workers
regain their economic footing through improved benefits and services.
It has been a little over 3 years since I appeared before the HELP
Committee to talk about independent contractor misclassification,\1\
and I am disheartened to say that the problems have exacerbated despite
some State activity to combat the problems, and call for Federal
leadership and action.
---------------------------------------------------------------------------
\1\ See, Testimony of Catherine Ruckelshaus before Senate HELP
Committee, June 2010,
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At NELP, we see low-wage workers in our economy's growth sectors
being forced to sign contracts saying they are ``independent
contractors'' as a condition of getting a job; we see employers
changing employees into independent contractors, franchisees, or other
non-employee labels to cut costs, and we see workers being paid off the
books completely, with no reporting or withholding of the basic payroll
taxes or insurance. Janitors, home care workers, construction laborers
and drywallers, cable installers, delivery persons, and even restaurant
servers--these are the workers we see who are called non-employees by
their employers. They are not running their own businesses by any
definition. They want to work and they too often accept whatever
arrangement gets them a job. These same occupations with high rates of
independent contractor misclassification are among the jobs with the
highest numbers of workplace violations.\2\
---------------------------------------------------------------------------
\2\ See, National Employment Law Project, Holding the Wage floor,
http://www.help.senate
.gov/imo/media/doc/Ruckelshaus.pdf. http://nelp.3cdn.net/
95b39fc0a12a8d8a34_iwm6bhbv2
.pdf.
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This hurts the workers, who lose out on labor and employment
protections including workers compensation, unemployment insurance,
fair pay, and health and safety safeguards. They also bear a tax burden
that their employers are supposed to incur. It hurts law-abiding
employers who treat their workers as employees but who cannot compete
with those who perpetrate fraud. This has resulted in a race to the
bottom and rewards cheaters. This affects the quality of what should be
middle-class jobs that could stimulate our economy.
My testimony will update what I presented in 2010, describing
independent contractor misclassification and its impacts on workers, on
State and Federal Government coffers, and on law-abiding employers. I
will describe the recent downturn in State legislative activity on this
important issue, and conclude with comments on Federal efforts to
address the problem, including the Payroll Fraud Protection Act.
i. what is independent contractor misclassification, or payroll fraud?
Companies looking to cut payroll costs to compete for work have
become increasingly emboldened in the ways they seek to skirt basic
labor standards, insurance and tax laws that apply to employers. They
call employees ``independent contractors,'' even when the worker is not
running his own business; they require employees to form a limited
liability corporation or franchise company-of-one as a condition of
getting a job, and they pay workers off the books, without any payroll
treatment at all. These workers are sometimes required to sign
boilerplate contracts attesting to independent contractor status even
where the functional relationships do not reflect true independence.
These practices are increasingly being called ``payroll fraud''
because they are intentional and aimed at evading the law. Legitimate
business-to-business transactions are not payroll fraud, because true
independent contractors have a specialized skill and have invested in a
business that enables them to earn a profit.\3\
---------------------------------------------------------------------------
\3\ See, Employment Arrangements: Improved Outreach Could Help
Ensure Proper Worker Classification, GAO-06-656 (July 2006), at p. 43.
---------------------------------------------------------------------------
Companies do this to avoid having to report and pay FICA and FUTA
taxes, evade labor organizing, skirt baseline labor standards like
minimum wage and overtime, discrimination protections, health and
safety and workers compensation, and unemployment insurance.\4\ And
they construct these arrangements because they can under-bid
competitors in labor-intensive sectors by saving as much as 30 percent
of payroll and related costs.
---------------------------------------------------------------------------
\4\ See, Employment Arrangements: Improved Outreach Could Help
Ensure Proper Worker Classification, GAO-06-656 (July 2006), at p. 25.
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A. Misclassification persists in labor-intensive and lower-wage jobs.
The most recent Government Accountability Office (GAO) report on
employment arrangements states in 2009 that,
``[t]he national extent of employee misclassification is
unknown; however, earlier and more recent, though not as
comprehensive studies suggest that it could be a significant
problem with adverse consequences.'' \5\
---------------------------------------------------------------------------
\5\ See, Employment Arrangements: Improved Outreach Could Help
Ensure Proper Worker Classification, GAO-06-656 (July 2006), at p. 43.
A 2000 study commissioned by the U.S. Department of Labor found
that up to 30 percent of firms misclassify their employees as
independent contractors.\6\ In January 2013, the U.S. Department of
Labor sought comments on a planned classification survey of workers,
which should update these earlier studies with much-needed more recent
information.\7\
---------------------------------------------------------------------------
\6\ Lalith de Silva, et al., ``Independent Contractors: Prevalence
and Implications for Unemployment Insurance Programs'' i-iv, prepared
for U.S. Department of Labor, Employment and Training Division by
Planmatics, Inc. (Feb. 2000), available at http://wdr.doleta.gov/
owsdrr/00-5/00-5.pdf.
\7\ Proposed Information Collection Request (ICR) for the Worker
Classification Survey; Comment Request http://www.gpo.gov/fdsys/pkg/FR-
2013-01-911/html/2013-900389.htm.
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Many States have studied the problem and find high rates of
misclassification, especially in construction, where as many as 47
percent of employers were found to have misclassified their
employees.\8\
---------------------------------------------------------------------------
\8\ See Fiscal Policy Institute, ``New York State Workers
Compensation: How Big is the Shortfall?'' (January 2007); Michael
Kelsay, James Sturgeon, Kelly Pinkham, ``The Economic Costs of Employee
Misclassification in the State of Illinois'' (Dept of Economics:
University of Missouri-Kansas City: December 2006); Sturgeon and
Kelsay, ``The Economic Costs of Employee Misclassification in the State
of Indiana,'' Department of Economics, University of Missouri-Kansas
City (2010); Peter Fisher, et al, ``Nonstandard Jobs, Substandard
Benefits'', Iowa Policy Project (July 2005); Francois Carre, J.W.
McCormack, ``The Social and Economic Cost of Employee Misclassification
in Construction (Labor and Worklife Program, Harvard Law School and
Harvard School of Public Health: December 2004); State of New Jersey,
Commission of Investigation, ``Contract Labor: The Making of an
Underground Economy'' (September 1997); Canak and Adams,
``Misclassified Construction Employees in Tennessee'' (2010).
---------------------------------------------------------------------------
Most of these studies do not capture the so-called ``underground
economy,'' where workers are paid off-the-books, sometimes in cash.\9\
These workers are de facto misclassified independent contractors,
because the employers do not withhold and report taxes or comply with
other basic workplace rules. Many of these jobs are filled by immigrant
and lower-wage workers.\10\
---------------------------------------------------------------------------
\9\ Bear Stearns in 2005 estimated that the United States is losing
$35 billion annually due to off-the-books employment. Justich and Ng,
``The Underground Labor Force is Rising to the Surface,'' at p. 3,
Bearns Stearns Asset Management (2005).
\10\ Francois Carre, J.W. McCormack, ``The Social and Economic Cost
of Employee Misclassification in Construction (Labor and Worklife
Program, Harvard Law School and Harvard School of Public Health:
December 2004), at p. 8.
---------------------------------------------------------------------------
Payroll fraud is persistently common in jobs where the workers are
not truly running their own independent businesses: construction,\11\
day labor,\12\ janitorial and building services,\13\ home health
care,\14\ agriculture,\15\ poultry and meat processing,\16\ high-
tech,\17\ delivery,\18\ trucking,\19\ home-based work,\20\ and the
public \21\ sectors.
---------------------------------------------------------------------------
\11\ Workers Defense Project, ``Building Austin, Building
Injustice: Working Conditions in Austin's Construction Industry''
(2009); Francois Carre, J.W. McCormack, et al., ``The Social and
Economic Cost of Employee Misclassification in Construction'' 2, Labor
& Worklife Program, Harvard Law School and Harvard School of Public
Health, Dec. 2004, available at http://www.faircontracting.org/
NAFCnewsite/prevailingwage/pdf/Work_Misclass_Stud_1.pdf.
\12\ Abel Valenzuela and Nik Theodore, On the Corner: Day Labor in
the United States (January 2006).
\13\ See Bulaj v. Wilmette Real Estate and Management Co., LLC,
2010 WL 4237851 (N.D.Ill.2010); Coverall North America, Inc. vs.
Commissioner of the Division of Unemployment Assistance, SJC-09682, 447
Mass. 852 (2006); Vega v. Contract Cleaning Maintenance, 10 Wage & Hour
Cases 2d (BNA) 274 (N.D. IL 2004).
\14\ See Crouch v. Guardian Angel Nursing, Inc., 2009 WL 3737887
(M.D.Tenn.2009); Bonnette v. Cal. Health & Welfare Agcy., 704 F.2d 1465
(9th Cir. 1983).
\15\ Sec'y of Labor v. Lauritzen, 835 F.2d 1529 (7th Cir. 1988).
\16\ Employment Arrangements: Improved Outreach Could Help Ensure
Proper Worker Classification, GAO-06-656 (July 2006), at p. 30.
\17\ Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir. 1996).
\18\ Ansoumana, et al v. Gristedes, et al, 255 F.Supp.2d 184
(S.D.N.Y. 2003).
\19\ See Smith, Bensman, Marvy, ``The Big Rig: Poverty, Pollution
and the Misclassification of Truck Drivers at America's Ports,''
(2010), http://nelp.3cdn.net/000beaf922628dfea1_
cum6b0fab.pdf; Steven Greenhouse, The New York Times, Clearing the Air
at American Ports, http://www.nytimes.com/2010/02/26/business/
26ports.html.
\20\ Employment Arrangements: Improved Outreach Could Help Ensure
Proper Worker Classification, GAO-06-656 (July 2006), at p. 31.
\21\ Phillip Mattera, ``Your Tax Dollars at Work . . . Offshore,''
Good Jobs First (July 2004) http://www.goodjobsfirst.org/publications/
Offshoring_release.cfm.
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Press accounts and queries coming into the NELP offices indicate
that employer payroll fraud and related practices rise during periods
of high unemployment, where workers will take a job under nearly any
circumstance. When job opportunities are scarce, workers face increased
pressure to acquiesce to independent contractor arrangements. An Ohio
worker who agreed in 2010 to be labeled an independent contractor as a
condition of getting a job building housing for the homeless under a
Federal grant explained, ``I went along with it because I felt my back
was up against the wall. I have a family. My fiance was in school. I'm
the only bread winner.'' \22\
---------------------------------------------------------------------------
\22\ http://www.bloomberg.com/news/2013-10-18/states-clamping-down-
on-workers-mislabeled-as-contractors.html.
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Permitting employers in these jobs to get away with skirting basic
labor and tax requirements will have a significant and long-term effect
on the nature of jobs and our economy.
ii. federal and state governments lose billions
Federal and State governments suffer hefty loss of revenues due to
independent contractor misclassification, in the form of unpaid and
uncollectible income taxes, payroll taxes, and unemployment insurance
and workers' compensation premiums.
A. Losses to Federal Revenues
As detailed in my 2010 testimony, several government studies
document the extent to which misclassification drains Federal revenues:
A 1994 study by Coopers and Lybrand estimated the Federal
Government would lose $3.3 billion in revenues in 1996 due to
independent contractor misclassification, and $34.7 billion in the
period from 1996 to 2004.\23\
---------------------------------------------------------------------------
\23\ Coopers & Lybrand, Projection of the Loss in Federal Tax
Revenues Due to Misclassification of Workers, Prepared for the
Coalition for Fair Worker Classification (1994).
---------------------------------------------------------------------------
A 2000 study commissioned by the U.S. Department of Labor
(DOL)--the ``Planmatics'' study--found that misclassification exacts an
enormous toll: misclassifying just 1 percent of workers as independent
contractors would cost unemployment insurance (UI) trust funds $198
million annually.\24\
---------------------------------------------------------------------------
\24\ Lalith De Silva, et al., Independent Contractors: Prevalence
and Implications for Unemployment Insurance Programs, Planmatics, Inc.,
Prepared for the U.S. Department of Labor Employment and Training
Administration (2000), available at http://wdr.doleta.gov/owsdrr/00-5/
00-5.pdf.
---------------------------------------------------------------------------
A 2009 report by the Government Accountability Office
(GAO) estimated independent contractor misclassification cost Federal
revenues $2.72 billion in 2006.\25\
---------------------------------------------------------------------------
\25\ U.S. General Accounting Office, Employee Misclassification:
Improved Coordination, Outreach, and Targeting Could Better Ensure
Detection and Prevention (August 2009), available at http://
www.gao.gov/products/GAO-09-717. See also, Treasury Inspector General
for Tax Administration, While Actions Have Been Taken to Address Worker
Misclassification, and Agency-Wide Employment Tax Program and Better
Data are Needed (February 4, 2009), available at http://www.treas.gov/
tigta/auditreports/2009reports/200930035fr.pdf (explaining that
``Preliminary analysis of fiscal year 2006 operational and program data
found that underreporting attributable to misclassified workers is
likely to be markedly higher than the $1.6 billion estimate from
1984.'')
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A 2010 study by the Congressional Research Service
estimated that a proposed modification to the IRS's ``Safe harbor''
rules, which currently allow employers significant leeway to treat
workers as independent contractors for employment tax purposes and
would yield $8.71 billion for fiscal years 2012-21.\26\
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\26\ A 2010 study by the Congressional Research Service built on
earlier national studies to compare the costs and benefits of improved
classification if President Obama's proposed modification of Section
530 of the Revenue Act of 1978 were passed. The modification would
permit the IRS to prospectively reclassify workers who are
misclassified. The U.S. Treasury estimated that the proposal would
yield $8.71 billion for the period of fiscal year 2012 through 2021.
The CRS study acknowledged, however, that the work needed to reduce
misclassification ``would impose significant costs.'' James M. Bickley,
Tax Gap: Misclassification of Employees as Independent Contractors,
Congressional Research Service (March 10, 2011), available at http://
op.bna.com/dlrcases.nsf/id/vros-8euvqa/$File/taxgap.pdf.
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B. Losses to State Revenues
The 2010 testimony I provided enumerated the various State task
force studies showing staggering losses in the billions of dollars to
State workers' compensation, unemployment insurance, and income tax
revenues.\27\ Updates to the State and Federal costs reports show
continued and damaging drains on public funds. Recent results from
State task force reports include:
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\27\ See, Testimony of Catherine Ruckelshaus before Senate HELP
Committee, June 2010, at pp. 7-8; http://www.help.senate.gov/imo/media/
doc/Ruckelshaus.pdf.; Leberstein, ``Independ-
ent Contractor Misclassification Imposes Huge Costs on Workers and
Federal and State Treasuries,'' National Employment Law Project (2012);
http://nelp.3cdn.net/0693974b8e20a9213e
_g8m6bhyfx.pdf.
A 2013 bill in the California legislature finds that an
estimated $9 billion of corporate, personal, and sales and use taxes
goes uncollected in California each year, with unreported and
underreported economic activity responsible for the vast majority of
that total. In 2012 California's Employment Development Department's
(EDD) Tax Branch conducted 4,290 audits and investigations, resulting
in assessments totaling $230.6 million, and identifying 89,063
unreported employees. EDD's Compliance Development Operations which
concentrates on the underground economy, conducted 2,600 joint
inspections, identified 13,226 previously unreported employees,
assessed $36 million in payroll tax assessments and assessed over $9
million on fraud cases in 2012.\28\
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\28\ California Employment Development Department, Annual Report:
Fraud Deterrence and Detection Activities, report to the California
Legislature (June 2013), available at http://www.edd.ca.gov/about_edd/
pdf/Fraud_Deterrence_and_Detection_Report13.pdf.
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The New York Joint Enforcement Task Force on Employee
Misclassification said in February 2013 that since its inception in
2007, it has identified over 88,700 instances of employee
misclassification and discovered over $1.4 billion in unreported wages
and conducted 142 joint sweeps. In 2012, the JETF identified over
20,200 cases of employee misclassification; discovered over $282.5
million in unreported wages; and assessed over $9.7 million in
unemployment insurance taxes.\29\
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\29\ Annual Report of the Joint Enforcement Task Force on Employee
Misclassification, (February 1, 2013), available at http://
www.labor.ny.gov/agencyinfo/PDFs/Misclassification-Task-Force-Report-2-
1-2013.pdf.
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In 2012, Massachusetts' Joint Task Force on the
Underground Economy and Employee Misclassification recovered over $15.4
million through its enforcement efforts: the Department of Unemployment
Assistance recovered $13 million in unpaid employer contributions to
the UI Trust Fund; the Department of Revenue recovered $328,000 in
unpaid taxes; and the Attorney General's Office brought in $593,400 in
restitution, penalties, and fines related to violations of the State's
wage and hour and independent contractor laws. Based on the review and
investigation of all JTF referrals in 2012, the Department of
Industrial Accidents issued 15 stop-work orders for lack of workers'
compensation coverage.\30\
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\30\ Massachusetts Department of Labor, Joint Task Force on the
Underground Economy and Employee Misclassification 2012 Annual Report
(August 2013), available at http://www.mass.gov/lwd/eolwd/jtf/annual-
report-2012.pdf.
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iii. state and federal policy reforms
A. State reforms
State legislation seeking to combat independent contractor abuses
has dwindled since the initial spate of laws were passed in the mid- to
late-2000s, with much of the more recent activity pertaining to small
provisions allowing discretionary penalties or weakening previously
enacted laws.\31\
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\31\ For State legislative round-ups of leading independent
contractor legislation, see National Employment Law Project, ``NELP
Summary of Independent Contractor Reforms: New State and Federal
Activity,'' November 2011, http://nelp.3cdn.net/
85f5ca6bd2b8fa5120_9qm6i2an7.pdf. Earlier year round-ups are cited in
the 2011 report footnotes.
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The State reforms fall into a few general categories, and with one
possible exception, are not comprehensive laws applying to all sectors.
Some themes that emerge from an analysis of State laws are:
Laws that create a presumption of ``employee'' or
``employer'' status for those performing or receiving labor or services
for a fee. State UI and other laws that use the so-called ``ABC'' test
are an example of these laws; they create a presumption of employee
status and require employers to overcome this presumption by showing
that: (a) an individual is free from control or direction over
performance of the work, both under contract and in fact; (b) the
service provided is outside the usual course of the business for it is
performed; and (c) an individual is customarily engaged in an
independently established trade, occupation or business. This ``ABC''
test for non-employee status is the most objective and the most
difficult for employers to manipulate.\32\
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\32\ Twenty-four States have this definition in their unemployment
insurance law Alaska, Arkansas, California, Connecticut, Delaware,
Florida, Hawaii, Illinois, Indiana, Louisiana, Massachusetts, Maryland,
Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, Oklahoma,
Rhode Island, Tennessee, Virginia, Vermont, Washington, and West
Virginia. Another eight States use a test that includes part ``C'' in
combination with other factors (Colorado, Georgia, Idaho, Minnesota,
Oregon, Pennsylvania, South Dakota, and Utah). This is also the law in
over 10 States' workers' compensation acts: AZ, CA, CO, CT, DE, HI, NH,
ND, WI, WA. Massachusetts' minimum wage act and its wage payment law
use the ABC test as well. http://www.mass.gov/legis/laws/mgl/149-
148b.htm.
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Construction industry-specific laws that apply the
standard across multiple State workplace laws to determine the status
of construction workers.\33\
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\33\ E.g., DE, IL, MD, MN, NB, NM, NY, PA, WI.
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Laws creating a study commission or task force to
coordinate audits and enforcement.\34\
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\34\ For a recent summary of State task forces and their results,
see National Employment Law Project, ``Independent Contractor
Misclassification Imposes Huge Costs on Workers and Federal and State
Treasuries,'' National Employment Law Project (2012); http://
nelp.3cdn.net/0693974b8e20a9213e_g8m6bhyfx.pdf.
---------------------------------------------------------------------------
The State reforms, including the State task forces and executive
branch activity, are an important first step and have brought real
results to the State treasuries. There is however a continued need for
Federal leadership and oversight, as nearly half of the States have no
payroll fraud provisions in place, and because the practices continue
largely unabated in many sectors.
B. Federal Reforms
To date, no Federal legislation has been enacted to address this
growing problem. The U.S. Department of Labor has launched a multi-
agency task force to combat payroll fraud, which is an important step.
Department of Labor Employee Misclassification Initiative: The
Department of Labor's multi-agency initiative to strengthen and
coordinate Federal and State efforts to identify and deter employee
misclassification was launched in 2010.\35\ In its Strategic Plan, the
Department described Wage & Hour Division investigations in industries
with the most substantial independent contractor abuses, and training
for investigators on the detection of misclassified workers; targeted
efforts to recoup unpaid payroll taxes due to misclassification,
including a pilot program to reward States with the most success at
detecting and prosecuting employers that misclassify; coordination with
the States on enforcement litigation against multistate employers that
routinely abuse independent contractor status; training for
Occupational Safety and Health inspectors on misclassification issues;
and legislative changes requiring proper classification, providing
penalties for misclassification, and restoring protections for
employees who have been improperly classified.\36\
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\35\ The DOL has signed Memoranda of Understanding with 13 States
and is undertaking targeted enforcement in collaboration with other
agencies to combat the worst abuses; see http://www.dol.gov/whd/
workers/misclassification/.
\36\ See http://www.dol.gov/_sec/media/congress/
20100310_appropriations.htm.
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The Internal Revenue Service has also launched its Voluntary Worker
Classification Settlement Program, which enables employers to resolve
past worker misclassification problems by voluntarily reclassifying
their workers prospectively and making a minimal payment covering past
payroll tax obligations.\37\ To be eligible, the employer must have (1)
consistently treated the workers in the past as nonemployees; (2) filed
all required Forms 1099 for the workers for the previous 3 years; and
(3) not currently be under audit by the IRS, the Department of Labor or
a State agency concerning the classification of these workers.
Employers accepted into the program will pay an amount equaling just
over 1 percent of the wages paid to the reclassified workers for the
past year.
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\37\ See http://www.irs.gov/newsroom/article/0,id=246203,00.html.
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The Payroll Fraud Prevention Act \38\ was introduced in April 2011
by Senator Brown, and would amend the recordkeeping requirements of the
Fair Labor Standards Act (FLSA) to require employers to notify all
employees and non-employees who perform services for remuneration of
their status, would establish a presumption that an individual is an
employee under the FLSA if the employer violates the notice
requirements; and would provide for the imposition of civil penalties.
The bill would also amend the Social Security Act to require State
unemployment insurance programs to implement investigative procedures
and establish penalties for misclassification; would require the
Department of Labor (DOL) to measure State performance in this
independent contractor misclassification enforcement when conducting
unemployment compensation tax audits; would require information-sharing
within the DOL regarding possible independent contractor abuses under
the FLSA, and authorize the sharing of such information with the IRS;
and would require that targeted audits conducted by the Wage & Hour
Division include industries with frequent incidence of employee
misclassification.
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\38\ https://www.govtrack.us/congress/bills/112/s770.
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This law, if enacted, would provide important transparency for
workers and their employers, and enable workers to question their
designated employment status if the notification appeared incorrect or
was confusing.
closing the irs safe harbor--fair playing field act
Under current law, an employer who is found by the IRS to have
misclassified its workers as independent contractors can have all
employment tax obligations waived. This ``Safe harbor'', at Section 530
of the Internal Revenue Act of 1978, 26 U.S.C. Sec. 7436, also prevents
the IRS from requiring the employer to reclassify the workers as
employees in the future. Among other factors, to get the safe harbor, a
business can assert its belief that a significant segment of its
industry treated workers as independent contractors, thereby
perpetuating industry-wide noncompliance with the law.
This loophole prevents the IRS from collecting back payroll taxes
and even issuing regulations or guidance clarifying the agency's
analysis of independent contractor practices for purposes of payroll
taxes, and has thus been a major bar to effective enforcement against
independent contractor abuses. To close this loophole, Senator Kerry
introduced the Fair Playing Field Act of 2012 (S. 2145). This bill
would amend the Internal Revenue Code to modify the rules giving
employers a ``safe harbor'' when they misclassify employees, and would
permit the IRS to issue guidance on the subject. This change is vital
to serious reform seeking to combat independent contractor abuses.
Without this monetary and tax incentive for employers to fix the
problem, it will continue unabated.
In addition, the Congress should support more Federal criminal
prosecutions for egregious violators of Federal criminal laws,
including the failure to report currency transactions, mail and wire
fraud, and tax fraud. The IRS could extend 1099 transaction reporting
requirements to any payments made to incorporated businesses; this
would help the IRS track down the companies who received those payments
but did not pay taxes. And finally, comprehensive immigration reform
would enable more immigrants to come forward and inquire about and
protect their rights.
Senator Casey. Thanks very much.
Mr. MacKrell.
STATEMENT OF CHRIS MacKRELL, PRESIDENT AND CHIEF OPERATING
OFFICER, CUSTOM COURIER SOLUTIONS, ROCHESTER, NY
Mr. MacKrell. Chairman Casey, Ranking Member Isakson, and
the committee, I want to thank you both for affording me the
opportunity to appear here today. I provided the committee with
a written testament of both my business and our industry, but I
wanted to share with the committee this afternoon my personal
perspective, the important role independent contractors play in
the economy.
After graduating college in 1982, I found myself ready to
start my career, but as you may recall, the country struggled
with tough economic times, not dissimilar to what the country
is going through today. In my search for a job, I was presented
with an opportunity to start my career as an independent
contractor working for a small courier company in up-state New
York. Over the next 3 years, I operated as an I.C. learning the
skills necessary to succeed in the same-day delivery business.
After 23 years working in the industry, I found myself,
once again, with the opportunity to operate my own small
business. So in 2006 with a partner, I started Custom Courier
Solutions. CCS's first business opportunity was to operate as
an independent contractor for a much larger courier company.
For the first 6 months, revenue from that single customer was
what kept CCS alive. As time passed, we developed our own
customer base and as they say in Saratoga Springs, NY, we were
off to the races.
Based on my experience gained as an I.C., we have built our
company. Our projected revenue is expected to exceed $22
million in 2013. We support a $6 million annual payroll. More
importantly, our company created over $13 million in annual
revenue for the independent contractors that work for our
organization.
CCS now operates in the northeast. We have offices in
Fairless Hills in Scranton, PA. We provide last mile solutions
for the medical and pharmaceutical industry, critical parts,
industrial and auto supplies, banking, retail, and home
delivery.
CCS relies on the I.C. business model to meet our customer
needs. Our 200-plus contractors and our 156 traditional
employees work together to support the needs of our 150-plus
customers. We have accomplished this despite one of the
Nation's toughest economic environments in decades.
Congress must not hinder the entrepreneurial spirit and
recognize the great potential and opportunity being an I.C. can
provide. Like Popaul Mukuralinda of Rochester, NY, a 30-year-
old recent immigrant from Africa who, in 2011, started
providing services to CCS with a single van. Today, Popaul has
a fleet of three vehicles, is operating his own small business,
and is living the American Dream. His story and my story are
not unique.
CCS is a member of the Customized Logistics and Delivery
Association, the CLDA. Our Associations focus on the last mile
of the world's supply chain. My testimony today is submitted on
behalf of CLDA's 425 members.
As an industry with a long history of reliance on an I.C.
for our mutual success, we are keenly aware of the need to
properly classify individuals. CLDA members are urged to file
industry best practices, as well as guidance from both Federal
and State agencies to determine classification. We take these
decisions seriously.
At CCS, we ask every potential I.C. to complete a
questionnaire that details their rights, expectations of being
an I.C., including those questions related to the requirements
that they file both State and Federal taxes. When we engage an
I.C., we execute a written contract. We issue them 1099 forms
for all services provided. We require them to provide us with
proof of insurance for both themselves and their vehicles.
Previous legislation has focused on the rights of the
misclassified worker, but has never extended to the rights of
the individuals who choose to operate as independent
contractors like Don Wulf, a 70-year-old retiree from
Rochester, NY who has been an I.C. since 1995. As Don says,
``I get to set my own schedule, work when I want, and
meet the needs of my individual needs and the energy
levels that allow me to work.''
Or Cathy Woods, a 52-year-old mother from Scranton, PA who
has been an I.C. for us little over a year; as Cathy says,
``I have finally found a way to contribute to my
family's financial well-being while at the same time
not having to give up the ability to participate in my
family's activities.''
In closing, I would like to ask as you consider
legislation, you look at the full picture and include
considerations for those who choose to be independent
contractors. Tens of thousands of people every day choose to
operate as an independent contractor in pursuit of the American
Dream. The right to do so must also be protected.
Chairman Casey, Ranking Member Isakson, I thank you for
your time and consideration.
[The prepared statement of Mr. MacKrell follows:]
Prepared Statement of Chris MacKrell
Chairman Casey and Ranking Member Isakson, I appreciate this
opportunity to provide testimony to the committee on the need for
proper classification of individuals as independent contractors or
employees. I share your concern over businesses that intentionally
misclassify employees as independent contractors. With that said, I
want you to have the full picture. I would like to share how my
industry, the customized logistics and delivery industry, relies upon
independent contractors to respond to our customers' needs. I also want
to voice our concerns with legislation introduced in the House and
Senate in past Congresses addressing the misclassi-
fication of employees as independent contractors.
I am the president and COO of Custom Courier Solutions, which is a
customized logistics and delivery company based in New York with
operations throughout the Mid-Atlantic and Northeast. We have offices
in Fairless Hills and Scranton, PA, along with seven locations in up-
state New York and one location each in Maryland and Virginia. Our
company has been providing business services to our customers for more
than 7 years. Throughout that time, Custom Courier Solutions has relied
heavily on independent contractors to meet our customers' needs. Custom
Courier Solutions employs approximately 156 individuals and utilizes
the services of about 225 independent contractors to make deliveries.
Custom Courier Solutions is a long-standing member of the
Customized Logistics and Delivery Association (CLDA) and its
predecessor organization, which is the non-profit association of the
messenger courier industry. My testimony today is submitted on behalf
of CDLA's 425 members, who represent our industry and have serious
concerns about this critical issue.
The same-day customized logistics and delivery industry is an
integral part of the American economy, providing transportation of
packages, medical supplies, bulk materials and documents among
businesses and corporations in the United States and beyond. What
distinguishes our companies from other components in the delivery
supply chain is our emphasis on less than 24 hour, just-in-time
delivery of packages in response to customer demand.
Customized logistics and delivery businesses are small businesses
that have a long history of positive influence in their communities.
Firms typically employ about 25 individuals, who receive good salaries
and benefits, and utilize up to three times that many independent
owner-operator drivers annually. There are more than 5,000 small
businesses that make up the multibillion-dollar same-day delivery
industry.
Our owner-operators pick up and deliver important business
documents or packages that need to be sent or received quickly either
locally, regionally or nationally. They also deliver items that the
customer is unwilling to entrust to other means of delivery because
they are either time-sensitive or require specialized individual
handling, including machine parts, medical supplies, blood and organs
for transplant.
While there are many industries that use our CLDA members'
services, certain industries critically depend on couriers for
expedited same-day or less than 24 hours delivery on a daily basis.
Biomedical labs and analysis centers use couriers to retrieve and
deliver samples for testing and evaluation. The manufacturing industry
relies on customized logistics and delivery services to distribute
parts to keep their plants operating smoothly. Financial institutions
use members of our industry to transfer multiple documents every day
between branch processing centers and the Federal Reserve. Law firms
rely on us to deliver confidential documents on very strict deadlines
and use couriers to ensure rapid delivery. Pharmaceutical distributors
utilize use our members as a critical part of their ability to deliver
medications to pharmacies, hospitals and nursing homes daily. And
pharmacies rely on customized logistic and delivery professionals to
deliver medications to the homebound. These are just a few examples of
our primary customer markets--each CLDA member company, depending on
its expertise and regional needs, has a unique customer and market
profile.
Due to the critical need for flexibility and speed, these packages
cannot be slotted into the existing delivery times for next-day or 2-
day delivery offered by the Postal Service and the large overnight
delivery companies. They must be delivered according to the customer's
schedule and specifications. Organs must be delivered in a certain
timetable to be viable for transplantation. Medical specimens must be
delivered for testing within a specific timeframe if results are to be
useful and available quickly. And legal documents are often prepared
and delivered to the client or judge on unforgiving deadlines.
For these types of goods, customized logistics and delivery
services are the only form of delivery that does not jeopardize the
item delivered or the business involved. Independent contractors are a
key part of our ability to make this happen. They are crucial to
meeting customer demands for flexible scheduling and to ensure that a
delivery professional will always be available for a customer's
specific needs.
The business model for the customized logistics and delivery
industry is particularly reliant on independent contractors, who are
engaged to perform a variety of deliveries. The nature of the industry,
with its on-demand, often unscheduled delivery model, requires a
varying number of courier drivers on any given day and time of day to
complete a set service. The business model is also supported by
numerous dedicated employee resources in a variety of executive,
clerical and administrative functions.
To meet those needs, our members contract with competent, ambitious
and responsible individuals on an ``as needed'' basis to service their
community every day. These independent contractors (whom we refer to as
owner-operators) pick up and deliver letters, important business
documents or packages that need to be sent or received quickly within a
local area. Because these items are transported according to the
customer's own timetable and often these shipments are time sensitive,
the owner-operator business model allows courier companies to staff
each day of work appropriately.
In our industry, independent contractors contribute to a healthy
competition in many respects. Independent contractors bid for work from
courier companies and by so doing set the price paid for their work. It
is common in our industry for individuals to start out as an
independent contractor providing services to courier companies and over
time develop their own courier company and compete with the company to
which they formerly provided services. In fact, I have had many
independent contractors expand their own firms to support both the
service they provided to CCS as well as offer their service to the
general business community and are now competitors of Custom Courier
Solutions.
In many instances, independent contractor owner-operator drivers
can make significantly more money offering their services competitively
to multiple businesses rather than receiving work from just one
company. We have independent contractors who have made a good living
and have provided services to our company dating back to 2006. It is
this entrepreneurial spirit and opportunity that helps drive our
industry and our country.
Many independent contractors in our industry enjoy the flexibility
of their situations. Accepting or rejecting work based on their desire
and ability to work as they wish is very attractive to many independent
contractors. There are many examples of independent contractors telling
companies that they will not work on certain days or will not accept
dispatch after certain hours or refusing a job because they don't want
to drive a long distance or short distances. The bottom line here is
that they like having control over the work they perform when and if
they want it.
The use of independent contractors by our industry is not a recent
trend or a new phenomenon. Independent contractors have been an
integral part of our industry since our early beginnings dating back
well over a hundred years. Our industry has evolved as the economy has
changed, but the need for independent contractors has remained a
constant.
There is a concern over businesses that intentionally misclassify
employees as independent contractors. As an industry reliant upon
independent contractors for our mutual success, we are keenly aware of
the need to properly classify individuals. CLDA urges all of its
members to use industry best practices in making determinations on this
matter. Our member companies make the determination about whether an
individual is an independent contractor or an employee based upon
guidance from Federal, State and private sources. We take these
decisions seriously.
Here's how our company does things: When engaging with an
independent contractor, Custom Courier Solutions executes a written
contract with the independent contractors. We ask that every potential
independent contractor complete a questionnaire that details the rights
and expectation of being an independent contractor. Included in the
survey is the requirement that they file both State and Federal tax
forms. We submit 1099 forms for all the services that our independent
contractors preform. We also require that they provide proof of the
proper insurance for themselves and their vehicle.
Our industry has great concerns over the legislation that has been
introduced in the Senate and House of Representatives in previous
Congresses on classification of independent contractors. Legislation to
eliminate the safe harbor found in Section 530 of the Internal Revenue
Code in particular is very troubling to our industry. The intention of
these bills may be to curtail intentional misclassification by those
companies or even industries. However, the reality is that these bills
will affect all companies using independent contractors, including
those that apply rigorous standards compliant with Federal, State and
local regulations.
We have two broad concerns with legislation introduced in previous
Congresses to amend the Fair Labor Standards Act. In the past,
legislation has created additional mandates and requirements on all
businesses using independent contractors. These new requirements, in a
vacuum, may not seem to some as too onerous. Unfortunately, we don't
operate our businesses in a vacuum. These changes must be considered in
the context of existing and new mandates being imposed on our
businesses.
Second, we have a concern about the employees' rights Web site
called for in previous legislation. We believe this proposed
legislation does not recognize the rights of an individual to be an
independent contractor or the benefits of being an independent
contractor. Independent contractors often have much greater economic
opportunity than employees, as well as the freedom to work when they
want and where they want.
The majority of the legislation introduced over the last few years
has focused on the rights of a misclassified worker, but it has never
extended to the right of an individual who chooses to operate as an
independent contractor.
We would urge this committee to proceed cautiously with this issue.
Our industry has seen the successful use of industry guidance as a way
to ensure proper compliance. In the State of Minnesota, our industry
with the help of CLDA was able to pass a State law providing such
guidance with the support of organized labor and the trucking industry.
We also urge the committee to review the New York State Department of
Labor (NYSDOL) Guidelines for the Messenger Courier Industry (a copy is
attached). As part of the team that worked with the NYSDOL to design
these guidelines, we can act as template for successful guidance
throughout the country. We would recommend Congress consider this
approach as an alternative to the changes in law.
The customized logistics and delivery industry is a critical part
of the national and global supply chain. People in our industry are
saving lives daily and improving the health and well-being of our
citizens. The most important deliveries--including financial
transactions, critical machine parts, lab reports and lifesaving
medications--are performed by independent contractors working for more
than 5,000 small courier companies. For more than 100 years, our
industry has been served by a business model that is a great example of
the American Dream. Our independent contractors work hard, follows the
rules and provide efficient, flexible services that cannot be
duplicated. We recommend that any future legislation consider how it
will impact our industry and its essential core component: the
independent contractor.
Senator Casey. Thank you, Mr. MacKrell.
We are going to go in a different order. I am going to
switch questioning order with Senator Franken. He will go ahead
of me.
Senator Franken.
Statement of Senator Franken
Senator Franken. Thank you, Mr. Chairman.
Thank you for this very important hearing. Thank you, all
of you, for your testimony.
I was just struck, Mr. Anderson with Mr. MacKrell's
description of independent contractors that work with his
business, and his describing them as entrepreneurial, and
having insurance for their vehicles, and that kind of thing.
You were, in your testimony, you did exactly the same
thing; right? And nothing changed other than you being told
that either you would have to accept being an independent
contractor or, quote, ``Don't work at all.''
Mr. Anderson. Correct.
Senator Franken. I think that is a big difference. I mean,
does anyone acknowledge that there is not a difference there?
OK. And Mr. Odom testified to the fact that he is competing
with companies that do exactly that.
Mr. Odom, you testified that it would serve, OK, you get
caught. It is kind of the cost of doing business. You get a
little bit of a fine that does not reflect anything near the
advantage that you get from doing this practice, which is
unethical and illegal.
Was there any indication, Mr. Anderson, that your employer
thought that what they were doing was against the law or do you
believe that the employer was at all concerned about facing
penalties?
Mr. Anderson. I do not believe they were afraid of facing
the penalties. Like Mr. Odom said, it is part of the cost. They
are willing to take that risk.
Senator Franken. OK. I think it is important.
Ms. Ruckelshaus, you talked about during a recession, this
practice becomes a widely used practice and employees are under
a lot of pressure.
And Mr. Odom, I have to say, I commend you for sticking
with your ethical way of doing business during the very
difficult times.
But this is very common now, Ms. Ruckelshaus. You said you
testified a few years ago and now it is more common.
Can you tell us a little bit about what happens in a
recession and also, can you draw a distinction here between
legitimate uses of independent contractors, I do not know much
about your business, Mr. MacKrell. I understand what it is. It
is making those deliveries on the same day like an organ, my
goodness, an organ transplant delivery or something like that.
But there is a distinction here, a very clear distinction
in my mind. Is there not?
Ms. Ruckelshaus. Yes, it is and I think the question really
is: is the person running a business or not; running his or her
own business? And if you think about what that means, it means
you have a specialized skill. You invest some capital. You can
decide what you are going to do, how you are going to do it.
You are not integrated into somebody else's business, and doing
their bidding, and doing construction work or janitorial work.
The workers we see, the low-income workers, under no
definition are they running their own business. I mean,
restaurant servers, it is hard to imagine how they could be
called independent contractors and they are.
So in a recession and when the unemployment rate is high,
as we have seen in the last several years, it is exacerbated
and we have gotten a lot more calls. We have been involved in a
lot more enforcement actions around the country because the
workers have no bargaining power. They will take a job because
they need a job. So if they are told that the arrangement is
changing on paper, they do not have much of a choice. They take
it because they need the job.
Senator Franken. Mr. Odom, you do work in several States
and that there have been efforts by States, including
Minnesota, to get a handle on this. But what is--to both of
you--the importance of Federal legislation to address this?
Mr. Odom. In our experience, the importance of the Federal
involvement here as opposed to State level is because you have,
as I mentioned in my testimony, multiple; a contractor can be
touching several different States within a given a project. He
can be domiciled in Georgia, installing a project in Tennessee,
with labor brokers that are sending labor out of Florida. So
there is some issue of jurisdiction there that having clear cut
enforcement across at the Federal level would help.
Ms. Ruckelshaus. There is also a patchwork of State laws.
Less than half have enacted laws that pertain in any way to
independent contractor abuses, and most of them pertain only to
construction because that is the poster child of where the
problems lie.
Senator Franken. Right.
Ms. Ruckelshaus. It is very patchwork, and then
enforcement, as Senator Casey mentioned earlier, is very spotty
because of lack of resources. So it is not enough.
We need Federal oversight and leadership to really get a
handle on the problem.
Senator Franken. My time is up, Mr. Chairman, but I want to
thank all of the witnesses for their testimony.
Thank you, Mr. Chairman.
Senator Casey. Thank you Senator Franken.
Senator Isakson.
Senator Isakson. Thank you, Mr. Chairman, and thanks to all
the witnesses.
Ms. Ruckelshaus, you made a reference in your closing
statement to the safe harbor in the IRS code. Is that the 10-
point test to establish whether or not an independent
contractor is truly independent or not?
Ms. Ruckelshaus. No. I was referring, Senator, to the safe
harbor at section 530 of the Internal Revenue Act. It is at 26
U.S.C. 7436 and that describes what, under the Internal
Revenue Code which, again, is a 20-factor test. That may be
what you are referring to.
But it prohibits, that safe harbor, prohibits the IRS from
issuing any guidance on the subject at all for payroll fraud.
It also permits employers to evade any kind of liability for
any back problems. So if the IRS says, ``You are misclassifying
your employees and you need to change it,'' there is no ability
to collect penalties or any damages there. And an employer can
get the safe harbor if it says that, ``Most of the other
employers in my business do this''--have this practice.
Senator Isakson. Excuse me for cutting you off, but the
time will be short.
The reason I mention this is my recollection, the company I
ran was covered by that safe harbor, and it defined the
definition and the parameters by which you could comply with
the Federal law, and IRS was the enforcement agent in terms of
that. And that is true today that a company can be challenged
by anybody to be in violation of that section and it can be
tested under the IRS codes. Is that not correct?
Ms. Ruckelshaus. That is correct, sir.
Senator Isakson. How often does that happen?
Ms. Ruckelshaus. That is a good question. There is very
little data on how often that happens. It is typically
competitors who come in and complain because workers are not
protected if they come to complain to the IRS. So I do not have
data on how often that happens.
Senator Isakson. My point is that when you refer to doing
away with the safe harbor, amending the safe harbor, you are
talking about the provisions that allow people to operate as
independent contractors legitimately.
Ms. Ruckelshaus. No, that is not what would happen. The
proposed law that Senator Kerry had introduced would have
narrowed the ability for employers to claim the safe harbor and
would have permitted the IRS to issue guidance, to give
guidance to employers around the country.
Senator Isakson. Which is my point; we have got to tread
very carefully on going from where we are with a clear
definition to a narrowing of that definition which might, by
intent or the unintentional consequences of depriving a lot of
people of work that is legitimate that they are doing. That is
the reason I wanted to bring that up.
Mr. MacKrell, thank you very much for being here. You
talked about workers enjoying the flexibility that comes with
an independent contractor status.
Can you expand on that, particularly what would happen to
these workers if that flexibility went away?
Mr. MacKrell. In our situation, and like many people who
work in our industry, the independent contractors that work for
us have chosen this style of life, this way to earn a living
because they need a flexible, variable schedule. They want to
work when they want to work. They do not want to be told when
to come to work, what time they need to be at work, whether
they work, what rates they need to charge.
So if we were forced to move into an employee type of
basis, I believe that we would probably lose probably 60 to 70
percent of our workforce. They move on to other things. They
would, by the very nature of the services that they provide to
us, they are looking for flexibility and the ability to operate
their own business.
Senator Isakson. Do you know, out of curiosity, how many of
your contractors might actually be multiple contractors for
different businesses? I mean, not just in the delivery
business, but in other types of professions?
Mr. MacKrell. All I can really speak about is, obviously,
in our delivery business, I would say about 35 to 40 percent of
our I.C.'s provide services to other similar transportation
companies.
Senator Isakson. Any other second career-type businesses
other than transportation?
Mr. MacKrell. Not that I can chime in on.
Senator Isakson. Not that you know.
Mr. MacKrell. No.
Senator Isakson. Mr. Odom, I am sorry you had difficulty
with a Georgia company. I was paying close attention in your
testimony. I would only suggest they passed a pretty strong law
in Georgia with regard to labor brokers' verification of
employment and legality in the United States and in Georgia. So
I would urge you to take a look at that. Those violations
probably took place in the State of Tennessee, so Georgia law
might not be applicable, but Georgia has really tried to
address that problem in terms of labor brokers and that type of
labor. But I am sorry you had the problem with Georgians coming
across the line into Tennessee and competing with you.
Mr. Anderson, thank you for your willingness to come and
testify. It is incidents like what happened to you that are
important to all of us. I think it is very important we provide
a way to see to it that people's rights are protected. That
when somebody is injured unduly, like you are, because somebody
made a voluntary shift for convenience for their sake, but
certainly inconvenience for yours, that we pay close attention
to that. So thank you for your testimony and for being here
today.
Thank you, Mr. Chairman.
Senator Casey. Thank you, Senator Isakson.
I wanted to start, Mr. Odom, with a couple of questions for
you, but just by way of preface, this is a place and this is an
institution, the Senate and the House, the Congress overall,
where you often have conflict by way of policy or otherwise
between employers and employees on issues. Sometimes taxpayers
feel that their concerns are not being heard.
I have to say that there are very few areas of policy or
maybe in this case a problem that we are trying to rectify or
deal with where, if we get this right, we will have benefited
all three. Right? Employees and workers will be better off,
companies and employers will be better off, and certainly
taxpayers will. So that is pretty rare and I just mention that
by way of preface.
Mr. Odom, I want to ask you about when you are competing
against firms that are engaged in misclassification, and again
I will say for the record, these are the ones who are violating
the rules, violating the law. Not all employers and, frankly
not even most, but we have to recognize that there is a problem
here.
But when you are competing against those that are not
playing by the rules, those competitors--it is almost hard to
call them competitors when they have a 20 percent head start,
or whatever the exact percentage is, if we could ascertain
that--what types of projects are you talking about? What is the
common scenario in your work?
Mr. Odom. We primarily focus our efforts in the commercial
industry. So we do a lot of assisted living type facilities,
multifamily housing. We do a lot of public work--new buildings
on school campuses, university campuses, and hospitals as well.
We do that kind of work, so your larger scale commercial is
where we focus most of our efforts.
Senator Casey. And can you walk us through the process? I
think everyone in the room by now understands the basic
problem, but can you walk us through either a specific
experience or a common set of facts in terms of how you
confront this problem?
Mr. Odom. Where we see it is on the results on bid day is
where it is first obvious.
Oftentimes you will have a group of prices of people such
as ourselves that are on a level playing field that are trying
to do things the right way. We will be a percentage or two
apart from each other on bid day, and then you will have a
separate group of pricing down below that, 10, 15, 20 percent
also grouped together. It is pretty obvious if you are looking
in our scopes of work that we price. That is where we see it.
And then we get onto projects as well, where we are
performing a certain scope of work and then additional scopes
of work are being performed by companies that are handling
their business in that way. And so, we see it on the ground
level as well.
Senator Casey. And in terms of your direct experience, the
differential between the bids between you and, say, a firm that
is not playing by the rules, can be in that range of 10 to 30
percent. Is that accurate?
Mr. Odom. Yes.
Senator Casey. I want to also ask you, as well, about
Senator Isakson's mention of this concept of labor brokers. Can
you tell us what you know about that and what that means?
Mr. Odom. The labor broker is sort of an intermediary that
an offending contractor will use to go and seek out a
collection of guys that can be brought in under the 1099.
So if I am contractor wanting to operate in that way, I
would approach XYZ Labor, which operates as a business and say,
``I need 25 carpenters next Monday.'' And then he assembles
those carpenters and sends them to the jobsite.
Senator Casey. And that is a rather new player in this or
has that been part of the dynamic for a while?
Mr. Odom. It has been part of the dynamic for a while; it
just seems to be more prevalent because there are fewer
opportunities.
In the past when the economy was really hopping in
construction, you miss one, you lose one to these type of
operators on bid day, you go and bid the next 25 that are on
your bid schedule because there are so many opportunities. Now,
the opportunities are much fewer, so it is a lot more
noticeable. Whether it is more prevalent, I am unsure, but it
has always been there. It has been there since I have been in
the office, which would be mid-1990s in our neck of the woods.
Senator Casey. I will come back to you on a couple of other
things, but Ms. Ruckelshaus, I wanted to ask you about the
State efforts here. Obviously, I know often in this town when
there is a problem, some people think the solution is always a
Federal law, and I understand the concerns about that. I know
people are being very polite in the room; some probably want to
stand up and shout and say, ``Yes.''
But there are some problems that we have to deal with in a
more comprehensive way across the Nation because of, as you
describe it, I think, a patchwork sometimes does not work. That
will be an area of debate and we can debate that. I think there
are good intentions on both sides of that.
But to the extent that there is activity, and there has
been a substantial amount of activity at the State level, I
guess now both Tennessee and Texas have enacted laws targeting
this classification. But what I wanted to ask you is, is action
at the State level sufficient, even if you had more of it? Let
us say for purposes of argument, they had more of it and they
were in the area of reform that you would advocate.
Where do you see it now? How do you compare what could be
done or is being done at the State level with what should be
done federally if you believe that there should be Federal
action?
Ms. Ruckelshaus. Yes. My office has been tracking the State
legislation since it really started to pick up around 2005, and
there was an up-tick and quite a bit of activity. Since last
year, it has begun to dwindle; 2011, 2012, the activity has
dipped and there has been more defensive actions by businesses
who want to cheat and who think the laws are not good.
We have actually been engaged in a lot of fight back and
some of the laws have been weakened, the new ones that were
passed have been weakened. Most of them continue to only cover
construction, and while that is a big sector that has the
problems, there are a lot of other sectors, like the ones I
mentioned, that are not covered at all by these laws.
It is very incomplete and because the task forces and
commissions often lack resources, the ebbs and flows of the
enforcement are very striking. So, it is my opinion that we do
need Federal leadership on this.
Senator Casey. I will come back to you, because I am
overtime.
I want to get back to Senator Isakson.
Senator Isakson. Mr. Odom, everybody at your construction
company is an employee of the company?
Mr. Odom. Yes, sir.
Senator Isakson. When you bid a job of, say, dormitory
project or a multifamily project, everybody that contributes to
the construction of that project is an employee?
Mr. Odom. Yes, for our scope of work. Yes, sir.
Senator Isakson. Say what that means.
Mr. Odom. Well, we are going in--when we price a dormitory,
we are pricing the framing, the drywall, acoustical ceiling,
plastering, the scopes that pertain to our company. We do not
do plumbing, electrical work, other scopes of work that would
be bid by other subcontractors. But everything that is in our
scope of work to perform is performed by an employee.
Senator Isakson. And that inures itself to my point: most
of those subcontractors would more likely to be independent
contractors rather than employees, correct?
Mr. Odom. I am not sure; of the other subcontractors?
Senator Isakson. Yes, of the ones that you refer to that
you do not cover their scope of business.
Mr. Odom. That would----
Senator Isakson. And my point--that is not a trick
question. I am not trying to pose a trick question.
But my point is there are an awful lot of people who are in
independent contractor status like Mr. MacKrell who may deliver
a specialized fixture to one of those projects, an electrician
that you hired to put in there who is going to install, he is
an independent contractor delivering the specialty fixture. And
the electrician is an independent contractor who bid the part
of the job that you do not do. That is my point I am making.
Mr. Odom. Yes, sir. That would be true.
Senator Isakson. Because there are an awful lot of small--
the National Association of Home Builders said 75 percent of
homebuilders, or was it 75, 85 percent of homebuilders built 25
or fewer homes and 75 percent built 10 or fewer homes. So there
are a lot of small operators that operate as contractors that
contract with independent contractors and puts them together,
end up building their end product. Is that not correct?
Mr. Odom. Yes.
Senator Isakson. And that would be, you would not want to
do away with that, would you?
Mr. Odom. No, no.
Senator Isakson. What you want to make sure is that the
master contractor that performs the services you provide, which
is the main structural service in terms of construction, is
competing with you on a level playing field. Is that right?
Mr. Odom. Correct.
Senator Isakson. OK. Mr. MacKrell, tell me a little bit
more about your typical independent contractor. Do you have a
typical one or are they across the board?
Mr. MacKrell. Our typical independent contractor would be
somebody who has come to us either through word of mouth,
advertising that we have, or just because they have been
working in the industry. They offer their services to us.
We give them a scope of work that they review. They submit
pricing to us. We come to an agreement. We sign a contract. We
exchange, obviously, insurance and other information, and they
begin to provide services to us.
Senator Isakson. Could you tell me approximately--and I
realize this would be an estimate--what percentage of truckers
in the United States of America operate as independent
contractors?
Mr. MacKrell. I really would not have the ability, in our
industry as it relates to truckers, but in our industry, there
is an estimated 5,000 courier companies in the United States.
Our industry surveys show that 85 percent of those companies
use some form of independent contractors to operate their
business.
Senator Isakson. And that is from primarily the last mile
service?
Mr. MacKrell. Last mile delivery services, yes.
Senator Isakson. Which the big company really cannot meet
with the same standards that they have to meet; is that
correct?
Mr. MacKrell. Correct, yes.
Senator Isakson. OK. All right. That is an important, very
important thing to understand that in this whole battle because
of the fact that I ran a company that had independent
contractors does not mean that I am on the other side of this
issue. But I do think we have to have a balanced advocacy on
behalf of America's needs.
One of the things we have acknowledged is that some of the
unintended consequences of Government regulation or of the
economy, one of the two or both in some cases, have forced
people to do things we would rather they not do, like go to an
independent contractor status, or go to a 30-hour workweek, or
something like that.
We have to be conscious of what we are talking about when
we talk about these very critical issues because nobody wants
to sanction illegal, or unintentional, or just plain wrong
practices on the part of workers or on the part of the
companies on their workers, but we also want to make sure we
protect the opportunity for workers to have jobs in America in
a very challenging time.
Thank you, Mr. Chairman.
Senator Casey. Thank you, Senator Isakson.
I wanted, Ms. Ruckelshaus, to get back to a question which
I do not think you have an answer for, maybe you do, but I
doubt it because I have not seen an overall number. But it is a
question of how many businesses we are talking about here.
I was struck by what Mr. MacKrell said in the pertinent
part of his testimony. Toward the end, he talked about the CLDA
urging all of its members to use industry best practices in
making determinations about independent contractor status and
all of that. That is what we want to see more of, obviously,
and we appreciate that they are doing that. But you probably
cannot answer the question about the number of businesses that
are engaged in this or even maybe a ballpark figure.
But you did in your testimony, and I am looking at your
testimony, you had it broken down into two sections of loss of
revenue. You had a Federal revenue section and you had a State
revenue section. I just wonder if you could just walk through
some of that to the extent that we have data, even though I
always believe data that is important, numbers are relevant,
but I think stories like Mr. Anderson's and others are more
compelling because they tell us about what happened to one
person, one family, one employer, one community.
But walk through some of the more significant Federal
revenue losses here.
Ms. Ruckelshaus. Yes, and as you mentioned earlier,
Senator, the data is old and there is a U.S. Department of
Labor survey that is being undertaken right now which should
update, at least, in terms of the magnitude of the problem.
The General Accountability Office in 2009 estimated that
these independent contractor abuses cost Federal revenues $2.72
billion in just 1 year in 2006. The Congressional Research
Service estimated that a modification to the IRS safe harbor
rule would save $8.7 billion from 2012 to 2021. So that is
mostly on the income side, the income tax side.
Senator Casey. So that would be like a 9-year number,
roughly?
Ms. Ruckelshaus. Right, that is a 9-year number, $8.7
billion.
The State losses are typically calculated using
unemployment insurance losses and workers' compensation; those
are the sources of data that the States use.
California is the most recent one. In 2013, it estimated
that there was a $236 million loss just in 1 year in California
to its unemployment revenues. New York found $1.4 billion in
losses and Massachusetts found a combination of unemployment
insurance, $15.4 million in 1 year loss and $13 million in
unreported earning. So adding up, it is quite a magnitude.
The Federal estimates vary a lot and depend on which data
set the agency is looking at.
Senator Casey. Appreciate that.
Mr. Anderson, I did not have a chance to ask you a question
or two about your own situation, but I was struck by, in your
testimony, the reference you made to, I picked up on that
phrase ``tongue lashing,'' meaning, this is the way I
interpreted it; see if this makes sense to you. That when you
are an employee there is, to use a term of art so to speak,
there is a degree of control that someone has, as an employer,
over an employee, and can direct them, and can obviously give
them a tongue lashing when they are not doing good work.
Whether it was that aspect of your relationship with your
employer and then however you described the next entity that
you were working with, whether it was tongue lashing or other
aspects of your relationship that did not change very much from
one status to the other. Is that correct?
Mr. Anderson. Correct. It did not change at all.
Senator Casey. The only thing that really changed in your
case--and that was kind of a leading question, but it is
important to validate it--the only thing that changed is that
you had a lot less protection and therefore later had to pay a
very severe price for not having those protections. Is that
fair?
Mr. Anderson. Yes, sir.
Senator Casey. I wanted to ask you as well from your own
experience. I take it from your testimony, you obviously did
not ask to be an independent contractor. You felt almost
compelled to because of your own circumstances and because the
employer in that circumstance was not giving you much of a
choice. Is that correct?
Mr. Anderson. Correct.
Senator Casey. I realize this is not the norm, but it does
happen, that is why your story is so important. You felt that
you had to do that in order to keep your job and have income
for your family.
Mr. Anderson. That is the way they put it to us.
Senator Casey. And I wanted to kind of project out from
your own story. You have obviously done all kinds of good work
and carpentry being a big part of that. If someone came up to
you today, a young person even younger than yourself, came up
to you today and said, ``I am thinking about a similar
career.'' What advice would you give them in terms of this
aspect of your work?
Mr. Anderson. I would tell them under no circumstances do
something like that; put themselves in a vulnerable position
like I put myself and my family.
Senator Casey. Senator Isakson, do you have any more?
Senator Isakson. Only that I appreciate the witnesses'
testimony today and look forward to working with you, Chairman
Casey and others, to see to it that we make sure that the
people who are doing the wrong thing the wrong way for the
wrong reasons are held accountable. But that we do not throw
out those people that are doing it playing by the rules and
contributing to the great development of the United States of
America and our economy. And thank you for calling the hearing.
Senator Casey. I want to thank Senator Isakson also for
bringing his own personal experience as someone who has lived
in the real world of business, not just the world of Congress.
I will just put a note, a little commercial here for the
Payroll Fraud Prevention Act. I do not have a chance to do this
very often with a captive audience, so I will do it, but I will
not read the whole summary. But as you read through even a
summary of this legislation I think it is, in a word, not just
necessary or essential but really, in a word, reasonable.
To break it down into kind of sections or subject areas,
part of this, and in some ways I almost cannot believe that we
do not have an existing prohibition on misclassifying workers.
But there are obviously aspects to this where if an employer
were to misclassify a worker that would be a violation of the
Fair Labor Standards Act.
If there is any kind of, what I might call intimidation,
but really any efforts to discharge someone or discriminate
against them based upon their opposition to any practice
concerning their own classification that would be a violation
of the law. I wish that were in place now. It does not seem to
make sense that it is not a violation presently. So there are
penalties for this kind of activity and sanctions, civil
penalties and others, and that is obvious and I know that gives
some people real concern, but I think it is essential, and
again reasonable.
But a lot of this, as well, if you look at the legislation,
is about basic, fundamental recordkeeping. You ought to have to
tell the employee and others that basic information about
classification. It is not asking too much to say someone is
either an employee or an independent contractor. The employer
should have to provide that information.
I believe that one measure of accountability is not just
that kind of disclosure and that kind of information to an
employee, a worker, but also that those kinds of actions should
be subject to audit, certainly, at the State level or
otherwise.
So I think when you go through this whether it is by way of
disclosure and providing basic information, whether it is the
prohibitions and the sanctions which I believe should be in the
law already, but are not; so we have to enact laws to do that.
But I think it is reasonable and in light of the problem here,
and again whether it is from the employees' and the workers'
perspective, whether it is from the perspective of most of the
folks doing this work, meaning the companies, the businesses,
the employers from their own vantage point. They are in need of
this kind of help because they are doing the right thing and
they are being underbid because someone else is cheating and
violating the law.
And then last, but not least obviously, are taxpayers. They
are being ripped off every day of the week. They are paying
their taxes and someone else is not, and we are all the worse
for it especially at a time when we have such fiscal challenges
and tight budgets.
So whether it is the employer, the employee, the employer,
or the taxpayer, I think it is important we pass legislation
like the Payroll Fraud Prevention Act. I appreciate the
opportunity to provide that commercial.
Senator Isakson has been great to work with on a whole
range of issues. I am grateful he is here with us today and to
be as our Ranking Member to be with us at this hearing.
I want to thank all of our witnesses for being here, for
taking the time to develop your testimony, to bring your own
personal experiences to bear on this issue, and we are
certainly grateful.
The record will remain open for 10 days to receive any
additional comments.
With that, the Subcommittee on Employment and Workplace
Safety hearing is adjourned. Thank you.
[Additional material follows.]
ADDITIONAL MATERIAL
Prepared Statement of the American Trucking Associations, Inc.
Chairman Casey, Ranking Member Isakson, and members of the panel,
American Trucking Associations, Inc. (``ATA'') submits this statement
in response to the subcommittee's hearing on the issue of worker
misclassification. ATA is the national association of the trucking
industry. Through a federation of 50 affiliated State trucking
associations and industry-related conferences and councils, ATA
represents more than 37,000 members covering every type of motor
carrier in the United States. The trucking industry is the backbone of
the Nation's economy with nearly 7 million Americans working in
trucking-related jobs. Given the critical role that independent
contractors (``ICs'', also referred to as owner-operators in the
trucking industry) play in enabling the Nation's trucking companies to
deliver goods to the public at large, ATA is pleased to offer its
perspective on the classification of workers.
introduction
The growing importance of independent contracting as an engine of
economic growth--particularly among small businesses--is widely
recognized.\1\ The trucking industry, with its long history of
independent contracting, underscores the point. For decades,
independent owner-operators--who drive vehicles in which they maintain
an ownership interest, or employ others to drive them--have been widely
used by trucking companies to meet fluctuations in demand, provide
needed equipment at considerable cost savings, and address longstanding
shortages of operators. In addition, a number of trucking companies
have structured their business models around the use of independent
contractors, recognizing that the experience, maturity, energy, and
initiative of the independent owner-operator can be harnessed to the
mutual benefit of trucking companies and contractors alike. ICs share
the motor carrier's incentives to meet customer demand safely and
efficiently and increase revenues and profits. By successfully and
skillfully managing operations, an IC grows his or her own business--
whether by productively performing services him or herself, or by
hiring employees to provide additional services--and, at the same time,
contributes to the success of the trucking company.\2\
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\1\ Steven Cohen and William B. Eimicke, Independent Contracting
Policy Management and Analysis (Aug. 2013) (hereafter ``Columbia
Study''), 8.
\2\ See, e.g., Philip J. Romero, The Economic Benefits of
Preserving Independent Contracting (Sept. 2011), 30.
---------------------------------------------------------------------------
Recently, there have been increased efforts at the Federal and
State level to legislatively impose conditions making it difficult to
predictably and reliably structure independent contractor
relationships. These efforts, which range from repeal of the section
530 safe harbor rules to presumptions of employment, are based on
mistaken, paternalistic notions that will only serve to reduce economic
growth, stifle small business entrepreneurialism, and increase consumer
costs--all with an uncertain impact on overall tax revenues. ATA will
briefly demonstrate why these efforts are misguided and unfounded. No
doubt, there are instances where workers may be subject to excessive
control of methods and means of performance and thus improperly
classified as ICs. However, devising ever-more complicated
classification tests and imposing presumptions that detract from
predictability of status and therefore stifle use of ICs is not the
answer.
ics in the trucking industry choose to be entrepreneurs
One widespread misconception is that ICs in the trucking industry
would prefer to be employees but instead have IC status forced upon
them. The results of a recent survey of ICs deemed to be representative
of IC drivers in the trucking industry in general \3\ suggest
otherwise. When asked how easy it would be to be hired as an employee
driver, 67 percent said it would be ``very easy'' and another 13
percent said it would be ``easy.'' \4\ Those who indicated it would not
be easy attributed the difficulty to safety concerns over their driving
record (e.g., previous accidents or violations). This data reflecting
the IC's free choice mirror data across all industries, indicating the
vast majority of independent workers affirmatively chose that path,
with ``[o]nly 1 in 7 report[ing] that the decision to work
independently was due to factors beyond their control.'' \5\
---------------------------------------------------------------------------
\3\ Steven L. Johnson, Relative Advantages and Disadvantages of
Independent Contractor Status: A Survey of Owner-Operators' Opinions
and Rationale, (January 2012) (hereafter ``Univ. of Arkansas Study'')
at 4.
\4\ Id. at 17.
\5\ MBO Partners, The State of Independence in America: Third
Annual Independent Workforce Report, Sept. 2013, at 6.
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ICs in the trucking industry elect and prefer this type of
arrangement, because they like independence, freedom, and control of
their own destiny.\6\ Again, the trucking industry reflects the
population at large. Several studies have found that ICs prefer
independent arrangements to employee arrangements and that ICs have a
higher sense of job satisfaction than employees.\7\ Additionally,
research indicates self-employment is a springboard for
entrepreneurship and small business creation.\8\
---------------------------------------------------------------------------
\6\ Univ. of Arkansas Study at 54.
\7\ Jeffrey A. Eisenach, The Role of Independent Contractors in the
U.S. Economy, (December 2010) (hereafter ``Navigant Study'') at 33-4.
\8\ Navigant Study at 35, citing Robert W. Fairlie, ``Self-
Employment, Entrepreneurship and the NLSY79,'' Monthly Labor Review
(February 2005) 40-7.
---------------------------------------------------------------------------
ics in the trucking industry pay their taxes
The belief that classification of workers creates a tax gap
motivates legislative efforts to reclassify ICs as employees. The
notion of a tax gap is based on the premise that employers subject to
withholding taxes on wages paid to an employee are more likely to
submit those taxes than ICs are to submit tax payments voluntarily. The
facts cast doubt on the premise. Of the IC drivers surveyed, 94 percent
said they engaged a tax preparer to prepare their returns while an
additional 3 percent said they use tax software.\9\ These numbers
suggest a high level of tax compliance among IC drivers and, in
conjunction with IRS research that estimated that 99 percent of income
is reported on a W-2 (employee) compared to 96 to 97 percent on a Form
1099-MISC (IC),\10\ means that reclassification of ICs would have
little impact on the purported tax gap.
---------------------------------------------------------------------------
\9\ Univ. of Arkansas Study, at 29.
\10\ Navigant Study, at 40-1.
---------------------------------------------------------------------------
ics can and do fare well relative to employee drivers
One more common misconception is that IC drivers cannot do as well
financially as employee drivers. Like any small business, the numbers
vary as there is ample opportunity for profit or even loss depending on
individual business practices. However, it is common for IC drivers to
earn more than similarly situated employee drivers. As one industry
expert recently put it, ``the average owner-operator fares better than
company driver counterparts,'' with a net income of $51,912 compared to
``about $40,000 per year for the same amount of work'' by an employee
driver.\11\ Similarly, the Bureau of Labor Statistics puts the average
annual wage for commercially licensed driver at just over $40,000 \12\
while a trade group for IC drivers calculated annual average net income
for its members to be $50,000.\13\
---------------------------------------------------------------------------
\11\ Rip Watson, Owner-Operators Make Modes Income, Freight-Rate
Gains, Industry Expert Says, Transport Topics, Sept. 23, 2013, at 12.
\12\ Bureau of Labor Statistics, Occupational Employment and Wages,
May 2012 at http://www.bls.gov/oes/current/oes533032.htm (last visited
November 7, 2013).
\13\ Owner-Operator Independent Drivers Association, Owner-Operator
Independent Drivers Profile 2012 at http://www.ooida.com/
OOIDA%20Foundation/RecentResearch/OOIDP.asp (last visited November 7,
2013).
---------------------------------------------------------------------------
conclusion
As ATA has noted, the foundation for the pursuit of further
legislative efforts to address alleged misclassification of employees
as ICs is very weak at best. The limited potential for collection of
additional tax revenues could be far outweighed by negative impacts on
small business job creation, economic growth and higher costs for
consumers. Instead, a simplification of the many confusing tests for
determining a worker's status to focus on control over methods and
means of performance would encourage greater compliance and allow
authorities to focus investigation and audit resources on the small
percentage that may be deliberately cheating the system. Some of the
most recognized trucking company names today, such as Schneider
National, C.R. England, Werner Enterprises and J.B. Hunt, started off
as single truck owner-operators. We need to ensure we do not, through
legislation, snuff out the opportunity for today's ICs to become the
next generation of recognized trucking company names.
Prepared Statement of the Campaign for Quality Construction*
The Campaign for Quality Construction (CQC) is comprised of the six
leading construction specialty trade associations, which together
represent industries comprised of more than 27,000 contractor firms
that perform mechanical, electrical, sheet metal, plumbing, air
conditioning, steel erection, trowel trades, painting, glazing,
flooring and related work.
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* The Campaign for Quality Construction (CQC) is an employer-based
construction coalition representing approximately 27,000 employers. It
is comprised of the leading specialty contracting firms in the Nation
and include the Finishing Contractors Association International (FCA),
the International Council of Employers of Bricklayers and Allied
Craftworkers (ICE), the Mechanical Contractors Association of America
(MCAA), the National Electrical Contractors Association (NECA), the
Sheet Metal and Air Conditioning Contractors' National Association
(SMACNA), and The Association of Union Constructors (TAUC). These
groups represent more than 25 percent of the total building
construction industry volume in this country and employ approximately
500,000 skilled workers. Specialty contractors hold a market share of
more than 60 percent of non-residential building construction. Our
members employ highly trained and highly skilled workers who are well-
compensated in wages, health and pension benefits--core components of a
strong and sustainable workforce.
The employers who comprise the CQC are leading members of Taxpaying
Employers Against Misclassification (TEAM). Union and non-union
employers in diverse industries have banded together, to focus on
payroll fraud and employee misclassification schemes. Membership and
information can be viewed at www.nomisclassification.com.
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The CQC is actively involved at all levels of public policy to
ensure that construction owners and taxpayers receive full value for
their construction dollar and urges the Congress to take strong action
on behalf of taxpayers and legally compliant employers who are at a
competitive disadvantage because they cannot compete with bad actor
employers who commit payroll fraud and otherwise engage in various
schemes to evade tax and employment law by misclassifying their
employees.
Independent contractors play a vital role in our economy but too
many employers are able to game the system and evade labor, employment,
and tax laws by taking advantage of the many loopholes in current law.
Employee misclassification schemes in construction have nothing to do
with career enhancement or individual entrepreneurship, but rather
everything to do with unfair low-wage competition.
Federal laws and policies should be reformed to favor law abiding
companies. Stronger employment and tax laws at the State and Federal
level with more effective enforcement should be enacted to eliminate
the current competitive advantages for those who abuse the system to
line their own pockets at the expense of their competitors, of the
government and the taxpayer and of workers.
payroll fraud, employment misclassification schemes highly prevalent
in construction
Unfair and abusive employment practices are widely acknowledged by
public policy experts to be epidemic in the construction industry.
Construction projects are temporary by nature, engage multiple levels
of contractors and subcontractors, and employ a highly mobile
workforce, all of which combine to make the industry especially
vulnerable to abuse. Ever-evolving schemes give unscrupulous employers
a huge advantage in a highly competitive, head-to-head bid industry.
As early as 1984, an Internal Revenue Service study found overall,
15 percent of employers misclassified their employees, but the rate was
19.8 percent in construction. A U.S. Department of Labor Employment and
Training Administration study reported $198 million tax loss annually
due to misclassification. That study noted that the construction
industry was a major offender. A 2005 study conducted in Maine reported
that 14 percent of construction employers misclassified workers while
in other industries it was 11 percent. In Massachusetts, a 2004 study
showed that misclassification in construction was calculated to be at
24 percent, higher than all other industries by 6 percent.
Significantly, in 2008, a Michigan study showed 26 percent of
construction employers misclassifying their workers. The same study
showed that construction employers engaged in payroll fraud through
other schemes more frequently than other employers. State studies and
task forces repeatedly show illegal employment practices to be
significant in the construction industry.
misclassification/classification schemes: a calculated business
decision
Businesses that avoid properly classifying workers as employees do
not have to pay unemployment insurance taxes, workers' compensation
premiums, or the employee's portion of Social Security and Medicare
taxes. Additionally, they do not pay or withhold payroll taxes on
behalf of their employees. It is estimated that businesses can save at
least 30 percent in labor costs by using misclassification schemes, but
in the end they are simply committing payroll fraud.
Legally compliant employers abide by Federal and State labor laws,
including the Fair Labor Standards Act. They abide by minimum wage and
overtime laws, and are more likely to provide benefits such as vacation
and sick leave, health care coverage and retirement.
CQC employers maintain high wage and benefit standards. They
embrace a system that includes training, health and welfare benefits,
pension benefits, and career advancement training as a way to ensure an
adequate supply of highly skilled trade persons who are compensated and
classified correctly as employees. Trending misclassification schemes
threaten to degrade the quality of high workforce standards in the
vitally important construction industry.
As further evidence that employers are deliberately trying to avoid
tax and employment law, one can see how business owners are stretching
the law in creative ways. No longer do firms simply misclassify
employees as independent contractors. Firms in construction and other
industries use labor brokers, form LLCs so that employees become owners
filing not a 1099 but a K1, establish sophisticated check cashing
schemes, and require workers to purchase a shell franchise.
While CQC contractors adhere to ethical employment relationships
and practices, they are increasingly forced to compete in the private
and public market against unlawful, unethical companies that
deliberately engage in payroll fraud to gain an unfair competitive
advantage.
misclassification and fraud cost all levels of government needed
revenue
The Federal Government has budget deficits and has an increasing
responsibility to collect owed revenue. Addressing payroll fraud is not
about increasing taxes, it is about increasing compliance. It is not a
union versus non-union issue; it is about going after the bad actors.
It is estimated that independent contractors under-report their income
by about 30 percent. Those workers paid off-the-books are unlikely to
report their income at all.
Paul Alexander, Strauss Engineering, Stafford, TX, wrote in a
letter to the Governor of Texas when the Texas State Legislature was
considering legislation to address the problem in the construction
industry,
``They break the law to underbid law abiding contractors like
me, and to add insult to injury, I am subsidizing those who are
gaming the system with impunity.''
Mr. Alexander's point is that the lawful business owner pays a
double penalty through lost economic opportunity and then again as a
taxpayer because higher taxes and premiums are levied to make up for
the dollars lost to the government and the community.
Government and academic studies estimate that the Federal
Government loses at least $3.5 billion annually on average. State
studies show a much higher figure. These serious budget issues cannot
be ignored. Texas loses $35 million each year in unemployment taxes
alone as a result of improper classification. Maryland estimated it was
losing $20 million or more in unemployment taxes due to
misclassification. Ohio did a comprehensive study and found it was
losing $35 million a year in unemployment taxes, $103 million a year in
workers' compensation premiums, and $223 million in lost State (not
including Federal) income tax revenue.
solutions: states alone cannot change the trend; the federal government
must act
The Federal Government and the States need the most effective tools
possible to go after the bad players. Business owners who commit
payroll tax fraud rely on lax State and Federal enforcement to cheat
the government and taxpayers and that ultimately disadvantages lawful
contractors.
Some 37 States have addressed the problem at some level. A large
percentage of the State laws passed deal directly with the construction
industry. But it is not enough; States alone cannot fully address this
problem. It should be noted this is a problem growing in scope and
tactics. It is a growing problem in janitorial services, trucking and
language interpretive services. Employers are resorting to creative
schemes to avoid paying Federal Social Security and Medicare and
unemployment taxes, while also avoiding overtime pay, State
unemployment taxes, and workers' compensation premiums.
CQC supports many of the recommendations in an August 2009
Government Accountability (GAO) report on ensuring detection and
prevention of misclassification. Studies show an epidemic rise of
worker misclassification with some reports stating as many as 30
percent of businesses are engaging in payroll fraud. Others suggest it
could be higher when new schemes are included.
The CQC also supports the U.S. Department of Labor cracking down on
misclassification in combination with other Labor Department actions.
However, the IRS needs to do more and Congress must act, both to un-
handcuff the IRS and to strengthen the Department of Labor in its
efforts on this issue.
The CQC has supported legislation in successive Congresses to deal
with the issue. It supports and recommends the following changes to IRS
and employment law:
Amend or eliminate section 530 safe harbor provisions of
the IRS code to create a new statutory standard with more realistic
standards for deeming a worker to be a non-employee and to end the
moratorium on allowing the IRS to close loopholes and provide guidance.
Eliminate the ability of employers to rely on
industry practice as a basis for claiming safe harbor. It
defies common sense to say that if enough employers in an
industry cheat, it should be deemed legitimate.
Allow IRS to prospectively reclassify workers while
guaranteeing no retroactive assessments would be allowed.
Allow IRS to issue regulations or revenue rulings on
employee/independent contractor status.
Create administrative procedures to allow workers to
petition Treasury for a determination of employment status.
Prohibit employer retaliation against an individual
petitioning for review of employment status.
Narrow the circumstances under which the Secretary of
Treasury may reduce the penalties for failure to deduct and withhold
income taxes or the employee's share of FICA taxes.
Require affirmative notifications by those who contract
with independent contractors, including written statements to each
independent contractor of their Federal tax obligations and the loss of
labor and employment protections, and their right to seek a status
determination from the IRS. Failure to comply in a timely manner would
be subject to penalties.
Require annual reports from the Secretary of Treasury and
the Secretary of Labor on worker classification schemes and to identify
and track complaints and enforcement actions.
Maintain current list of employee ``exclusions'' to assure
true independent contractors are not adversely affected by new
legislation.
Finally, The CQC promotes immigration reform that supports lawful
employers and solves the problem of undocumented workers in order to
level the playing field for companies that abide by the law. The CQC
also supports a fair and efficient worker verification system such as
E-Verify and would support a new law requiring businesses E-Verify
individuals contracted as independent contractors. However, reform
should not impose vicarious liability on contractors by separate
employers or lower tier contracting parties. CQC cautions Congress
against authorizing a new expanded guest worker program for skilled
trades and additionally supports strict controls in the program to
avoid guest workers admitted for low-skilled classifications from
migrating to construction. Additionally, CQC supports flexibility in
Administration programs to deal with skilled workforce shortages in the
future.
As the problem grows in construction and other industries, it is
time for Congress to join States and take action to eliminate loopholes
and schemes that currently enable firms to use a business model that
eliminates the employer-employee relationship. Without action,
responsible firms will be priced out of the market place. We urge you
to consider these sorely needed reforms.
Prepared Statement of the Coalition to Promote
Independent Entrepreneurs
The Coalition to Promote Independent Entrepreneurs (the
``Coalition'') appreciates the opportunity to submit testimony
concerning the important issue of independent contractors and the
economic effect of companies doing business with them. The Coalition
consists of industry associations, businesses and independent
contractors that share a common interest in preserving the legal status
accorded independent contractors, and in the creation of economic
opportunities for all individuals, whether they offer their services as
independent contractors or employees.
The Coalition absolutely supports the proper classification of
workers, and the proper and timely compliance by independent
contractors with their Federal, State and local tax reporting and
payment obligations. Moreover, it supports government policies aimed at
enhancing these objectives, provided that such policies do not
undermine the rights of independent contractors and their clients to do
business with each other, or the economic opportunities created by the
legitimate use of independent contractors.
i. individuals benefit from the ability to be self-employed
Individuals choose self-employment for a variety of different
reasons that are very personal to them. Examples include:
To be one's own boss;
To be able to work with a wide variety of different
clients and thereby maintain a high level of professional technical
expertise;
As a bridge between the loss of a job and the next job;
To maximize control over one's financial destiny;
To ensure that the individual reaps the financial rewards
of his or her hard work;
To earn more money than would be possible by working as
an employee, e.g., as a commissioned sales representative or as a
consultant;
To generate supplemental income to fund a family
vacation;
To generate additional income to save for retirement;
To be able to work from home and meet family obligations;
and
To be able to work a flexible, seasonal or sporadic
schedule.
Individuals highly value the freedom to achieve these objectives by
working as an independent contractor. Surveys of independent
contractors consistently report a high degree of satisfaction with
their self-employed status.\1\
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\1\ See, Jeffrey A. Eisenach, The Role of Independent Contractors
in the U.S. Economy, at p. 37 (December 2010), Navigant Economics,
http://www.naviganteconomics.com/docs/Role%
20of%20Independent%20Contractors%20December%202010%20Final.pdf (the
``Navigant Economics Study'') (citing multiple studies for this
proposition).
---------------------------------------------------------------------------
ii. companies benefit from having access to self-employed individuals
Companies also benefit from the ability to do business with
independent contractors. For example, if a company has a short-term
need for a specific type of service that the company's personnel does
not possess, the ability to engage independent contractors who possess
that skill and are able to promptly commence work on the project can be
of immense value to the company.
Similarly, for a company that engages individuals to perform
services away from its premises and has found it impractical to
supervise or monitor their performance, a business model that has
proven effective is for the company to contract with dedicated
entrepreneurial independent contractors who will self-manage their own
performance and consistently perform at a high level in order to grow
their own business and retain and attract clients.
In some cases, the decision whether to do business with independent
contractors is based on a philosophical viewpoint. An example is sales.
Some companies operate with an employee sales force, while other direct
competitors contract with independent-contractor sales professionals.
This decision commonly turns on whether (i) the company believes it
knows best how to sell and that the best strategy for maximizing sales
results is for the company to train an employee sales force; or (ii)
the company believes the best strategy for maximizing sales results is
to contract with independent-contractor sales professionals and unleash
their entrepreneurial zeal and creativity.
All of these examples illustrate a decision to do business with
independent contractors that is driven by a desire to maximize
performance and achieve legitimate business objectives.
iii. self-employment is not anti-competitive
The contention that a company doing business with independent
contractors enjoys an unfair competitive advantage relative to a
different business that chooses to perform such work with its own
employees creates a very slippery slope. A fundamental defect with this
type of contention is that there is no discernible limiting principle,
as a similar argument could be made with respect to any business
decision that could create a disparity in terms of cost or efficiency.
For example, should a startup family-owned business that pays its
family members relatively low salaries and provides them no benefits
beyond what the law requires be prohibited from competing against a
publicly held corporation that pays its employees generous salaries
plus a wide array of employee benefits? Should a company be prohibited
from implementing a new technology that will enable it to perform more
efficiently when its competitor chooses not to?
Moreover, such a contention is woefully inequitable to the
independent contractor who is seeking to do business with company
clients. If an individual decides to work as a self-employed
individual, there is nothing anticompetitive or otherwise inappropriate
about the individual doing so--or about a company engaging the
individual to perform a project or accomplish an objective. A
government policy that impedes a company's ability to do business with
legitimate independent contractors is highly inequitable to
enterprising and entrepreneurial independent contractors.
iv. no new burdens should be imposed on companies that do business with
self-employed
While the Coalition certainly does not in any way support or
condone ``payroll fraud,'' it nonetheless believes it critically
important to keep the payroll-fraud issue completely separate from the
``competitive'' issue associated with one company operating a business
model that is more efficient or cost-effective than a competitor.
Conflating the two can lead to economically harmful policy
prescriptions.
In this regard, the Coalition would oppose the imposition of any
additional administrative or regulatory burdens on companies that do
business with legitimate independent contractors. The current legal and
regulatory environment governing worker classification already has had
a disruptive impact on these relationships.
During the past several years, certain companies that traditionally
operated on an independent-contractor model have changed their model,
terminated the independent contractors and offered them employment--due
principally if not entirely to the current legal and regulatory
environment. The best interests of the economy are not served when
companies change their business model in the direction of a less
efficient one, solely to reduce their legal and regulatory risks.\2\
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\2\ The Navigant Economics Study found that curtailing independent
contracting would:
Reduce job creation and small business formation.
Independent contractors start businesses and create jobs. Of the 10.3
million independent contractors in the most recent Bureau of Labor
Statistics survey, nearly 2.4 million had one or more paid employees,
with the vast majority employing five or fewer workers.
Reduce competition and increase prices. By reducing the
importance of economies of scale, independent contracting allows small
businesses to compete with larger ones, increasing competition and
lowering prices for consumers.
Create sector specific disruptions. Independent
contracting is a primary business model in a number of important
industries, including construction, emergency medicine, financial
advice, timber harvesting and transportation. Limitations on
independent contracting could create serious economic disruptions in
these and other industries.
Produce a less flexible and dynamic workforce.
Independent contracting allows both firms and workers to respond to
changes in the economy, reducing ``structural'' unemployment. Empirical
studies show independent contracting facilitates workers' re-entry into
the workforce after being laid off.
Navigant Economics Study at p. ii.
---------------------------------------------------------------------------
The adverse impact of the current legal and regulatory environment
is also corroborated by government data. The number of self-employed
individuals, as reported monthly by the Bureau of Labor Statistics, has
been gradually declining over the past several years. The following is
a graph illustrating the number of ``self-employed workers,
unincorporated,'' as reported each month in The Employment Situation,
Table A-8, commencing June 2009, http://www.bls.gov/schedule/archives/
empsit_nr.htm. The ``y'' axis represents the number of ``self-employed
workers, unincorporated,'' in millions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The foregoing graph reveals that not since February 2010 has the
number of self-employed unincorporated workers exceeded nine million.
Moreover, the graph illustrates a disturbing downward trend of self-
employment.
v. conclusion
The Coalition respectfully urges that the Congress not impose any
additional administrative or regulatory burdens on companies that do
business with self-employed individuals. We believe the current
regulatory and legal environment for these relationships is more than
adequate to discourage worker misclassification, as the environment has
had the unfortunate impact of causing companies to eschew even
legitimate independent-contractor relationships due to legal and
regulatory concerns. Such an outcome only exacerbates the financial
pressures for those legitimate self-employed individuals who are
seeking client opportunities to expand their operations and support
their families in these difficult economic times.
Prepared Statement of Forest Resources Association, Inc.,
Deb Hawkinson, President
The Forest Resources Association is a 79-year-old trade association
representing all components of the U.S. wood supply chain, which
provides forest-based raw materials to primary forest products
manufacturers such as pulp and paper mills, lumber and other building
product mills, and bio-energy plants. FRA members include forest
landowners; logging contractors and other wood suppliers; forest
product trucking businesses, wood- and forest-biomass consuming mills;
as well as businesses providing products and services in support of the
wood supply chain.
Forest products manufacturing is the seventh largest industrial
sector in the United States, contributing to economic growth and
community development in rural and remote communities where other job
generators have much less access.
In contrast to most other countries with large forest products
industries, U.S. wood supply systems are substantially de-integrated,
and contracting among their various components is crucial to their
operation. The reasons lie in the historical configuration of our
diverse forest resource, the many different types and sizes of
landownerships, and our country's tradition of enabling and fostering
entrepreneurship at the local level.
The remote working conditions under which timber is harvested in
the United States create great challenges for supervision. Vesting
independent personnel with personal entrepreneurial goals and profit
opportunities relieves the service recipient--who needs timber
delivered or a forest improvement contract executed--of the expenses
and time of supervision, while imposing on him or her the lighter and
less intrusive task of contract administration. With today's emphasis
on excellence in environmental compliance, giving a responsible
entrepreneur, qualified with appropriate education and certification, a
measurable stake in project outcome can be more practical than
threading a supervisory chain from the headquarters of a major
corporation to the forest operation, itself.
Independent contracting is essential to this supply chain's working
flexibly within market realities. Policies which raise uncertainties
about these relationships or call into question the ability of a
contractor to make independent business decisions cloud the
contractor's planning horizon, obstruct his or her access to credit,
and make business investments difficult.
In summary, clarity in Independent Contractor status determinations
is very important to the forest products supply chain:
Entrepreneurship in logging and wood supply creates value
and quality;
Uncertainty in status determinations impedes small
businesses' planning and credit access;
Current policy already discourages illicit ``underground''
operators, within both IRS and Department of Labor jurisdictions;
Additional regulatory requirements will add costs and
administrative burdens, impeding small business recovery.
Prepared Statement of the Home Care Association of America\1\
Misclassification of Workers
position
The Home Care Association of America (HCAOA) supports efforts to
clarify and fully enforce existing worker classification laws. Many in-
home, non-medical companion care workers should be classified as
employees, because how, where and when they perform their duties is
controlled by the person or entity who sets up the assignment.
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\1\ The Home Care Association of America (HCAOA) is the Nation's
first association for providers of private-pay home care. HCAOA was
founded on the principle that quality private duty home care has one
model of care and that model is to employ, train, monitor and supervise
caregivers, create a plan of care for the client and work toward a safe
and secure environment for the person at home.
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HCAOA asks that you support legislative and regulatory efforts to
enhance appropriate worker classification.
background
Current law requires that workers be treated as employees when the
nature, time and place, and method of performing the work are under the
control of the entity or person for whom the work is done. This is the
20-point common law control test.
However, agencies that refer workers, seniors and their families
who employ them, and the workers themselves all too frequently either
do not know or misinterpret these rules. This results in a
misclassification of these workers as independent contractors.
A misclassified private-pay home care worker loses important
employee protections when this misclassification occurs. These include:
Worker compensation.
Unemployment insurance.
The employer-paid share of payroll (Social Security/
Medicare) taxes.
As of 2014, when health reform rules take effect,
employer-provided (and paid) health insurance.
Seniors, individuals with disabilities and their families are also
harmed by this worker misclassification because they may find
themselves liable for back taxes and penalties when their situation is
discovered and remedied.
Federal and State Governments lose much-needed tax revenue when
misclassified workers--usually through ignorance rather than conscious
decisions to ignore the law--fail to pay their appropriate level of
income and payroll taxes.
Compliant employee-based private-pay home care companies face a
severe competitive imbalance because their competitors--who are often
not complying with current law and thus incurring the employee
protection expenses associated with current law--can and do offer lower
cost private-pay home care services.
If you would like more information on this matter or have questions
please contact Patrick Cooney at [email protected] or by calling
(202) 347-0034 x101. You may also contact Michael Eastman at
[email protected] or by calling (202) 629-5625.
Prepared Statement of Private Care Association, Inc.,
James Mark, President
The Private Care Association (``PCA''), since 1977, has been the
voice of private duty home care. PCA's membership is made up of home
care registries that refer self-employed caregivers to provide
assistance with activities of daily living such as bathing, dressing,
lifting/transferring, continence care, feeding/meal preparation,
companion care, homemaker services and nursing services in the client's
home. The consumer-directed model of care is based on the idea of
consumer choice in home care options and gives consumers the right to
make decisions and direct the care needed. The principal advantages of
consumer-directed care are that it costs less to the consumer, the
caregivers typically earn more, it allows consumers to individually
select caregivers, it provides greater continuity in caregiver
relationships, and it supports caregiver entrepreneurship.
The title of this hearing suggests that it is focused on
circumstances where the decision to provide services as an employee or
as an independent contractor is made by the service recipient and not
by the worker who provides the services, in that a service recipient
that misclassifies workers is a ``bad actor.'' The home-care industry
does not operate in that manner.
i. the home-care industry
In the home-care industry, the individual caregivers who provide
the care decide whether to work as employees or as independent
contractors. They have far more opportunities to work as employees than
to work as independent contractors. Examples of opportunities for
employment include:
Hospitals;
Nursing homes;
Assisted living centers;
Skilled nursing facilities;
Group homes;
Home health agencies; and
Employee-based home care agencies.
By contrast, the opportunities available to caregivers to work as
independent contractors are more limited. They can offer their services
on Craigslist and similar Web sites, market their services through
other informal marketing channels, or offer their services through
caregiver registries.
It follows that caregivers who work as independent contractors in
the home-care industry have made an affirmative decision to do so. They
represent a self-selecting cohort of caregivers who choose to work in
this capacity.
There are many reasons why caregivers will make this choice. The
independent-contractor option offers caregivers the flexibility to
determine when they will work, which enables them to (i) supplement
other full-time work, (ii) balance family needs with work, and (iii)
enjoy the freedom to take time off at any time without explanation or
justification. The independent-contractor option also empowers
caregivers to select their own clients, determine where they will work,
and set their own pay rate. In fact, these caregivers typically earn
more than their colleagues who work as employees, in terms of both per-
hour and take-home pay. The level of enjoyment of work is also an
important factor. Under the independent-contractor option, a caregiver
has only one client to keep satisfied, namely, the care recipient. This
contrasts with those who work for an employee-based agency, where the
caregiver needs to keep satisfied both the client and the agency; and
those who work in an institutional setting where one caregiver can be
expected to keep satisfied a large number of care recipients.
Among those caregivers who choose to work as independent
contractors, there are compelling reasons why they would choose to
offer their services through a caregiver registry. Fundamentally, a
registry enables a caregiver to devote work hours to performing
compensable client services, rather than marketing. In addition, a
caregiver registry offers access to a wide variety of client
opportunities, which creates a greater potential that a caregiver will
be able to find a client opportunity that matches the caregiver's work
availability. Finally, an important factor to caregivers is that many
of their potential clients feel more comfortable obtaining a caregiver
through a caregiver registry--because a caregiver registry will refer
to clients only caregivers who have passed a rigorous background-check
and credential-verification protocol.
Consumers who need care have many options as well. They could move
to a facility, obtain care from an employee-based home care agency, or
obtain a caregiver on their own. The principal value that a caregiver
registry offers a consumer is that a registry provides a critically
important safety component by virtue of its background-check and
credential-verification protocol. Furthermore, consumers who wish to
self-manage their home care can avoid the third-party interference in
their home-care relationship that results when an employee-based agency
is involved. For example, while an agency can re-assign a caregiver
from one client to a different client, a registry cannot.
Finally, for clients whose finances are being handled by an out-of-
town relative or an institution, a caregiver registry can facilitate
the delivery of client payments to the caregivers. Registries commonly
accomplish this by establishing an escrow account for the purpose of
receiving and disbursing third-party payments to caregivers. For
clients who have long-term care insurance, a registry also can
facilitate the insurer's approval and payment of the benefits to which
the care recipient is entitled.
ii. caregiver registries are not ``bad actors''
Caregiver registries have been operating since at least the 1940s,
when they were regulated by the State of Florida under the Private
Employment Agency regulatory law.\1\ These entities perform an
important function for the home-care market, by creating a virtual
marketplace through which buyers (consumers) and sellers (caregivers)
of home-care services can find each other. In this regard, caregiver
registries facilitate consumer choice by creating a marketplace where
consumers can shop for a caregiver that best meets their individual
needs, as opposed to having to find a caregiver on their own.
---------------------------------------------------------------------------
\1\ Repeal of Nurse Registry Regulation?, Staff of Florida H. Comm.
on Health Care Licensing and Regulation, at p. 5 (Oct. 1999), http://
www.leg.State.fl.us/data/Publications/2000/House/reports/
interim_reports/pdf/nurse.pdf.
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Caregiver registries also provide a vitally important consumer-
safety function by only referring to clients those caregivers who have
passed a rigorous background-screening and credential-verification
protocol.
In cases where clients utilize a caregiver registry's escrow
account to disburse client payments to caregivers, the caregiver
registry reports the payments on Forms 1099, and thereby enhances tax
compliance by the caregivers,\2\ inasmuch as the individual consumers,
themselves, generally have no Form 1099 reporting obligations with
respect to the payments they make to caregivers because they are not
engaged in a trade or business.\3\
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\2\ Internal Revenue Service data indicate that the compliance rate
for recipients of Forms 1099 is 97 percent. E.g., TAX COMPLIANCE
Opportunities Exist to Reduce the Tax Gap Using a Variety of
Approaches, GAO-06-1000T, at 11 (July 26, 2006) GAO, Tax Gap: Making
Significant Progress in Improving Tax Compliance Rests on Enhancing
Current IRS Techniques and Adopting New Legislative Actions, GAO-06-
453T, at 17, (Feb. 15, 2006); GAO, Tax Compliance: Reducing the Tax Gap
Can Contribute to Fiscal Sustainability but Will Require a Variety of
Strategies, GAO-05-527T, at 18 (Apr. 14, 2005).
\3\ Internal Revenue Code section 6041(a) imposes Form 1099
reporting duties only on ``persons engaged in a trade or business.''
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Finally, caregiver registries are not providers of home-care
services, they do not set the rate of pay for caregivers, do not
determine the hours a caregiver will work for a referred client, and do
not determine any aspect of a home-care relationship that exists
between a caregiver and a client. It follows that a caregiver registry
does not function as an employer of a caregiver.
iii. caregiver registries are not ``hurting workers''
Because of the far more numerous employment options that are
available to caregivers, caregiver registries only help caregivers, by
providing those who affirmatively choose to work as independent
contractors an avenue through which they can efficiently learn about
client opportunities.
Caregivers need to affirmatively seek out caregiver registries, as
there are fewer caregiver registries than other businesses that offer
employment opportunities. Furthermore, a caregiver registry is
inherently a passive business type, in that it can only inform
caregivers about client opportunities; the caregiver in all cases will
determine whether or not to pursue an opportunity.
iv. caregiver registries are not ``hurting businesses''
The principal competitors of caregiver registries are Internet
options, such as Craigslist, and other informal channels through which
consumers can find caregivers. While some employee-based agencies view
caregiver registries as competitors, they are mistaken, as their true
competitors in this context are the caregivers who choose to work as
independent contractors and not as employees of agencies. A caregiver
registry merely creates an efficient marketplace that facilitates a
caregiver's ability to do this.
To the extent that employee-based agencies actually view caregiver
registries as competitors and believe registries have an unfair
competitive advantage, that viewpoint would be purely self-serving as
it is premised on restricting consumer choice by forcing all consumers
of home-care services into the one option that employee-based agencies
have elected to offer them. If caregiver registries were eliminated,
that would not reduce the ranks of independent-contractor caregivers,
it would only cause the marketplace for freelance caregivers to operate
less efficiently. Moreover, it would remove an important consumer-
protection/caregiver-vetting service for consumers who wish to self-
manage their own home care.
Academic studies have shown that the employee-based agency option
is not the preferred option for all consumers; and that some consumers
prefer a consumer-directed option--which caregiver registries
facilitate.\4\
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\4\ E.g., Benjamin, Mathias and Franke, Comparing Consumer-directed
and Agency Models for Providing Supportive Services at Home, Vol. 35
Part II, Health Services Research No. 1 Selected Papers From the
Association for Health Services Research Annual Meeting (April 2000) at
351, et seq.
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PCA supports consumer choice. We believe consumers should be given
access to as many varied options as possible, so they have the
opportunity to select the option that best meets their individual
needs.
v. caregiver registries are concerned about recent changes to the flsa
One issue that is of much concern to caregiver registries is the
treatment of caregivers under the Fair Labor Standards Act (``FLSA'').
Since 1974, home-care workers have been generally exempt from the
FLSA's overtime and minimum-wage requirements, pursuant to what is
commonly known as the companionship exemption.\5\ This will soon
change.
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\5\ 29 U.S.C. Sec. 213(a)(15).
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The U.S. Department of Labor recently issued final regulations \6\
that, effective January 1, 2015, will materially change the
companionship exemption so that it will apply only in exceptional
circumstances. While the Preamble to these final regulations \7\
contains an example that appears intended to clarify the circumstances
in which a caregiver registry would not be considered a ``third-party
employer'' of a caregiver, the conclusion given by the example is that
under the stated facts the registry is ``likely not'' the employer of
the caregiver. The example certainly is helpful, but it does not
provide the degree of certainty that the industry needs.
---------------------------------------------------------------------------
\6\ Application of the Fair Labor Standards Act to Domestic
Service, 78 Fed. Reg. 60454 (Oct. 1, 2013) (to be codified at 29 CFR
Part 552).
\7\ Id. at pp. 60484 -485.
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The final regulations governing the FLSA's companionship exemption
create a unique dilemma for caregiver registries, in that registries
are potentially at risk for overtime or minimum-wages with respect to
the caregivers they refer--by being deemed an employer or a joint
employer for purposes of the FLSA; but they have no meaningful way to
manage this risk. A caregiver registry does not control the number of
hours a caregiver works for a client (or for two or more clients) or
the amount the client will pay the caregiver for those hours.
PCA submits that for caregiver registries to be subjected to
uncertainty with respect to their potential FLSA liabilities under
these circumstances is inappropriate. For the reasons set forth above,
caregiver registries provide consumers a safe option for gaining access
to caregivers; registries are not intended to, and do not, function as
an employer of the caregivers they refer. Consequently, caregiver
registries seek clarifying guidance on how they can avoid employer and
joint-employer status, for purposes of the FLSA, relative to the
caregivers they refer to clients.
vi. conclusion
Caregiver registries do not operate in an industry in which an
individual's status, as an employee or independent contractor, is
determined by the service recipient. For the reasons stated, caregivers
in all cases make the unilateral decision on how they choose to work.
PCA submits that caregiver registries provide a vitally important
role in facilitating the market for freelance home-care providers and
in providing consumers with an opportunity to obtain an independent
third-party verification of the background and credentials of the
caregivers who care for them.
Caregiver registries are very concerned, however, about their
potential legal risks under the DOL's final regulations governing home
care. Consequently, PCA respectfully seeks additional clarification on
how caregiver registries can operate their businesses with confidence
that they will avoid any risk of being determined to be the employer or
joint employer for purposes of the FLSA of the caregivers they refer to
care recipients.
Prepared Statement of the National Association of Home
Builders (NAHB)
The more than 140,000 members of the National Association of Home
Builders (NAHB) appreciate the opportunity to present this statement to
the U.S. Senate Committee on Health, Education, Labor, and Pensions
Subcommittee on Employment and Workplace Safety as it considers the
classification of employees and independent contractors. This issue is
of great importance to the home building industry, which thrives on the
efficiency and entrepreneurship that comes from both home builders and
their trades being able to freely choose their form of business
relationship.
NAHB's statement focuses on the economic considerations lending to
the prevalence of the independent contractor business model in the
residential construction industry. It further examines the motivations
of both contractual parties in choosing this type of business
relationship.
the residential construction industry and economies of scale
Independent contractors are commonly engaged in the residential
construction sector. With success and growth, many of these independent
contractors become larger enterprises employing their own workers. Less
understood, however, is the structure of the home building industry and
the important business-related factors that necessitate the use of this
business model in the construction of a home.
Intuitively, one understands that the construction of a home is a
complex undertaking requiring a variety of labor, expertise, and skill
to turn a design into a finished product. From laying the home's
foundation, to framing the house and trusses, and installing complex
plumbing and electricity systems, a home builder has an extensive and
diverse set of projects to complete for the consumer in a set amount of
time.
Consequently, home builders rely on myriad specialty trades to
complete a finished home. The U.S. Census identifies some of these
roles: construction supervisor, brick mason, carpenter, flooring
contractor, cement worker, general laborer, pile driver, engineer,
drywaller, electrician, glazier, insulation contractor, painter,
paperhanger, pipe plumber, plaster contractor, rebar worker, roofer,
metalworker, quality inspector, fencer, hazmat removal contractor, and
septic and sewer specialist.
Importantly, the dominance of small business entities in the
residential construction sector further illustrates the necessity of
the independent contractor business model in the industry. In 2012, 85
percent of NAHB's builder members built 25 or fewer homes, and 75
percent built 10 or fewer.
Because the typical home builder may only construct a few homes
annually, there is not sufficient internal demand to justify hiring an
employee for the numerous specialized tasks required to complete a home
project. For example, the total internal demand for an electrician may
only be one-half of a position per year.
Economic theory dictates that firms employ labor in-house only when
the costs of doing so are less than the cost of contracting with
another firm. In general, labor costs are lower for businesses that
specialize in a particular activity compared to a business that
attempts to do all tasks in-house. Consequently, it may be more
efficient to contract with a business consisting of dedicated
specialists than housing a single specialized employee within the firm.
This effect is also known as economies of scale and is likely to occur
in industries associated with large fixed costs, low marginal costs and
learning-by-doing, such as residential construction or the technology
sector.
Accordingly, it makes more economic sense for a home builder to
contract with an electrician who acts as an independent contractor
rather than hire an employee. This contractor will likely own his or
her own equipment, provide for his or her own training, and may have
his or her own staff. Essentially, this contractual relationship is
between two businesses--one hiring the other to perform a particular
function the other cannot.
The economics of why there is a large share of independent
contractors in the construction sector can also be seen in the data.
The JOLTS data from the Bureau of Labor Statistics demonstrate hiring
and separation rates can be 50 percent to 100 percent higher than other
business sectors. These higher rates of both hiring and separations for
the construction sector are consistent with a market that has high
worker turnover due to seasonal and contract- or project-based labor
needs. Such ``lumpy'' demand for workers results in high turnover as
contracts are begun and completed, typically under weather constraints.
Moreover, with respect to separations, the data indicate that while the
categories for the rates of quits and other separations for
construction are comparable with the rest of the economy, the layoffs/
discharges separation rate is twice as high.
Overall, the JOLTS data for the construction sector reveal an
industry with high rates of worker turnover. For such industries,
independent contractor status makes a good deal of economic sense, as
it provides the flexibility to link demand for workers with available
supply. Also given the current weakness in economic growth, the economy
needs more flexibility in this regard, not less.
both contractual parties benefit from the independent contractor
business model
Deciding whether to utilize independent contractors or hire
employees is a question posed by a business when it decides how to
operate. As discussed above, the independent contractor model is
traditionally utilized in the home building industry due to the
necessity of specialty trades and dominance of small business entities
in the industry. This model also allows businesses to adjust their
workforce based on demand, seasonal considerations, and other factors
determined by a dynamic housing market.
Likewise, similar considerations are made by individuals in
deciding whether he or she will seek entrepreneurship over a more
traditional form of employment. Often is the case that an independent
contractor will prefer this type of autonomous contractual
relationship, which supports entrepreneurial activity, offers
independence over one's own work hours, and control over his or her
performance on the job.
Generally, self-employed individuals have exclusive ownership over
their services, and because they are free to choose their own jobs and
clients, the quantity and quality of their work is better correlated
with the amount of money they make. In the construction industry, it is
true that many independent contractors gain a foothold in the middle
class by learning a specialty trade and growing their own business from
the ground up.
conclusion
The residential construction industry is dominated by small firms,
in terms of count and homes built. A virtue of this large number of
firms is competition, which is good for home buyers.
While NAHB appreciates the subcommittee's interest in the proper
classification of employees and independent contractors, NAHB strongly
supports maintaining the efficiency and flexibility of the marketplace
by continuing to allow employers to classify their workers as
independent contractors. At the same time, we support enforcement of
present law to ensure a level playing field for small businesses.
Policies that would eliminate or raise the cost of engaging
independent contractors would have the impact of increasing the minimum
size of a home builder in order to have the scale required to place
additional workers or subcontractors under full employee status. This
increase in minimum firm size would in turn cause many small firms to
cease to exist, thereby reducing competition and harming the demand
side of the housing sector.
Prepared Statement of The Snack Food Association
The Snack Food Association (SFA) is the international trade
association of the snack food industry representing snack manufacturers
and suppliers. SFA represents over 400 companies worldwide.
The core business of SFA member-companies is manufacturing and
distributing convenience foods to thousands of retail outlets such as
grocery and convenience stores. In support of these activities, these
companies collectively employ or contract with tens of thousands of
professional drivers and operate commercial vehicles in a wide range of
private fleet operations.
SFA recognizes that abuses of independent contractor status may
exist in certain industries. We also understand and support the need
for proper employee/independent contractor classification. However, we
also believe it is critically important for policymakers to recognize
that many companies utilize independent contractors as a legal and
appropriate means of doing business.
A number of snack food companies utilize self-employed contractors
as a part of their direct store delivery systems. These independent
drivers deliver product to retail locations, stack shelves and interact
directly with customers, among other duties. This model helps meet
customers' demands for flexible scheduling and other individual
business needs. It has served as a successful one for our industry and
for the small business entrepreneurs that provide these services.
These arrangements generate economic and other benefits for both
the self-employed drivers and those companies that retain them by
providing labor services in situations where the traditional employee/
employer relationship may not provide the best fit for the worker, the
company, or both.
Paramount for many contract drivers is the desire to ``be one's own
boss'' and to otherwise benefit from the independence associated with
being self-employed. This spirit of entrepreneurship is a positive
force for our industry and the economy as a whole.
Any legislation seeking to address ``misclassification'' of workers
must not be so broadly crafted as to restrict or inhibit legitimate
contracting practice. Doing so will result in higher unemployment, less
formation of small businesses, a less dynamic workforce, and reduced
economic vitality. For our industry, it would cause significant
disruption for those companies that choose to utilize self-employed
individuals as a part of their distribution business model.
SFA opposes efforts to place new disclosure or recordkeeping
requirements on companies that utilize independent contractors. We
further oppose any effort to amend or repeal the so-called ``Section
530'' protections in Federal law which provides a ``safe harbor''
against employment tax liability in cases where an employer has
traditionally treated an individual as an independent contractor.
In sum, SFA believes the legitimate use of independent contractors
has an essential and dynamic role for many of our member-companies and
for the economy as a whole. We oppose changes in Federal law that would
place new regulatory or administrative burdens on employment or
contracting practices.
______
American Society of Travel Agents,
Alexandria, VA 22314,
November 8, 2013.
Hon. Robert P. Casey, Jr., Chairman,
Subcommittee on Employment and Workplace Safety,
Senate Committee on Health, Education, Labor, and Pensions,
143 Hart Senate Office Building,
Washington, DC 20510.
Hon. Johnny Isakson, Ranking Member,
Subcommittee on Employment and Workplace Safety,
Senate Committee on Health, Education, Labor, and Pensions,
113 Hart Senate Office Building,
Washington, DC 20510.
Dear Senators: I am writing to share the views of the American
Society of Travel Agents (ASTA) on the issue of independent contractors
in advance of the committee's November 12 worker classification
hearing, and ask that this letter be included in the official hearing
record.
By way of introduction, ASTA was established in 1931 and is the
leading professional travel trade organization in the world. Its
current membership consists of nearly 2,200 domestic travel agency
firms--including 73 in Pennsylvania and 57 in Georgia--employing around
30,000 people. ASTA's members vary in size from the smallest home-based
agent to large travel management companies such as American Express
Travel to the prominent online agencies like Expedia, Orbitz, Priceline
and Travelocity.
Like many other industries, travel agencies rely on the services of
``independent contractors,'' which are defined by the Internal Revenue
Service as ``people such as doctors, lawyers, [and] accountants . . .
who are in an independent trade, business, or profession in which they
offer their services to the general public.'' \1\ As the many travel
agencies who have utilized an independent contractor (IC) arrangement
can attest, it provides substantial benefits for both workers and
agencies in situations where a traditional employment relationship is
either impractical or uneconomical.
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\1\ ``Independent Contractor Defined,'' last modified November 5,
2013, http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/
Independent-Contractor-Defined.
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Travel agencies who use ICs are in good company. In 2010, 10.3
million workers, comprising 7.4 percent of the U.S. workforce, were
classified as independent contractors by the U.S. Department of Labor
(DOL), and another 4 million work in ``alternative work arrangements''
in which they may be legally classified as ICs.\2\ Alternative workers
accounted for approximately $626 billion in personal income, or about
one in every eight dollars earned in the United States.\3\ For years,
travel agencies across the country have utilized IC arrangements to run
their businesses more efficiently. An estimated 61 percent of ASTA
member agencies use at least one independent contractor, and the
average ASTA member utilized eight ICs in 2012. According to the
research firm PhoCusWright, an estimated 20,000 ICs work in the travel
agency industry--equivalent to 20 percent of total industry
employment.\4\
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\2\ Bureau of Labor Statistics, Navigant Economics.
\3\ Navigant Economics calculations based on data from the Bureau
of Labor Statistics and the Bureau of Economic Analysis. Note that
these figures do not include earnings of those who engage in
independent contracting as a ``second job.''
\4\ Quinby, Douglas and Sullivan, Mary Pat. The Once and Future
Agent: PhoCusWright's Travel Agency Distribution Landscape 2009-2013.
PhoCusWright, Inc. March 2012.
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For an agency, using ICs allows for flexibility to bring people on
to help out during a busy season, to pay for services based on output
instead of timesheets, and to better manage their capital expenses. For
a contractor, the arrangement provides benefits in terms of building
the expertise and client base necessary for entrepreneurship and small
business formation, but perhaps most of all fulfills the desire to ``be
your own boss.''
Negative news articles on this issue give the impression that
businesses are forcing their employees to become ICs against their
will. The reality is quite the contrary--workers overwhelmingly prefer
independent contractor relationships to salary/wage employment.
According to the DOL, 82.3 percent of ICs prefer an independent work
arrangement to being an employee, compared with only 9.1 percent who
would prefer a traditional employment arrangement.\5\ In the same vein,
a 2009 Pew Research Center survey found that self-employed workers are
``significantly more satisfied with their jobs than other workers,''
and that ``they're . . . more likely to work because they want to and
not because they need a paycheck.'' \6\
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\5\ Bureau of Labor Statistics survey on Contingent and Alternative
Work Arrangements, 2005.
\6\ Rich Morin, Job Satisfaction Among the Self-Employed (Pew
Research Center, September 2009) (available at http://
pewsocialtrends.org/pubs/743/job-satisfaction-highest-among-self-
employed).
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Another argument critics present is that independent contractors
are more likely to underreport income than employees, leading to
reduced tax revenues and thus increasing the so-called ``tax gap.''
While tax evasion undoubtedly exists throughout the U.S. economy, there
is no evidence that IC arrangements contribute disproportionately to
the tax gap. In fact, the opposite is true. The Treasury Department
looked at this in great detail several years ago and concluded that,
provided income and expenses are properly reported, ``independent
contractors and their clients tend to pay higher levels of taxes,
especially Social Security and Medicare taxes, than employees and
employers'' (emphasis added).\7\
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\7\ Department of the Treasury, Taxation of Technical Services
Personnel: Section 1706 of the Tax Reform Act of 1986, A Report to
Congress (March 1991) at 24-26.
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At the end of the day, independent contracting provides a flexible
way to conduct business when traditional employment arrangements don't
make sense, allows for new entrants to move into the workforce, and is
a key means toward small business development and new job creation.
While there have been abuses, and the Federal Government is within its
rights to ensure proper worker classification, we fear that cracking
down too hard on the IC system will result in slower economic growth
and lower consumer welfare overall.
ASTA's position is simple--the independent contracting system has
proven its value to travel agencies' business operations and should
remain a viable option. We will oppose proposals to undo longstanding
protections for businesses that rely on the services of legitimate ICs,
force them to fundamentally change the way they do business, and assume
massive new tax and compliance expenses.
Thank you for considering ASTA's views on this critical issue. If
you or your staff have any questions about this or any issue related to
the travel industry or small business, please don't hesitate to contact
me or Eben Peck, ASTA's VP of Government Affairs, at (703) 739-6842 or
[email protected].
Yours Sincerely,
Zane Kerby,
President and Chief Executive Officer.
[Whereupon, at 3:39 p.m., the hearing was adjourned.]
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