[Congressional Record Volume 140, Number 12 (Wednesday, February 9, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: February 9, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
 TESTIMONY ON THE EMPLOYMENT STATUS PROVISIONS OF THE ADMINISTRATION'S 
                          HEALTH SECURITY ACT

                                 ______


                            HON. TOM LANTOS

                             of california

                    in the house of representatives

                      Wednesday, February 9, 1994

  Mr. LANTOS. Mr. Speaker, as we debate the President's health care 
proposal and employer mandates, we must pay close attention to the 
issue of the proper classification of workers. If we require employers 
to pay a significant share of their employee's health care insurance 
premiums, employers will be tempted to misclassify their employees as 
independent contractors. The President's Health Security Act contains 
important provisions to prevent the further misclassification of 
workers and I support him in this effort. I testified before the House 
Ways and Means Subcommittee on Select Revenue Measures yesterday on the 
problem of the misclassification of workers and in support of the 
President's approach to curb further abuse of workers and the law. I 
respectfully request that my remarks be placed in the Record and urge 
my colleagues to support efforts to craft an effective solution to the 
problem of the misclassification of workers.

                        Statement of Tom Lantos

       Thank you, Mr. Chairman, it is a pleasure for me to testify 
     again before your Subcommittee on an issue of great 
     importance to me--the misclassification of employees. As we 
     all know, the President's health care proposal, of which I am 
     a sponsor, would require businesses to help pay their 
     employees' health coverage. This leaves the critical 
     questions: Who is an employee? And how should employers 
     distinguish between employees and independent contractors for 
     whom employers will not have to provide health benefits?
       In the 70's Congress enacted Section 530 which provides 
     several safe harbors for employers to escape IRS assessments 
     for past misclassification and to permit continued 
     misclassification in the future. If Section 530 does not 
     apply, the determination of whether an employer-employee or 
     independent contractor relationship exists is made under a 
     very subjective 20 factor common law test.
       Strong evidence suggest that the current means for 
     determining employment status has had several negative 
     effects: one, Section 530 safe harbors results in similarly 
     situated employers being treated very differentially under 
     tax law; two, misclassification allows--and actually 
     encourages--businesses to undercut competitors through unfair 
     practices; three, misclassification leaves workers exploited 
     and unprotected; and four--surely an issue of prime 
     importance to all of us--misclassification deprives the 
     Federal government of significant revenue.
       The misclassification of workers is not a small problem. 
     The IRS reported that in 1984 one in seven employers 
     misclassified some three million workers with $16 billion in 
     compensation. The Social Security system, state unemployment 
     funds and the general treasury are all losing money. More 
     significantly, these estimates, according to the IRS, ``are 
     conservative. They represent employers with employment tax 
     filing requirements but do not include withholding and 
     employment tax noncompliance for employers who are completely 
     noncompliant with employment taxes regulations.'' In other 
     words, these estimates do not include the submerged bulk of 
     the iceberg, the willful violators.
       The incentives to misclassify workers as independent 
     contractors are huge. An employer who misclassifies a worker 
     as an independent contractor instead of an employee escapes 
     many obligations, including paying half of Social Security 
     tax, unemployment tax, workers compensation insurance, 
     withholding income taxes and providing benefits such as 
     vacation, sick and family leave, health and life insurance, 
     pensions, etc., by passing these obligations on to, in many 
     cases, unknowing workers.
       As Chairman of the House Government Operations Subcommittee 
     on Employment and Housing, I have seen the devastating 
     effects on workers who are misclassified as independent 
     contractors. The loss of financial benefits and of the many 
     protections which are provided to employees can be 
     catastrophic in cases of illness, unemployment and 
     retirement. I certainly agree with and recognize the 
     appropriate and valuable roles of many who work as 
     independent contractors. It is the misuse of the independent 
     contractor status and its serious adverse effects on both 
     employer and workers that concern me.
       My colleague, Congressman Chris Shays, and I have 
     introduced legislation (H.R. 3069) in an effort to remedy 
     some of the abuses by employers that occur in determining a 
     worker's employment status. The President recognizes, and I 
     agree, that health care reform will make it imperative to 
     develop clearer rules for determining the employment status 
     of all workers.
       I have long advocated repealing the safe harbor provisions 
     of Section 530 and permitting the Department of Treasury to 
     define the term ``employee'' by regulation and these 
     provisions are contained in Sections 7301-7303 of the 
     President's Health Security Act. These important changes in 
     law would improve revenue collections, reduce the incidence 
     of inequitable tax administration, assist legitimate 
     businesses, and help to implement the economic safety net we 
     want for our workforce. These changes will also minimize the 
     administrative and compliance burden on firms and make it 
     more difficult for employers to avoid the obligation to pay 
     health care premiums or inappropriately take advantage of 
     premium discounts.
       I can assure you that as we move down the road toward 
     employer mandated health care, the incentives to misclassify 
     workers by employers will be even larger. There is no better 
     time to clarify the rules for classifying workers. There is 
     no better time to prevent worker misclassification than now.
       Thank you for your attention to this issue.

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