Employment Arrangements: Improved Outreach Could Help Ensure	 
Proper Worker Classification (11-JUL-06, GAO-06-656).		 
                                                                 
Millions of U.S. workers participate in "contingent" employment, 
such as temporary or part-time work, and not in permanent or	 
full-time jobs. The Department of Labor (DOL) enforces several	 
labor laws to protect these and other workers, including the Fair
Labor Standards Act (FLSA), which provides minimum wage, overtime
pay, and child labor protections. In June 2000, GAO reported that
contingent workers lagged behind standard full-time workers in	 
terms of income, benefits, and workforce protections, and that	 
some employees do not receive worker protections because	 
employers misclassified them as independent contractors. GAO was 
asked to update this report by describing (1) the size and nature
of the contingent workforce, (2) the benefits and workforce	 
protections provided to contingent workers, and (3) the actions  
that DOL takes to detect and address employee misclassification. 
We analyzed DOL survey data on contingent workers and interviewed
DOL officials.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-656 					        
    ACCNO:   A57019						        
  TITLE:     Employment Arrangements: Improved Outreach Could Help    
Ensure Proper Worker Classification				 
     DATE:   07/11/2006 
  SUBJECT:   Employee medical benefits				 
	     Employee rights					 
	     Labor law						 
	     Labor statistics					 
	     Part-time employment				 
	     Pensions						 
	     Temporary employment				 
	     Fringe benefits					 

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GAO-06-656

     

     * Results in Brief
     * Background
     * Contingent Workers Constitute a Relatively Constant Proporti
          * Contingent Workers' Proportion of the Total Workforce Has Ch
          * Contingent Workers Are a Diverse Group
     * A Smaller Proportion of Contingent Workers than Others Has B
          * A Smaller Proportion of Contingent Workers than Others Recei
          * A Smaller Proportion of Contingent Workers than Others Has A
          * Some Categories of Contingent Workers Are Not Covered by Key
          * Incorrect Employment Relationship May Result in Lack of Work
     * DOL Detects and Addresses Employee Misclassification through
          * Investigators Determine Workers' Employment Relationship
          * Employee Misclassification, though Not an FLSA Violation, Ma
          * DOL's Outreach Efforts Provide Some Information on Employee
          * DOL Offices We Studied Vary in How Often They Forward Miscla
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments
          * Family and Medical Leave Act of 1993 (29 U.S.C. 2601)
          * Employee Retirement Income Security Act (29 U.S.C. 1001)
          * Fair Labor Standards Act (29 U.S.C. 201)
          * National Labor Relations Act (29 U.S.C. 151)
          * Unemployment Insurance
          * Workers' Compensation
          * Occupational Safety and Health Act (29 U.S.C. 651)
          * Title VII of the Civil Rights Act (42 U.S.C. 2000e), the Ame
          * Consolidated Omnibus Budget Reconciliation Act (29 U.S.C. 11
          * Health Insurance Portability and Accountability Act of 1996
     * GAO Contact
     * Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to the Ranking Minority Member, Committee on Health, Education,
Labor, and Pensions, U.S. Senate

United States Government Accountability Office

GAO

July 2006

EMPLOYMENT ARRANGEMENTS

Improved Outreach Could Help Ensure Proper Worker Classification

GAO-06-656

Contents

Letter 1

Results in Brief 3
Background 5
Contingent Workers Constitute a Relatively Constant Proportion of the
Workforce and Are Diverse 10
A Smaller Proportion of Contingent Workers than Others Has Benefits or Is
Covered by Key Workforce Protection Laws 14
DOL Detects and Addresses Employee Misclassification through
Investigations, but Offices We Studied Vary in How Often They Forward
Misclassification Cases to Other Federal and State Agencies 26
Conclusions 34
Recommendations for Executive Action 35
Agency Comments 36
Appendix I Objectives, Scope, and Methodology 38
Appendix II Establishing the Employment Relationship of Workers 43
Appendix III Size and Characteristics of the Contingent Workforce 47
Appendix IV Key Laws Designed to Protect Workers 51
Appendix V Comments from the Department of Labor 56
Appendix VI GAO Contact and Staff Acknowledgments 58
Related GAO Products 59

Tables

Table 1: Key Federal and State Agencies That Can Be Affected by Employee
Misclassification 8
Table 2: Contingent Workers and the Total Employed Workforce (February
1995, February 1999, February 2005) 11
Table 3: Workers with Annual Family Incomes below $20,000 (February 2005)
14
Table 4: Changes in the Size of the Contingent Workforce 47
Table 5: Characteristics of Contingent Workers (February 2005) 48

Figures

Figure 1: Categories of Workers That GAO Considered Contingent 6
Figure 2: Composition of the Contingent Workforce (February 2005) 12
Figure 3: Workers with Health Insurance (February 2005) 16
Figure 4: Workers with Employer-Provided Pensions (February 2005) 19
Figure 5: Key Laws Designed to Protect Workers 22

Abbreviations

BLS Bureau of Labor Statistics CPS Current Population Survey DOL
Department of Labor EMPLEO Employment Education and Outreach ERISA
Employee Retirement Income Security Act ESA Employment Standards
Administration ETA Employment & Training Administration FLSA Fair Labor
Standards Act FOH Field Operations Handbook IRS Internal Revenue Service
NLRA National Labor Relations Act NLRB National Labor Relations Board

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separately.

United States Government Accountability Office

Washington, DC 20548

July 11, 2006

The Honorable Edward M. Kennedy Ranking Minority Member Committee on
Health, Education, Labor, and Pensions United States Senate

Dear Senator Kennedy:

Millions of workers in the U.S. economy participate in some form of
"contingent" employment, such as temporary or part-time work. While
definitions of the contingent workforce vary, broadly defined, contingent
workers are workers who do not have standard full-time employment, that
is, are not wage and salary workers working at least 35 hours a week in
permanent jobs. Contingent work arrangements often have the potential to
provide flexibility for employers and workers. However, such arrangements
may also exclude some contingent workers from receiving key worker
benefits and protections such as the guarantee of workers' rights to safe
and healthful working conditions, a minimum hourly wage and overtime pay,
freedom from employment discrimination, and unemployment insurance. The
Department of Labor (DOL) enforces a wide range of labor laws that provide
protections to workers, including the Fair Labor Standards Act (FLSA),
which provides minimum wage, overtime pay, and child labor protections.
Other federal and state agencies enforce laws that provide workers with
additional workforce benefits and protections.

In June 2000, we reported that contingent workers, as broadly defined,
constituted almost 30 percent of the workforce and that compared with
standard full-time workers, contingent workers lagged behind in terms of
income and benefits.1 We also reported that some workers do not receive
worker protections to which they are entitled because employers
misclassify them as independent contractors-a category of workers that is
excluded from many protections-when they should be classified as
employees. In its last comprehensive misclassification estimate, the
Internal Revenue Service (IRS) estimated that 15 percent of employers
misclassified 3.4 million workers as independent contractors in 1984,
resulting in an estimated tax loss of $1.6 billion (or $2.72 billion in
inflation-adjusted 2006 dollars2) in Social Security tax, unemployment
tax, and income tax.

1 GAO, Contingent Workers: Incomes and Benefits Lag Behind Those of Rest
of Workforce, GAO/HEHS-00-76 (Washington, D.C.: June 30, 2000).

In this context, you asked us to update our work on contingent workers and
review employee misclassification issues. Specifically, you asked us to
examine (1) the size and nature of the contingent workforce, (2) the
benefits and workforce protections provided to contingent workers, and (3)
the actions that DOL takes to detect and address employee
misclassification.

To respond to your request, we analyzed data from the Bureau of Labor
Statistics' (BLS) Current Population Survey (CPS), which is used to survey
people about their work and workplace benefits, and a CPS supplement
developed to collect information on the contingent workforce. We used this
CPS contingent workforce supplement to produce estimates of
characteristics of contingent workers, their receipt of health insurance,
and their participation in pension programs. To ensure reporting
consistency, we used the same definition of contingent workers that we
used in our 2000 report. This definition included eight categories of
contingent workers: agency temporary workers (temps), direct-hire temps,
on-call workers, day laborers, contract company workers, independent
contractors, self-employed workers, and standard part-time workers.3 We
interviewed BLS officials and other researchers about contingent worker
issues. We also reviewed key workforce protection laws to determine
coverage of contingent workers. To obtain information on DOL's efforts to
detect and address employee misclassification as part of FLSA enforcement,
we reviewed DOL documents and interviewed DOL officials from headquarters,
3 of 5 regional offices, and 9 of 51 district offices.4 We also reviewed
literature and interviewed researchers about employee misclassification
issues. We performed our work in accordance with generally accepted
government auditing standards between July 2005 and June 2006. Appendix I
provides detailed information on the scope and methodology of our work.

2 The $2.72 billion is intended to be an estimate of the magnitude of tax
loss due to misclassification in 2006 dollars-not an updated estimate. The
actual tax loss due to misclassification in 2006 may be higher or lower
based on the tax rates, the level of independent contractors used in
various sectors of the economy, and the types and levels of
misclassification observed in 2006.

3 Standard part-time workers are individuals who regularly work less than
35 hours a week for a particular employer and are wage and salary workers.

                                Results in Brief

Contingent workers constituted a relatively constant proportion of the
total workforce from 1995 through 2005 and had diverse characteristics.
While the population of the contingent workforce grew by an estimated 3
million workers during this time period, the proportion of contingent
workers in the total workforce remained relatively constant at about 31
percent.5 In 2005, there were about 42.6 million contingent workers in the
workforce. Across categories, contingent workers vary in terms of their
demographic characteristics. For example, on average, contingent workers
range in age from about 35 years for direct-hire temps to about 48 years
for self-employed workers. While about two-thirds of standard part-time
workers are female, females constitute about one-third of contract company
workers. Contingent workers are employed in a wide range of industries and
occupations, including the services industry, construction, and retail
trade.

A smaller proportion of contingent workers than of standard full-time
workers has health insurance or pension benefits, or is protected by key
workforce protection laws, including laws designed to ensure proper pay
and safe, healthful, and nondiscriminatory workplaces. While 72 percent of
standard full-time workers received employer-provided health insurance in
2005, the proportion of contingent workers who received employer-provided
health insurance ranged from 9 to 50 percent, depending on the category of
contingent worker. When other sources of health insurance are taken into
account, the proportional difference between contingent and standard
full-time workers decreases substantially but is not eliminated. With
regard to pension benefits, 76 percent of standard full-time workers
reported working for an employer who offered a pension, and 64 percent
reported being included in their employer's plan. In contrast, 17 to 56
percent of contingent workers reported working for an employer who offered
a pension, and 4 to 37 percent reported being included in their employer's
plan.

4 We selected the regional and district offices using a nonprobability
sample-a sample in which some items in the population have no chance, or
an unknown chance, of being selected. Results from nonprobability samples
cannot be used to make inferences about a population; thus, the
information we obtained cannot be generalized to all regional and district
offices.

5 Estimates of the size and characteristics of the contingent workforce
are based on CPS sample data and are subject to sampling error. For
example, the 95 percent confidence intervals for percentages of the total
workforce are within +/- 1 percentage point of the estimate itself.
Appendix I contains information on the magnitude of sampling error for the
CPS estimates contained in this report.

DOL detects and addresses misclassification of employees as independent
contractors by investigating complaints, but does not always forward
misclassification cases to other federal and state agencies. DOL
investigators detect and address employee misclassification primarily when
responding to FLSA minimum wage and overtime pay complaints. DOL
investigators examine the employment relationship-whether a worker is an
employee or an independent contractor-to determine whether workers are
covered under FLSA. DOL relies heavily on complaints from workers to
enforce FLSA, but the FLSA workplace poster-a principal means of
communicating FLSA protections-does not contain any information on
employment relationship or provide a telephone number for individuals to
register complaints. While misclassification of an employee as an
independent contractor is not a violation of FLSA, it may contribute to an
FLSA violation if the employer does not pay the minimum wage or overtime
required by the act. In addition, employee misclassification may
contribute to a violation of laws enforced by other agencies, such as tax
laws. DOL procedures require officials to share information with other
federal and state agencies whenever investigators find possible violations
of other laws. However, the district offices we contacted vary in how
often they forward misclassification as a possible violation of other
agencies' laws.

This report contains recommendations that DOL (1) revise its FLSA
workplace poster to include additional contact information that would
facilitate the reporting of potential employee misclassification
complaints, and (2) evaluate the extent to which misclassification cases
identified through FLSA investigations are referred to the appropriate
federal or state agency, and take action to make improvements as
necessary. In commenting on our draft report, DOL agreed with the first
recommendation and agreed with the primary part of the second
recommendation, but disagreed with one part of this recommendation.
Regarding the second recommendation, DOL agreed with the value of sharing
potential employee misclassification with appropriate federal and state
programs, but did not agree with a part of the draft recommendation that
referral of cases should include notifying the employer that the
misclassification case has been forwarded to the appropriate agency. After
considering DOL's position concerning this aspect of the draft
recommendation, we deleted this part from the final recommendation. DOL
also provided technical comments, which we incorporated in the report as
appropriate. Our summary evaluation of the agency's comments is on page
36. DOL's comments are reproduced in appendix V.

                                   Background

The term "contingent work" can be defined in many ways to refer to a
variety of nonstandard work arrangements. Broadly defined, "contingent
work" refers to work arrangements that are not long-term, year-round,
full-time employment with a single employer. For example, an employer may
hire workers when there is an immediate and limited demand for their
services, without any offer of permanent or even long-term employment.
Temporary workers, independent contractors, and part-time workers are
examples of contingent workers. In 2000, we reported our definition of
contingent workers that we also used in this report.6 Figure 1 shows this
definition, which includes eight categories of contingent workers.

6 Although we used data from the Contingent Work Supplement, we used a
definition of contingent worker different from the one used by BLS in its
analysis of the data. As in our 2000 review of contingent workers, we did
not restrict our definition to include only workers with relatively short
job tenure, but rather provided information on a range of workers who
could be considered contingent under different definitions. Although we
believe that it is useful to consider the nature and size of the
population of workers in jobs of limited duration as well as their access
to benefits, we also believe that it is useful to provide information
according to categories that are more readily identifiable and mutually
exclusive. Appendix I provides a more detailed description of GAO's
definition of contingent workers.

Figure 1: Categories of Workers That GAO Considered Contingent

Research has shown that employers use contingent work arrangements for a
variety of reasons. Employers may hire contingent workers to accommodate
workload fluctuations, fill temporary absences, meet employee's requests
for part-time hours, screen workers for permanent positions, and save on
wage and benefit costs, among other reasons.7 Previous analyses of data
from the CPS Contingent Work Supplement have indicated that workers also
take temporary and other contingent jobs for a variety of personal and
economic reasons. For example, workers in various types of contingent jobs
indicated that they (1) preferred a flexible schedule to accommodate their
school, family, or other obligations; (2) needed additional income; (3)
could not find a more permanent job; or (4) hoped the job would lead to
permanent employment.8 Studies using data from the BLS National
Longitudinal Survey of Youth show that events such as the birth of a child
or a change in marital status affect the likelihood of entering different
types of employment arrangements and prompt some workers to enter
contingent work arrangements.9

Concerns arise when employers misclassify workers as independent
contractors, who are in a category of contingent workers excluded from
certain worker protections. Employee misclassification occurs when an
employer improperly classifies a worker as an independent contractor when
the worker should be classified as an employee. In 2000, we reported that
because most key workforce protection laws cover only workers who are
employees, independent contractors and certain other contingent workers,
such as self-employed workers, are, by definition, not covered. (See app.
IV for a more detailed description of these key laws.)

Misclassification of employees can affect the administration of many
federal and state programs, such as payment of taxes and pension benefits.
For example, if employers misclassify workers as independent contractors,
then they may not be paying the payroll taxes required to be paid for
employees. At the federal level, misclassification can reduce tax
payments, Medicare payments, and Social Security payments. At the state
level, misclassification can affect payments into state tax, workers'
compensation, and unemployment insurance programs. Table 1 shows key
federal and state agencies that can be affected by employee
misclassification issues.

7 See Susan N. Houseman, "Temporary, Part-Time, and Contract Employment in
the United States: A Report on the W.E. Upjohn Institute's Employer Survey
on Flexible Staffing Policies" (November 1996, revised June 1997), and
Susan N. Houseman, "Why Employers Use Flexible Staffing Arrangements:
Evidence from an Establishment Survey," Industrial and Labor Relations
Review (October 2001):149-170.

8 See Sharon R. Cohany, "Workers in Alternative Employment Arrangements,"
Monthly Labor Review (October 1996): 31-45; Anne E. Polivka, "Into
Contingent and Alternative Employment: By Choice?," Monthly Labor Review
(October 1996):55-74; Sharon R. Cohany, "Workers in Alternative Employment
Arrangements: a Second Look," Monthly Labor Review (November 1998):3-21;
Steven Hipple, "Contingent Work: Results from the Second Survey," Monthly
Labor Review (November 1998):22-35; Steven Hipple, "Contingent Work in the
Late-1990s," Monthly Labor Review (March 2001):3-27.

9 Donna S. Rothstein, "Entry Into and Consequences of Nonstandard Work
Arrangements," Monthly Labor Review (October 1996): 76-83, and Barbara A.
Wiens-Tuers and Elizabeth T. Hill, "How Did We Get Here from There?
Movement into Temporary Employment," Journal of Economic Issues (June
2002):303-311.

Table 1: Key Federal and State Agencies That Can Be Affected by Employee
Misclassification

                                                  Areas potentially affected
                                                  by employee    
Entity                  Law                    misclassification
U.S. Department of      Fair Labor Standards   Minimum wage, overtime, and
Labor                   Act                    child labor provisions
                           Family and Medical     Job-protected and unpaid
                           Leave Act              leave          
                           Occupational Safety    Safety and health
                           and Health Act         protections    
U.S. Department of      Federal tax law,       Federal income and
Treasury-Internal       including:             employment taxes
Revenue Service                                
                           Federal Insurance      
                           Contributions Act      
                                                  
                           Federal Unemployment   
                           Tax Act                
                                                  
                           Self-Employment        
                           Contributions Act      
U.S. Department of      Title XVIII of the     Medicare benefit payments
Health and Human        Social Security Act    
Services                (Medicare)             
DOL/IRS/Pension Benefit Employee Retirement    Pension, health, and other
Guaranty Corporation    Income Security Act    employee benefit plans
Equal Employment        Title VII of the Civil Prohibitions of employment
Opportunity Commission  Rights Act             discrimination based on
                                                  race, color, religion,
                                                  gender, and national origin
                           Americans with         Prohibitions of
                           Disabilities Act       discrimination against
                                                  individuals with
                                                  disabilities   
                           Age Discrimination in  Prohibitions of employment
                           Employment Act         discrimination against any
                                                  individual 40 years of age
                                                  or older       
National Labor          National Labor         The right to organize and
Relations Board         Relations Act          bargain collectively
Social Security         Social Security Act    Retirement and disability
Administration                                 payments       
DOL/state agencies      Unemployment insurance Unemployment insurance
                           law                    benefit payments
State agencies          State tax law          State income and employment
                                                  taxes          
                           State workers'         Workers' compensation
                           compensation law       benefit payments

Source: GAO analysis of laws.

DOL may encounter employee misclassification while enforcing worker
protection laws. DOL's mission is to promote the welfare of job seekers,
workers, and retirees in the United States by improving their working
conditions, advancing their opportunities for profitable employment,
protecting their retirement and health care benefits, helping employers
find workers, strengthening free collective bargaining, and tracking
changes in employment, prices, and other national economic measurements.
In carrying out this mission, DOL enforces a variety of worker protection
laws, including those guaranteeing workers' rights to safe and healthful
working conditions, a minimum hourly wage and overtime pay, freedom from
employment discrimination, and unemployment insurance.

In particular, DOL's Employment Standards Administration's (ESA) Wage and
Hour Division enforces FLSA. The Wage and Hour Division-with staff located
in 5 regional and 72 district, area, and field offices throughout the
country-conducts investigations of employers who have $500,000 or more in
annual sales volume.10 In addition, the division conducts outreach efforts
for employers and workers to ensure compliance with FLSA. District
directors oversee investigators, who play a key role in carrying out FLSA
enforcement. Investigators are trained to investigate a wide variety of
workplace conditions and complaints and enforce a variety of labor laws in
addition to FLSA.11 Regional and district offices conduct outreach to
employers and workers through brochures, workplace posters, presentations
or training sessions for individuals or groups, and Web-based information.

FLSA-which provides minimum wage and overtime pay protections-requires
that employers pay those employees covered by the act at least the minimum
wage and pay overtime wages when they work more than 40 hours a week.12
FLSA requires that an employer-employee relationship exist for a worker to
be covered by the act's provisions. The act defines "employee" broadly as
an individual employed by an employer. The U.S. Supreme Court has
identified certain factors to be considered in determining whether a
worker meets the FLSA definition of employee. Appendix II contains more
information on establishing the employment relationship under FLSA.

10 In addition, other types of employers-such as hospitals and schools-are
covered by FLSA regardless of their annual sales volume.

11 Complaints are a key component of DOL enforcement efforts under many
federal labor laws. DOL enforcement generally relies on two types of
information to identify potential violations: (1) complaints from
individuals who believe they may have suffered a violation and (2)
analysis of data to specifically target problematic industries or work
sites.

12 FLSA also includes record-keeping and child labor provisions.

Contingent Workers Constitute a Relatively Constant Proportion of the Workforce
                                and Are Diverse

Contingent workers constituted a relatively constant proportion of the
total workforce from 1995 through 2005 and had diverse characteristics.
While the number of contingent workers grew by an estimated 3 million
during this time period, the contingent proportion of the total workforce
remained relatively constant. In 2005, there were about 42.6 million
contingent workers in the workforce. The different categories of
contingent workers vary in terms of demographic characteristics,
industries, occupations, preferences for the type of job that they
currently hold, and incidence of low family income.13 Appendix III
contains detailed information on changes in the size of the contingent
workforce and characteristics of contingent workers.

Contingent Workers' Proportion of the Total Workforce Has Changed Little over
the Past Decade

In 2005, an estimated 31 percent of the workforce could be considered to
maintain a contingent work arrangement.14 As shown in table 2, while the
number of contingent workers grew from 39.6 million workers in 1995 to
42.6 million workers in 2005, contingent workers' share of the total
workforce remained relatively constant over this time period.15

13 GAO's 2000 review of contingent workers used $15,000 as the family
income threshold for defining "low family income." This income level was
selected because the BLS reports family income in $5,000 increments, and
$15,000 was the income level closest to and below the 1999 federal poverty
threshold for a family of four ($17,028). We selected $20,000 as the
family income threshold for "low family income" for this report because it
was the income level closest to the current federal poverty level. The
2004 federal poverty threshold for a family of four (the most current
information published by the Bureau of the Census at the time this project
was designed) was $19,307.

14 Workforce characteristics are estimated from the CPS February 2005
Contingent Work Supplement. Percentage estimates based on the total
workforce have 95 percent confidence intervals of within +/- 1 percentage
point of the estimate itself. Appendix I contains additional information
and confidence interval ranges for other CPS estimates presented in this
report.

15 Similarly, the proportions of the various categories of contingent
workers changed little over this time period (see app. III).

Table 2: Contingent Workers and the Total Employed Workforce (February
1995, February 1999, February 2005)

                  February 1995         February 1999          February 2005
               Estimated              Estimated              Estimated            
              numbers of  Estimated  numbers of  Estimated  numbers of  Estimated 
                 workers percentage     workers percentage     workers percentage 
Category of          (in     of the         (in     of the         (in     of the 
worker        thousands)  workforce  thousands)  workforce  thousands)  workforce
Contract                                                                          
company                                                                
workers              652        0.5         769        0.6         813        0.6
Agency temps       1,181        1.0       1,188        0.9       1,217        0.9 
On-call                                                                           
workers/day                                                            
laborers           2,014        1.6       2,180        1.7       2,736        2.0
Direct-hire                                                                       
temps              3,393        2.8       3,227        2.5       2,972        2.1
Self-employed                                                                     
workers            7,256        5.9       6,280        4.8       6,125        4.4
Independent                                                                       
contractors        8,309        6.7       8,247        6.3      10,342        7.4
Standard                                                                          
part-time                                                              
workers           16,813       13.6      17,380       13.2      18,360       13.2
Subtotal:                                                                         
contingent                                                             
workers           39,618      32.2a      39,271      29.9a      42,567       30.6
Standard                                                                          
full-time                                                              
workers           83,589       67.8      92,222       70.1      96,385       69.4
Total                                                                             
workforce        123,207      100.0     131,493      100.0     138,952      100.0

Source: GAO analysis of data from the CPS February 1995, 1999, and 2005
Contingent Work Supplements.

Note: We combined the on-call workers and day laborers categories because
the definitions and characteristics of these workers are similar and the
number of day laborers alone was not large enough to be statistically
significant.

a Percentages do not add up to subtotal because of rounding.

Contingent Workers Are a Diverse Group

The categories of contingent workers differ considerably in terms of their
share of the contingent workforce. In 2005, standard part-time workers
constituted the largest category (43 percent) and contract company workers
constituted the smallest category (2 percent) of the contingent workforce
(see fig. 2).

Figure 2: Composition of the Contingent Workforce (February 2005)

Note: Actual estimated percentages do not add to 100 percent because of
rounding.

Contingent workers exhibit a wide range of demographic characteristics.
For example, direct-hire temps (with a mean age of about 35 years16) were,
on average, the youngest contingent workers in 2005, while self-employed
workers (with a mean age of about 48 years17) were the oldest. An
estimated 68 percent of standard part-time workers were female, while
about 31 percent of contract company workers were female.18 Self-employed
workers had the highest percentage (81 percent) of white/non-Hispanic
workers, while agency temps had the smallest percentage (50 percent) of
white/non-Hispanic workers. Standard part-time workers had the highest
percentage (21 percent) of workers with less than a high school degree,
while self-employed workers and independent contractors had the lowest
percentages (8 percent).

16 The 95 percent confidence interval is from 34.1 to 36.3 years old.

17 The 95 percent confidence interval is from 47.2 to 48.5 years old.

18 The percentage estimates for individual categories of contingent
workers have 95 percent confidence intervals of within +/- 10 percentage
points, unless noted. See appendix I for additional information.

Contingent workers are employed in a wide range of industries and
occupations. Regarding industry, in 2005, the percentage of part-time
workers employed in retail trade (38 percent) was greater than in other
industries, the percentage of agency temps in business services (28
percent) was greater than in other industries, the percentage of
direct-hire temps in educational services (28 percent) was greater than in
other industries, and the percentage of independent contractors in
construction (22 percent) was greater than in other industries. Regarding
occupation, in 2005, the percentage of self-employed workers in management
(29 percent) was greater than in other occupations, the percentage of
agency temps in office and administrative support (25 percent) was greater
than in other occupations, and the percentage of contract company workers
in construction and extraction (20 percent) was greater than in other
occupations.

The extent to which contingent workers express a preference for a
different type of employer or job also varies across the different
categories of contingent workers. For example, in 2005, 59 percent of
agency temps expressed a preference to work for a different type of
employer. Similarly, 48 percent of on-call workers/day laborers indicated
that they would prefer a job where they worked regularly scheduled hours.
In contrast, 9 percent of independent contractors and 8 percent of
self-employed workers indicated that they would prefer to work for someone
else.

The proportion of contingent workers reporting low family incomes varies
considerably across the different categories of contingent workers. As
shown in table 3, while 16 percent of the overall contingent worker
population reported family incomes below $20,000 in 2005, the incidence of
low family income ranged from 8 percent for self-employed workers (the
same percentage as for standard full-time workers) to 28 percent among
agency temps. The relatively high incidence of low family income among
some groups of contingent workers may reflect a number of factors,
including lower levels of educational attainment, lower number of hours
worked, or employment in low-wage sectors of the economy.

Table 3: Workers with Annual Family Incomes below $20,000 (February 2005)

                             Estimated number of      Estimated percentage of 
                             workers with family  workers with family incomes 
Category of worker      incomes below $20,000               below $20,000a 
Self-employed workers                 382,484                            8 
Contract company                      85,210b                           11 
workers                                       
Independent contractors               952,924                           11 
Direct-hire temps                     464,561                           18 
Standard part-time                  2,963,389                           19 
workers                                       
On-call workers/day                   501,014                           21 
laborers                                      
Agency temps                         318,535b                           28 
Subtotal: contingent                5,668,117                           16 
workers                                       
Standard full-time                  6,902,861                            8 
workers                                       
Total workforce                    12,570,978                           11 

Source: GAO analysis of data from the CPS February 2005 Contingent Work
Supplement.

a The percentages in this table are based on valid responses only.

b The 95 percent confidence interval for agency temps and for contract
company workers are 318,535 +/- 70,692, and 85,210 +/- 36,585,
respectively. The 95 percent confidence intervals for totals for other
categories of contingent workers are within +/- 20 percent of the estimate
itself.

A Smaller Proportion of Contingent Workers than Others Has Benefits or Is
                    Covered by Key Workforce Protection Laws

A smaller proportion of contingent workers than of standard full-time
workers has health insurance or pension benefits, or receives protections
offered by key workforce protection laws, including ones designed to
ensure proper pay and safe, healthy, and nondiscriminatory workplaces. A
smaller proportion of contingent workers than of standard full-time
workers has employer-provided health insurance coverage. When other
sources of health insurance are taken into account, the difference between
contingent and standard full-time workers decreases, but it remains the
case that a smaller proportion of contingent workers is insured. In
addition, a smaller proportion of contingent workers than of standard
full-time workers has employers who offer pension plans or is included in
employer-provided plans. Finally, contingent workers are less likely than
standard full-time workers to receive protections offered by key workforce
protection laws. Some laws contain requirements that exclude certain
categories of contingent workers or contain certain time-in-service
requirements that make it difficult for them to be covered. In addition,
in cases where contingent workers have more than one employer, it is
difficult to determine which employer is responsible for providing workers
with workforce protections. Appendix IV contains a detailed description of
the key workforce protection laws.

A Smaller Proportion of Contingent Workers than Others Receives Health Insurance

The proportion of contingent workers receiving health insurance is smaller
than the proportion of standard full-time workers receiving health
insurance. Overall, an estimated 13 percent of contingent workers received
health insurance through their employer in 2005, compared to 72 percent of
standard full-time workers. As shown in figure 3, the share of contingent
workers receiving employer-provided health insurance ranged from 9 percent
for agency temps to 50 percent for contract company workers.19

19 Workers who do not have employers are not included in the questions on
employer provided health insurance in the CPS February 2005 Contingent
Work Supplement. All workers in the "self-employed" category, and most
workers in the "independent contractor" category, do not have employers
and were excluded from our analysis of employer-provided health insurance.

Figure 3: Workers with Health Insurance (February 2005)

a Most workers in these categories do not have an employer and were
excluded in our analysis of employer-provided health insurance.

b For this figure, the population of contingent workers is defined as all
those respondents who gave a valid response to the question "Do you
receive health insurance from any source?" The percentages reported above
are based on this population.

Although the proportion of contingent workers who received health
insurance increased significantly when other sources of health insurance
were taken into account, a smaller proportion of contingent workers than
of standard full-time workers received health insurance from any source.
Overall, about 73 percent of contingent workers received health insurance
through any source in 2005, compared to 87 percent of standard full-time
workers. The share of contingent workers who received health insurance
through any source ranged from 41 percent among agency temps to 81 percent
among contract company workers. As might be expected, a smaller proportion
of workers with low family incomes received health insurance than of
workers of all income levels.20 Overall, the highest percentage of
contingent workers who had health insurance through a source other than
their employer received it from their spouse's health insurance plan.
Contingent workers also reported receiving health insurance through other
family members' plans, plans offered through other or previous jobs,
direct purchase, or participating in Medicare or Medicaid programs.

Workers may lack access to employer-provided health insurance for a number
of reasons, including electing not to participate in an available plan,
having an employer who does not offer a health insurance plan, or being
ineligible for their employer's plan if one is offered. Just over half of
workers-both contingent and standard full-time-who lacked
employer-provided health insurance coverage in 2005 worked for an employer
who offered health insurance to some of its employees. Not all workers
reported being able to participate in their employer's health insurance
plan. An estimated 38 percent of the contingent workers in this group
reported that they could participate in their employer's health insurance
plan if they wanted to, compared to 81 percent of standard full-time
workers. Both contingent and standard full-time workers reported several
reasons for not participating in health insurance plans offered by their
employer, including having coverage through another plan and the expense
of their employer's plan.

Some states and professional associations have developed health insurance
programs that help contingent workers access health care. For example,
Massachusetts recently passed legislation that will make health insurance
available to all residents of the state, including contingent workers such
as part-time workers, contractors, and self-employed workers. This new law
provides for health insurance premium assistance for low-income workers as
well as low-cost policies available for purchase in the private market. In
addition, Maine recently created the Dirigo program, which provides low
cost health insurance to self-employed workers and workers without
employer-sponsored insurance. Similarly, New York's Healthy NY program
helps uninsured workers, including self-employed workers, who earn too
much to qualify for Medicaid access comprehensive health insurance.
Professional associations are also creating health plans to serve
contingent workers. For example, the HR Policy Association-a nonprofit
organization of senior human resources executives of Fortune 500
companies-recently brought major health insurers and large companies
together to create the National Health Access program. This program
provides a range of low-cost health plans to part-time, seasonal, and
temporary workers, as well as independent contractors at participating
companies who are ineligible for the companies' traditional health plans.
While these public and private initiatives are relatively new and
long-term outcomes have yet to be determined, the programs have succeeded
in expanding health insurance options to some contingent workers.

20 In 2005, 49 percent of contingent workers with low family incomes
received health insurance from any source, as compared to 73 percent of
contingent workers of all income levels. Similarly, 9 percent of
contingent workers with low family incomes received employer-provided
health insurance, as compared to 13 percent of contingent workers of all
income levels.

A Smaller Proportion of Contingent Workers than Others Has Access to
Employer-Provided Pensions

A smaller proportion of contingent workers than of standard full-time
workers has employers who offer pensions or is included in their
employer's pension plans.21 Overall, 38 percent of contingent workers
reported having employers who offered a pension in 2005, compared to 76
percent of standard full-time workers. Similarly, while 17 percent of
contingent workers reported being included in their employers' pension
plan, 64 percent of standard full-time workers reported being included in
such plans. As shown in figure 4, with the exception of agency temps, 53
to 56 percent of the contingent workers in other categories reported
having employers who offered pension plans.22 The percentage of contingent
workers who were included in employer-provided pension plans ranged from 4
percent for agency temps to 37 percent for contract company workers.

21 The CPS classifications regarding access to employer-provided pensions
are sometimes described in different terms. For example, the CPS
questionnaire asks workers if their employer "offers" a pension plan to
any of its employees, and if they are "included" in this plan. In a past
GAO report, GAO has used other terms to describe access to
employer-provided pensions. For example, GAO has indicated that employers
can "sponsor" a pension plan (similar to "offering" a plan) and workers
can be "covered" by a plan (similar to being "included" in a plan). See
GAO, Pension Plans: Characteristics of Persons in the Labor Force without
Pension Coverage, GAO/HEHS-00-131 (Washington, D.C.: Aug. 22, 2000).

22 Most workers in the self-employed and independent contractor categories
do not have employers and were excluded from our analysis of
employer-provided pensions.

Figure 4: Workers with Employer-Provided Pensions (February 2005)

a Because workers in the self-employed category, and most workers in the
independent contractor category, do not have employers, they were not
included in this figure.

b For this figure, the population of contingent workers is defined as all
those respondents who gave a valid response to the question "Do you work
for an employer who offers a pension plan?" The percentages reported above
are based on this population.

Among contingent workers with employers who offered pension plans, the
most frequently reported reasons for not being included in the plan were
those related to eligibility. For example, these workers reported that
they were not allowed to join the plan, they had not worked enough hours
or weeks, or they had not worked long enough to be eligible.

In addition to employer-provided pension plans, other types of tax
deferred retirement accounts (such as individual retirement accounts and
Keogh plans) may offer workers an opportunity to save for retirement. A
larger proportion of self-employed workers and independent contractors
than of other categories of contingent workers reports having other types
of tax deferred retirement accounts.23 For example, 45 percent of
self-employed workers and 42 percent of independent contractors, compared
to 16 percent of standard full-time workers, reported having such accounts
in 2005.

Contingent workers with low family incomes have less access to
employer-provided pension benefits than workers of all income levels.
Overall, 29 percent of contingent workers with low family incomes reported
having employers who offered pension plans in 2005; 7 percent of
contingent workers with low family incomes reported being included in such
plans. Contingent workers with low family incomes commonly reported that
they were not included in their employer's pension plan for reasons
related to eligibility; for example, they were not allowed to join the
plan, they had not worked enough hours or weeks, or they had not worked
long enough to be eligible.

23 Most workers in the independent contractor category were self-employed.

Some Categories of Contingent Workers Are Not Covered by Key Laws Designed to
Protect Workers

Contingent workers who are employees are generally protected under key
laws designed to protect workers, but certain categories of contingent
workers-such as independent contractors and self-employed workers-may be
excluded from coverage under these laws. While most of the key worker
protection laws do not distinguish between types of employees (i.e.,
contingent and standard full-time employees), some laws contain
requirements that exclude certain categories of contingent workers or
contain certain time-in-service requirements that make it difficult for
them to be covered.24 In addition, because these laws are based on the
traditional employer-employee relationship, they generally cover only
workers who are employees; independent contractors and self-employed
workers, therefore, are not covered. According to the 2005 Contingent Work
Supplement, 10.3 million individuals are independent contractors; these
individuals would not be covered by these workforce protection laws.

When employers have misclassified workers as independent contractors,
workers may need to go to court to establish their employee status and
their eligibility for protection under the laws. In addition, DOL may
bring a lawsuit on behalf of the worker or group of workers to require
that the employer provide the benefit or protection under the law. As
shown in figure 5, the key workforce protection laws cover a wide range of
issues.

24 All of the key laws designed to protect workers have some exclusions,
such as exclusions for small businesses, that apply to both contingent
workers and standard full-time workers. We did not, however, examine
whether contingent workers are disproportionately affected by these
exclusions.

Figure 5: Key Laws Designed to Protect Workers

Certain categories of contingent workers, such as temporary, on-call, and
part-time workers, are not covered by some of the laws designed to protect
workers. For example, the Family and Medical Leave Act requires workers to
have worked for the same employer at least 12 months and a minimum of
1,250 hours during the past 12 months to be covered. These conditions
decrease the likelihood that workers who are temporary, on-call, or
part-time will be covered. Although employers are not required to provide
pension or health care plans to their employees, when plans are offered,
the Employee Retirement Income Security Act (ERISA) has rules that govern
which employees must be included in the plans in order to qualify for
special tax treatment. For example, ERISA allows employers to exclude
workers who have worked less than 1,000 hours in a 12-month period from
entering their pension plans. ERISA also allows employers to exclude
employees who have worked for the company less than 3 years as well as
part-time and seasonal employees from the count of employees who must be
included in self-insured medical plans and group term life insurance
plans. As a result, some temporary, on-call, and part-time workers may not
be included in their employers' benefit plans. These exclusions are
intended to strike a balance between providing benefits to workers and not
be unduly burdening employers. For example, the exclusions in ERISA were
enacted to recognize that it may be impractical or too costly for
employers to include all short-term employees in their pension plans.

Some laws have exemptions for portions of certain industries or types of
employers that may disproportionately affect contingent workers. For
example, FLSA exempts all agricultural employers from the overtime pay
requirement and exempts agricultural employers who do not use more than
500 days of labor in any calendar quarter from the minimum wage
requirement. These exemptions affect some categories of contingent workers
more than standard full-time workers because a greater proportion of these
contingent workers is in the agriculture industry; for example, an
estimated 11 percent of self-employed workers, 2 percent of on-call
workers and day laborers, 2 percent of independent contractors, and 1
percent of direct-hire temporary workers are employed in agriculture,
compared with 1 percent of standard full-time workers.

Similarly, the nature of contingent work makes it difficult for some
contingent workers to meet state eligibility requirements for unemployment
insurance. Temporary and part-time workers may not meet the minimum
earnings requirements, which vary by state, and these workers may have
difficulty meeting the rules governing job loss because they have less
flexibility when the circumstances of their jobs change. For example,
temporary workers who choose this type of work in order to meet family
obligations or to attend school might be more likely to quit if their
employer changed the job location or required them to work different
hours. Nevertheless, they would be ineligible for unemployment insurance
benefits in many states because they voluntarily quit without good
cause.25 In addition, contingent workers can find it difficult to meet
continuing eligibility requirements.26

Some contingent workers, such as temporary or contract workers, may also
find it difficult to meet the requirements of the National Labor Relations
Act (NLRA) for joining an existing bargaining unit or forming a new
bargaining unit. For example, under the act, temporary workers wanting to
join an existing collective bargaining unit at a work site must first
demonstrate that they have a "sufficient community of interest" with the
permanent workers in the bargaining unit.27 In 2004, the National Labor
Relations Board (NLRB) overturned a decision made in 2000, and required
consent from both the user and supplier employer before temporary
employees could join an existing bargaining unit.28 The 2004 decision made
it more difficult for temporary and leased employees to join unions and
bargain collectively. Contingent workers may also find it difficult to
form new collective bargaining units. For example, temporary workers and
day laborers may find it difficult to form bargaining units because they
do not work at one location or with one employer long enough to identify
with a particular group of workers and organize a union. In addition, some
worker advocacy groups maintain that contract company workers have
difficulty forming new collective bargaining units because employers that
use contract company workers may cancel contracts and contract with other
companies when workers attempt to unionize.

25 Applicants are generally disqualified from receiving benefits when job
loss is due to voluntary separation without good cause, although the
definition of "good cause" varies from state to state.

26 According to a report by the National Employment Law Project ("Part
Time Workers and Unemployment Insurance," March 2004), unemployed workers
who limit their search for new work to only part-time jobs are denied
unemployment benefits in many states because workers are not available for
full-time employment. Since 2001, 24 states and the U.S. Virgin Islands
maintain restrictive rules regarding part-time unemployment insurance
eligibility.

27 A "sufficient community of interest" includes factors such as common
supervision, working conditions, and interest in the unit's wages, hours,
and conditions of employment.

28 M.B. Sturgis, 331 NLRB 1298 (2000) and H.S. Care L.L.C., 343 NLRB No.76
(2004).

Incorrect Employment Relationship May Result in Lack of Worker Protections

In some cases it is difficult to determine which employer is responsible
for providing workers with workforce protections because some contingent
workers have more than one employer. In these cases, employers may be (1)
an intermediary, such as a temporary employment agency, contract company,
or leasing company; (2) the client firm that obtains the workers through
the intermediary; or (3) both the intermediary and the client firm.
Because it is often difficult in these cases to determine which employer
is liable to provide workers with workforce protections, litigation may be
necessary to resolve this issue.

Even in cases where there is only one employer involved, employers
sometimes classify workers improperly, primarily by designating some
workers as independent contractors when, in fact, they are more
appropriately considered employees. Moreover, employers have economic
incentives to misclassify employees as independent contractors because
employers are not obligated to make certain financial expenditures for
independent contractors that they make for employees, such as paying
certain taxes (Social Security, Medicare, and unemployment taxes),
providing workers' compensation insurance, paying minimum wage and
overtime wages, or including independent contractors in employee benefit
plans.

In addition, the tests used to determine whether a worker is an
independent contractor or an employee are complex, subjective, and differ
from law to law. For example, the NLRA, the Civil Rights Act, FLSA, and
ERISA each use a different definition of an employee and various tests, or
criteria, to distinguish independent contractors from employees.29 (See
app. II for more information on employment relationship.)

29 See app. IV for descriptions of the tests used under each law.

DOL Detects and Addresses Employee Misclassification through Investigations, but
  Offices We Studied Vary in How Often They Forward Misclassification Cases to
                        Other Federal and State Agencies

DOL detects and addresses employee misclassification when enforcing the
FLSA minimum wage and overtime pay provisions. As part of its FLSA
investigation process, DOL examines the employment relationship-whether a
worker is an employee or an independent contractor-to determine which
workers are covered. Investigators use various methods to test the
employment relationship of workers, including interviewing employers and
workers, reviewing payroll and related documents, and touring work sites.
While misclassification alone is not an FLSA violation, it may contribute
to FLSA violations or violations of other laws, such as tax violations.
DOL's outreach efforts provide some information to employers and workers
on employee misclassification issues. DOL procedures require officials to
share information with other federal and state agencies whenever
investigators find possible violations of other laws. However, the
district offices that we contacted vary in how often they forward
misclassification cases as a possible violation of other agencies' laws.

Investigators Determine Workers' Employment Relationship

DOL relies on complaints as a primary way to identify potential violations
for investigation.30 All FLSA investigations of minimum wage and overtime
pay complaints begin with an examination of workers' employment
relationship because FLSA applies only to employees, not to independent
contractors. If investigators determine that a worker is an employee and
not an independent contractor, they continue with their FLSA investigation
to determine whether the employer has provided the minimum wage and
overtime pay required by the act.

DOL's Field Operations Handbook (FOH) provides investigators with
statutory interpretations and investigation procedures regarding the
employment relationship required for FLSA to apply. It also describes the
Supreme Court factors and explains how to apply them to test employment
relationship. For example, the Supreme Court factors address whether the
worker uses his or her own tools or equipment and whether the worker can
decide which hours to work. Appendix II contains more information on the
employment relationship. According to DOL officials, investigators rely on
their professional judgment when applying the Supreme Court factors.
Investigators receive classroom training and on-the-job mentoring on the
Supreme Court factors and techniques for applying the factors. In their
training, they are taught to identify all the relevant factors and make a
full, balanced assessment of the facts of each case.31

30 Complaints are a key component of DOL enforcement efforts under FLSA.
DOL enforcement of FLSA generally relies on two types of information to
identify potential violations: (1) complaints from individuals who believe
they may have suffered a violation and (2) analysis of data to
specifically target problematic industries or work sites.

Investigators may identify possible employee misclassification at
different points during the investigation. According to DOL officials,
misclassification issues may come up during the initial conference with
the employer or during an investigator's review of records to determine
whether an employer had classified workers as employees or independent
contractors. At the initial conference with the employer, investigators
ask employers about the nature of their work, annual dollar volume of
business, the number of workers, and how workers are paid, and they
request payment documents, such as payroll records, time cards, and W-2
forms. While it is standard practice for investigators to review payroll
and other records related to wages and employment, investigators do not
necessarily review contracts or 1099 forms used to pay independent
contractors unless they have a reason to suspect possible
misclassification.

Investigators may have reason to suspect misclassification stemming from
the complaint that initiated the case or their knowledge of potential
misclassification in that industry. In these cases, the investigator would
ask employers about whether they contract any work and how they classify
their workers. For example, according to DOL officials, if an investigator
was conducting an investigation of a large drywall employer, then the
investigator would probably spend a large amount of time pursuing
independent contractor issues because misclassification has been a problem
in the past with construction contractors subcontracting work to
drywallers, roofers, electricians, and carpenters. In other cases where
the investigator has no knowledge about potential misclassification, the
employer's responses at the initial conference may raise questions. For
example, if the employer had millions of dollars in annual business but
only two employees, then the investigator would likely ask further
questions about the employment relationship of any other workers. In
addition, DOL officials told us that investigators compare payroll records
with the work process identified by the employer to see if there are any
gaps. For example, investigators would need to follow up with employers
who describe work processes that required many workers but had no
employees listed on the payroll. Such a scenario could indicate that
employers had misclassified workers as independent contractors who were
not listed on the payroll.

31 In 2005, DOL began an "Off-the-Clock" initiative to identify employers
who do not compensate workers for all the hours that they work and who may
not keep accurate wage and employment records for their workers (also
referred to as "off the books"). Although the focus is off-the-clock work,
this effort may help detect employee misclassification. This initiative
includes training, outreach, and investigation. The investigator training
includes a section on employment relationship, with questions and
scenarios about how to determine whether a worker is an independent
contractor or an employee.

Investigators may learn about employment relationship when interviewing
workers to verify the employer's payroll and time records or to identify
workers' duties in order to determine whether FLSA applies. According to
DOL officials, an investigator would not ask directly whether the worker
is an independent contractor or an employee; instead, an investigator
would ask questions to determine whether the worker is an employee or an
independent contractor. For example, an investigator would ask whether
workers set their own work hours or use their own equipment on the
job-indications that workers may be independent contractors, not
employees.

Investigators may obtain additional information on employment relationship
while touring an employer's establishment. During a tour, investigators
can compare their observations about employment relationship in the work
environment to the information from the records and interviews with
employers and workers. Specifically, investigators can observe control
issues, such as whether workers are supervised and provided with supplies
and equipment. For example, if an apartment rental complex treats its
maintenance workers as independent contractors, then the investigator
would observe who provides the plumbing supplies and paint-the employer or
the workers-to help determine whether workers are independent contractors
or employees. Also, a tour can identify potential misclassification issues
for an investigator to follow up on. For example, if the payroll records
show that the employer has 10 employees but the investigator sees 15
workers during the tour, then the investigator will conduct further
interviews and record review to determine whether these other 5 workers
are employees or independent contractors.

Because employee misclassification is not a violation of FLSA,
investigators are not required to discuss misclassification identified
during FLSA investigations with employers or to include it in their
investigation report. According to DOL officials, however, an investigator
may discuss misclassification with the employer during the investigation
and may note instances of misclassification in the investigation report.
In discussing a misclassification case with the employer, the investigator
would explain that the workers should be classified as employees, not
independent contractors, and that the employer may be violating other laws
administered by other agencies, such as tax laws or workers' compensation
laws. Specifically, investigators would explain to the employer how they
applied the Supreme Court factors in determining that the workers were
employees, not independent contractors. DOL officials said that
investigators would provide employers with publications and fact sheets on
employment relationship if they identified misclassification during an
investigation. In addition, the investigators may mention employee
misclassification in their final investigation report that summarizes the
facts of the investigation. According to DOL officials, if the
investigators included misclassification in the case report, it would be
mentioned as an underlying reason for a minimum wage or overtime
violation. However, investigation reports do not always include the reason
for the violation.

Employee Misclassification, though Not an FLSA Violation, May Contribute to FLSA
or Other Violations

Employee misclassification alone is not a violation of FLSA, but may
contribute to FSLA minimum wage and overtime pay violations or violations
of tax, workers' compensation, or unemployment insurance laws.32 DOL
investigations have identified FLSA violations associated with employee
misclassification. For example, one misclassification case involved a
valet parking company located in Arizona that provided services to local
restaurants, sports venues, hotels, and theaters. In 2004, this company
paid $66,947 in minimum wage and overtime pay back wages to 262 employees
who had been misclassified as independent contractors. When reviewing the
employment relationship, the DOL investigator found that the services
provided by these workers were integral to the business, and that the
employer had imposed strict policies and procedures to follow and told
them when they would work, where they would work, what their pay rate
would be, and what uniforms they would wear. The investigator determined
that the workers were not required to use initiative, judgment, or
foresight to be successful as independent contractors; did not have any
investment in facilities or equipment; and were not operating to make a
profit.

32 According to DOL officials, in some cases, misclassification may be
considered an FLSA record-keeping violation, but there are no penalties
for record-keeping violations under FLSA.

Another misclassification case involved a chicken-processing company based
in California that contracted out its deboning operations to a
subcontractor. In 2005, DOL investigators found that the subcontractor had
misclassified as independent contractors the employees he hired to work at
this deboning plant. The subcontractor violated FLSA when he failed to
meet payroll for 2 weeks, pay minimum wages and overtime pay, and keep
adequate payroll records. The subcontractor also illegally deducted the
cost of aprons, gloves, hair nets, and other required equipment from
workers' paychecks. When the subcontractor went bankrupt, the contractor
agreed to cover the back wages due-$40,000 owed to 59 workers-although the
contractor was not legally required to do so.

DOL officials told us that their investigators have encountered cases
where employers classified workers as independent contractors instead of
employees to avoid paying proper wages under federal and state wage laws
or to avoid providing benefits under other laws, such as workers'
compensation and unemployment insurance laws. For example, in 2004, a
joint DOL-State of California investigation found that a services company
located in California had misclassified employees and not paid overtime in
accordance with FLSA. The affected workers provided janitorial services to
a major department store chain located in California, Arizona, Nevada,
Texas, and New Mexico. According to DOL officials, the company contracted
out the janitorial work to individuals who were not legitimate contractors
in that, among other things, they did not control the location or hours of
work. These "contractors" then hired others to do the janitorial work. As
a result of this arrangement, the services company avoided paying minimum
wage, overtime, and other benefits, such as workers' compensation. In
response to the investigation, the company agreed to pay $1.9 million in
back wages to 775 employees. Throughout the investigation, DOL worked with
the state to ensure compliance with state wage laws, workers' compensation
programs, and unemployment insurance programs.

DOL's Outreach Efforts Provide Some Information on Employee Misclassification
Issues

As part of general FLSA outreach efforts to employers and workers, DOL
provides some information on establishing the employment relationship.
While these outreach efforts primarily focus on how to comply with
provisions of FLSA-minimum wage, overtime pay, and child labor-they also
include some information on the employment relationship. Specifically,
information on employment relationship issues is available to employers
and workers through brochures, pamphlets, fact sheets, and Web-based
information. According to DOL officials, outreach efforts conducted
specifically for industries likely to use independent contractors may also
address the topic of employee misclassification.

The DOL Web site contains several sources of information on the FLSA
employment relationship. DOL's Wage and Hour Division posts its Employment
Relationship under FLSA (WH Publication 1297) and fact sheets that provide
information on determining the employment relationship in applying
provisions of FLSA. For example, Fact Sheet 13: Employment Relationship
under the Fair Labor Standards Act (FLSA) outlines the Supreme Court's
factors for determining an employment relationship under FLSA and is
available in several languages, including Chinese, Korean, Spanish, Thai,
and Vietnamese. It also identifies common problems: (1) construction
contractors hire so-called independent contractors, who in reality should
be considered employees because they do not meet the Supreme Court tests
for independence and (2) individuals who work at home are often improperly
considered independent contractors. Another DOL Web site resource is
Employment Laws Assistance for Workers and Small Businesses (elaws) FLSA
Advisor, an interactive system that allows employers and workers to
determine whether a worker would be considered an employee or an
independent contractor. These Web site outreach sources contain
contacts-such as the Wage-Hour toll-free telephone line and links to
district office telephone numbers-to obtain additional information about
employment relationship issues.

Another form of outreach that DOL provides is its workplace poster. FLSA
regulations require that every employer that has employees subject to the
act's provisions post a notice explaining the act in a prominent and
accessible place at the work site.33 While DOL relies heavily on
complaints from workers to enforce FLSA, the FLSA workplace poster does
not provide a telephone number for workers or others to call to register
complaints. Instead, the poster directs inquiries for additional
information to the nearest Wage and Hour Division office listed in the
telephone directory under "United States Government, Labor Department."
Also, the FLSA workplace poster does not include any information on the
employment relationship. As a result, individuals seeking to report
possible employee misclassification complaints have no easy method to do
so.

33 DOL's Wage and Hour Division prescribes the content of the FLSA
workplace poster (WH Publication 1088).

DOL district offices conduct locally based general FLSA outreach efforts
for employer and worker groups that do not target employee
misclassification, but they provide some information on establishing the
employment relationship. DOL officials told us that they distribute
employment relationship publications and fact sheets to industries that
use independent contractors-such as the construction and garment
industries-and may be more likely to misclassify employees. According to
DOL officials, this outreach to industries using independent contractors
may also address the topic of employee misclassification. Also, in DOL's
Western Region, a recent outreach effort to educate Hispanic employers and
workers about general workplace rights and responsibilities has identified
cases of employee misclassification from calls to a hotline. Specifically,
the Employment Education and Outreach (EMPLEO)-an alliance of federal and
state agencies, Mexican and Central American consulates, and private
nonprofit groups-provides a toll-free hotline staffed by Spanish-speaking
volunteers, not associated with the government, who forward calls to the
appropriate agency for response.

DOL Offices We Studied Vary in How Often They Forward Misclassification Cases to
Other Federal and State Agencies

Employers' misclassification of workers as independent contractors may in
some circumstances violate tax, unemployment insurance, and workers'
compensation laws. According to the Field Operations Handbook, DOL
regional or district officials are required to share information with
other appropriate federal and state agencies whenever investigators
conducting FLSA investigations find instances of possible violations of
other laws. At the same time, however, the FOH cautions investigators not
to interpret laws outside their authority. We discussed whether DOL
forwards misclassification cases identified during an FLSA investigation.
The DOL officials we spoke to in 9 district offices could not provide the
number of misclassification cases they referred to other agencies because
they do not track this information. However, their responses indicated
that district offices vary in how often they implement the procedures to
refer cases to other agencies. Some of the DOL district offices told us
that they notified IRS and state agencies when they found
misclassification, while others told us that they had little or no contact
with other agencies regarding misclassification issues. These district
offices also reported that it was rare for them to receive
misclassification referrals from other federal or state agencies.34

DOL requires its regional or district officials to notify other agencies
about possible violations identified during DOL investigations. The
procedures state that investigators should note conditions that appear to
be possible violations of other federal or state laws or regulations. They
also state that for matters that are not within the authority of the Wage
and Hour Division, investigators should confine their investigative
activities to obvious conditions that they observe, or are brought to
their attention, to avoid any impression that the Wage and Hour Division
is overstepping its investigation authority. Further, the procedures
instruct investigators not to interpret any law other than those
administered by the Wage and Hour Division. They also direct investigators
to report to district office management any possible violations of other
laws or regulations. The Wage and Hour Division provides a form (WH-124)
for regional or district office officials to use to notify other federal
or state agencies about possible violations of laws or regulations
administered by those agencies.

According to DOL officials, investigators do not have the authority or the
expertise to look for violations of other laws. DOL officials told us that
because investigators focus on identifying minimum wage, overtime pay, and
child labor violations during FLSA investigations, checking for compliance
with laws enforced by other agencies is not a priority. DOL officials also
noted that interagency collaboration on employee misclassification
referrals is difficult because different laws have different tests of
establishing the employment relationship.

The DOL district offices we contacted varied in how often they implemented
the procedures to refer possible violations, including misclassification,
to other federal or state agencies. According to the DOL officials in
these offices, in most cases, district offices are responsible for
contacting other agencies. While some districts told us that they notified
IRS and state agencies about misclassification cases, other districts told
us that they had no contact with states or other federal agencies about
misclassification issues. Some district officials told us that they
notified IRS when investigators found instances of misclassification that
appeared to involve tax law violations, but rarely received any response
from IRS after submitting their referral.35 Other districts told us that
they had little contact with IRS regarding misclassification.36 For
example, one district official said his district generally does not
receive any feedback from IRS. He said that his district would have more
incentive to refer cases if IRS would inform the district when it received
DOL referrals and if the district knew that IRS would act on the
referrals.

34 Beginning in 2005, DOL's Employment & Training Administration (ETA) has
been involved in efforts to coordinate with other agencies about
misclassification: (1) ETA has coordinated with IRS to assist states in
obtaining IRS 1099 information to identify misclassification in state
unemployment insurance tax audits and (2) ETA is participating on an
interagency Questionable Employment Tax Practices team with IRS, federal
tax administrators, and state workforce agencies to develop a memo of
understanding, share information, and coordinate compliance activities.
The team is planning to address several issues, including
misclassification.

Similarly, some DOL officials told us that their contact with state
agencies could include misclassification, while others said they had
little contact with states about these issues. For example, one regional
official cited coordination with the state agencies that are responsible
for employment tax and registration of contractors in the construction
industry. He said that this state agency imposes fines on individuals who
are not registered as contractors and that this sometimes involves
misclassification.37

District officials in the offices we contacted said they rarely receive
referrals about misclassification from other federal or state agencies.
While one district official said that other state agencies in the region
refer some complaints that occasionally include misclassification issues,
most officials said their districts have not received any
misclassification referrals from IRS or other federal or state agencies.

                                  Conclusions

Contingent workers constitute an important and diverse sector of the U.S.
workforce. Yet while contingent work arrangements offer flexibility to
both employers and workers, they also provide contingent workers with
fewer workforce protections than are available to other workers.
Contingent workers also received fewer benefits. Many contingent workers
may not be covered under employer-sponsored health and benefit plans and
may not be able to afford these benefits on their own-a situation that
could have long-term adverse consequences for workers and government
programs. To the extent that contingent workers neither receive health or
pension benefits nor qualify for unemployment or workers' compensation,
they may have to turn to needs-based programs, such as Medicaid, to make
ends meet. To the extent that this occurs, costs formerly borne by
employers may be shifted to federal and state public assistance budgets.
To help address the lack of health insurance coverage, some state and
professional associations have developed programs that help contingent
workers access health care. Although these initiatives are relatively new
and long-term outcomes have yet to be determined, they may serve as
promising practices for the future.

35 The IRS officials we contacted about this could not comment on the
specifics of referrals at the district level.

36 Also, some districts have made referrals and conducted general outreach
to IRS when DOL has identified that employers are paying workers in cash,
and most likely are not paying taxes. However, this practice is not
necessarily employee misclassification.

37 One district has coordinated with state agencies that enforce tax,
workers' compensation, unemployment insurance, and Social Security laws
about workers paid in cash and probably not paying taxes. However, this
practice is not employee misclassification.

DOL investigators identify instances of employee misclassification when
responding to minimum wage and overtime pay complaints. However, because
the FLSA workplace poster does not provide an easy method for workers to
report complaints, DOL may be missing opportunities to address other
instances of potential misclassification. Improving the workplace poster
would reinforce DOL's complaint-based strategy and would help further
protect the wages of employees who may be misclassified.

While DOL investigators conducting FLSA investigations are required to
share information with other federal and state agencies whenever they find
instances of possible violations of other laws, DOL district offices we
studied varied in how often they forwarded misclassification cases to
other agencies. DOL does not know the extent to which district offices
refer misclassification cases to other agencies. DOL cautions
investigators not to interpret laws outside their authority, but referring
misclassification cases identified through FLSA investigations would not
require DOL to interpret other agencies' laws. In addition, referring this
information may assist other federal and state agencies in addressing
misclassification. Furthermore, when DOL does not refer cases of
misclassification, other agencies lose opportunities to fulfill their
fiduciary duties in conserving government funds.

                      Recommendations for Executive Action

To facilitate the reporting of FLSA complaints, we recommend that the
Secretary of Labor instruct the Wage and Hour Division to revise the FLSA
workplace poster to include national, regional, and district office
telephone numbers and a Web site address that complainants may use to
report alleged employee misclassification issues.

To facilitate addressing employee misclassification across federal and
state programs, we recommend that the Secretary of Labor instruct the Wage
and Hour Division to evaluate the extent to which misclassification cases
identified through FLSA investigations are referred to the appropriate
federal or state agency potentially affected by employee
misclassification, and take action to make improvements as necessary. In
addressing its referral mechanism, the Wage and Hour Division officials
should consider building upon efforts by district offices currently
engaging in referrals.

                                Agency Comments

We provided a draft of this report to DOL for comment. Overall, DOL agreed
with the first recommendation and agreed with the primary part of the
second recommendation, but disagreed with one part of this recommendation.
DOL's written comments are reproduced in appendix V.

DOL's ESA agreed with the first recommendation on revising the workplace
poster to provide additional contact information to facilitate the
reporting of possible misclassification complaints. ESA noted that the
Wage and Hour Division is in the process of revising its workplace poster
to add the division's toll-free phone number.

Regarding the second recommendation, on referring misclassification cases
to other agencies, DOL agreed with the value of sharing potential employee
misclassification with appropriate federal and state programs. The agency
commented that the Wage and Hour Division will review its processes to
determine the appropriateness of referral of such cases to other agencies.
However, DOL did not agree with a part of the draft recommendation that
referral of cases should include notifying the employer that the
misclassification case has been forwarded to the appropriate agency. The
agency stated that such notification could place the Wage and Hour
Division staff in the untenable position of having to defend a referral
based upon interpretations of laws, which the division staff has no
expertise or authority to interpret or enforce. After considering DOL's
position concerning this aspect of the draft recommendation, we deleted
this part from the final recommendation.

DOL's BLS also provided technical comments, which we incorporated in the
report as appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the date of this report. At that time, we will send copies of this report
to the Secretary of Labor and other interested parties. We will also make
copies available to others upon request. In addition, the report will be
available at no charge on GAO's Web site at http://www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (202) 512-7215 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who have made major contributions to
this report are listed in appendix VI.

Sincerely,

Robert E. Robertson Director, Education, Workforce, and Income Security
Issues

Appendix I: Objectives, Scope, and Methodology

The objectives of our study were to determine (1) the size and nature of
the contingent workforce, (2) the benefits and workforce protections
provided to contingent workers, and (3) the actions that the Department of
Labor (DOL) takes to detect and address employee misclassification.

To obtain information on the contingent workforce, we analyzed data from
the Bureau of Labor Statistics (BLS). Specifically, we reviewed BLS's
Current Population Survey (CPS), which is used to survey people about
their work and benefits, and a CPS supplement that BLS developed to
collect information on the contingent workforce. We defined "contingent
workers" according to the methodology used in our 2000 review of the
contingent workforce, examining eight categories of workers who could be
considered contingent: agency temporary workers (temps), direct-hire
temps, on-call workers, day laborers, contract company workers,
independent contractors, self-employed workers, and standard part-time
workers.1 Standard full-time workers were defined as all workers who do
not fall into one of the contingent worker categories. We reported
descriptive statistics on the characteristics of contingent workers and
standard full-time workers, their receipt of health insurance, and their
participation in pension plans. We did not conduct multivariate analyses
to determine the causal relationships explaining contingent workers'
incidence of low family income, receipt of health insurance, or
participation in pension plans. We also interviewed BLS officials and
other researchers about contingent worker issues.

To estimate the size of the contingent workforce and describe how it has
changed over the past decade, we used data collected in the CPS as well as
data collected in a special supplement to the survey-the Contingent Work
Supplement-in February 1995, 1999, and 2005.2 To describe the demographic
characteristics of the contingent workforce and the extent to which these
workers have access to health insurance and pension benefits, we used data
collected in the CPS and the Contingent Work Supplement in February 2005.

1 GAO, Contingent Workers: Incomes and Benefits Lag Behind Those of Rest
of Workforce, GAO/HEHS-00-76 (Washington, D.C.: June 30, 2000).

2 The years 1995, 1999, and 2005 were selected to examine changes in the
size of the contingent workforce over the past decade in order to reflect
the changes that occurred during the time period covered in our 2000
review of contingent workers (1995-1999) as well as those occurring since
that time (1999-2005).

The CPS is designed and administered jointly by the Bureau of the Census
(Census) and BLS. It is the source of official government statistics on
employment and unemployment in the United States. The survey is used to
collect information on employment as well as such demographic information
as age, sex, race, marital status, educational attainment, and family
structure. The survey is based on a sample of the civilian,
noninstitutionalized population of the United States. Using a multistage
stratified sample design, about 60,000 households are selected on the
basis of area of residence to be representative of the country as a whole
and of individual states. A more complete description of the survey,
including sample design, estimation, and other methodology, can be found
in the CPS documentation prepared by Census and BLS.3

The Contingent Work Supplement was designed by BLS to obtain information
from workers on whether they hold contingent jobs, defined by BLS as jobs
that are expected to last only a limited period of time.4 In addition,
information is collected on several alternative employment relationships,
namely working as independent contractors and on call, as well as working
through temporary help agencies or contract firms. All employed persons
except unpaid family members are included in the supplement. For persons
holding more than one job, the questions refer to the characteristics of
their main job-the job in which they work the most hours. Similar surveys
have been conducted in February of 1995, 1997, 1999, 2001, and 2005. For a
more complete description of the supplement see the technical
documentation prepared by Census and BLS.5

For our data reliability assessment, we reviewed agency documents on the
CPS and conducted electronic tests of the files. On the basis of these
reviews, we determined the required data elements from the CPS were
sufficiently reliable for our purposes.

Because the CPS is a probability sample of the population based on random
selection, the sample is only one of a large number of samples that might
have been drawn. Since each sample could have provided different
estimates, confidence in the precision of the particular sample's results
is expressed as a 95 percent confidence interval (for example, +/- 4
percentage points). This is the interval that would contain the actual
population value for 95 percent of the samples that could have been drawn.
As a result, we are 95 percent confident that each of the confidence
intervals in this report will include the true values in the study
population.

3 See Technical Paper 63RV: "Current Population Survey-Design and
Methodology," issued March 2002.

4 See Anne E. Polivka, "Contingent and Alternative Work Arrangements,
Defined," Monthly Labor Review (Oct.1996), pp. 3-9 for a description of
how BLS defines and estimates the contingent workforce.

5 Current Population Survey, February 2005: Contingent Work Supplement
File Technical Documentation CPS-05.

For the CPS estimates in this report, we use the CPS general variance
methodology to estimate the sampling error and report it as confidence
intervals. Percentage estimates based on the total workforce have 95
percent confidence intervals of within +/- 1 percentage point of the
estimate itself, unless otherwise noted.6 Percentage estimates for
individual categories of contingent workers have confidence intervals of
within +/- 10 percentage points of the estimate unless otherwise noted.
Estimates of totals exceeding 1 million workers have 95 percent confidence
intervals of within +/- 10 percent of the estimate itself unless otherwise
noted. Estimates of totals exceeding 400,000 workers have 95 percent
confidence intervals of within +/- 20 percent of the estimate itself
unless otherwise noted. The 95 percent confidence intervals for other
estimates are presented with the estimates themselves in the body of the
report. Consistent with CPS documentation guidelines, we do not produce
estimates from the February 2005 supplement for populations of less than
75,000.

In addition to the reported sampling errors, the practical difficulties of
conducting any survey may introduce other types of errors, commonly
referred to as nonsampling errors. For example, differences in how a
particular question is interpreted, the sources of information available
to respondents, or the types of people who do not respond can introduce
unwanted variability into the survey results. For the CPS, data are often
collected from one household member for all household members. Nonsampling
error could occur if a proxy responder was unable to provide correct
pension or insurance information for household members not at home at the
time of the interview.

Although we used data from the Contingent Work Supplement, we used a
definition of contingent worker different from the one used by BLS in its
analysis of the data. As in our 2000 review of contingent workers, we did
not restrict our definition to include only workers with relatively short
job tenure, but rather provided information on a range of workers who
could be considered contingent under different definitions. Although we
believe that it is useful to consider the nature and size of the
population of workers in jobs of limited duration as well as their access
to benefits, we also believe that it is useful to provide information
according to categories that are more readily identifiable and mutually
exclusive.7 The categories we used to define the contingent workforce
included direct-hire temporaries (workers hired directly by employers to
work in temporary jobs), even though the Contingent Work Supplement did
not contain a question that directly asked for this information.8 We also
combined on-call workers and day laborers because the definitions and
characteristics of these workers are similar and the number of day
laborers alone was not large enough to be statistically significant.
Information on leased workers was not included in our 2000 review of
contingent workers because of a lack of data on these workers. For this
reason, leased workers were not included in the definition of the
contingent workforce used in this report.

6 For example, an estimated 30.6 percent of the 2005 workforce are
contingent workers; the 95 percent confidence interval for this estimate
would be within 29.6 and 31.6 percent.

To obtain information about the workforce protections that are offered to
contingent workers, we reviewed key workforce protection laws, related
court cases, and other studies on contingent workers.

To obtain information on DOL's actions to detect and address employee
misclassification as part of FLSA enforcement, we reviewed FLSA and its
corresponding regulations. We also reviewed DOL documents related to FLSA,
including policies and procedures on conducting investigations,
information on investigator training, and outreach efforts. We interviewed
officials from the Wage and Hour Division headquarters office, 3 of the 5
regional offices, and 9 of the 51 district offices-3 district offices in
each region. We selected a nonprobability sample of district and regional
offices to target offices located in large cities and that provided
geographic coverage across each region. Because this was not a probability
sample, we did not generalize the results of our regional and district
interviews to the regions and districts we did not contact. In each
office, we interviewed regional and district management-level officials
using a standard set of questions in order to obtain information related
to employee misclassification as part of FLSA enforcement. The interview
questions asked about (1) the extent and source of employee
misclassification, (2) investigations related to employee
misclassification, and (3) training and outreach efforts related to
employee misclassification. We contacted the following offices:

7 See Susan N. Houseman, Flexible Staffing Arrangements, August 1999, and
Anne E. Polivka, Sharon R. Cohany, and Steven Hipple, "Definition,
Composition, and Economic Consequences of the Nonstandard Workforce," in
Nonstandard Work: The Nature and Challenges of Changing Employment
Arrangements, Industrial Relations Research Association Series 2000,
edited by Francoise Carre, Marianne A. Ferber, Lonnie Goldman, and Stephen
A. Herzenberg, for examples of the research used to model the different
categories of contingent workers.

8 The category of direct-hire temps was constructed using several
questions from the supplement. We included workers who indicated that
although they did not work for a temporary employment agency, their job
was temporary or they could not stay in their jobs as long as they wished
for one of the following reasons: (1) they were working only until a
specific project was completed, (2) they were temporarily replacing
another worker, (3) they were hired for a fixed period of time, (4) their
job was seasonal, or (5) they expected to work for less than a year
because their job was temporary.

           o  Northeast Regional Office

                        o  New York City District Office
                        o  Richmond District Office
                        o  Southern New Jersey District Office

           o  Midwest Regional Office

                        o  Columbus District Office
                        o  Detroit District Office
                        o  Springfield District Office

           o  Western Regional Office

                        o  East Los Angeles District Office
                        o  Phoenix District Office
                        o  Seattle District Office

In addition, we reviewed literature and interviewed researchers from four
academic institutions and two nonprofit groups about employee
misclassification issues.

We performed our work in accordance with generally accepted government
auditing standards between July 2005 and June 2006.

Appendix II: Establishing the Employment Relationship of Workers

Establishing the employment relationship of workers under the Fair Labor
Standards Act (FLSA) and the Employee Retirement Income Security Act
(ERISA) can be complex and may result in litigation. FLSA requires that an
employer-employee relationship exist for a worker to be covered by the
act's provisions.1 FLSA-which provides minimum wage and overtime pay
protections-requires that employers pay those employees covered by the act
at least the minimum wage and pay overtime wages when they work more than
40 hours a week.2 The act defines "employee" broadly as an individual
employed by an employer. The U.S. Supreme Court has identified certain
factors that should be considered in determining whether a worker is an
employee or an independent contractor under FLSA. In general, a worker who
meets the FLSA definition of employee is one who is economically dependent
on the business he or she serves. In contrast, an independent contractor
is one who is engaged in a business of his or her own. The test used to
determine whether an employment relationship exists for FLSA purposes is
referred to as the economic realities test.3 The court has indicated that
in applying this economic realities test under FLSA, such determinations
must consider the circumstances of the whole activity and cannot be based
on isolated factors or a single characteristic. In enforcing FLSA, DOL
uses the following factors:

           o  The extent to which the worker's services are an integral part
           of the employer's business

                        o  Examples: Does the worker play an integral role in
                        the business by performing the primary type of work
                        that the employer performs for their customers? Does
                        the worker perform a discrete job that is one part of
                        the business' overall process of production? Does the
                        worker supervise any of the company's employees?

           o  The permanency of the relationship

                        o  Example: How long has the worker worked for the
                        same company?

           o  The amount of the worker's investment in facilities and
           equipment

                        o  Examples: Is the worker reimbursed for any
                        purchases, materials, or supplies? Does the worker
                        use his or her own tools or equipment?

1 29 U.S.C. 201 et. seq.

2 FLSA also includes record-keeping and child labor provisions.

3 Rutherford Food Corp. v. McComb, 331 U.S. 722, 730 (1947).

           o  The nature and degree of control by the employer

                        o  Examples: Who decides on what hours to be worked?
                        Who is responsible for quality control? Does the
                        worker work for any other company(s)? Who sets the
                        pay rate?

           o  The worker's opportunities for profit and loss

                        o  Examples: Did the worker make any investments such
                        as insurance or bonding? Can the worker earn a profit
                        by performing the job more efficiently or exercising
                        managerial skill or suffer a loss of capital
                        investment?

           o  The amount of initiative, judgment, or foresight in open market
           competition with others required for the success of the claimed
           independent contractor

                        o  Examples: Does the worker perform routine tasks
                        requiring little training? Does the worker advertise
                        independently through the Yellow Pages or business
                        cards? Does the worker have a separate business site?

In some cases, employers misclassify workers as independent contractors
when they should be classified as employees. Under FLSA, the courts have
examined the issue of misclassification by applying the economic realities
test and making case-by-case determinations as to whether the workers are
employees and thereby covered by the act. For example, a federal district
court recently determined that over 500 delivery workers for supermarket
and drugstore chains had been misclassified as independent contractors.4
The court ruled that the companies that had hired these workers to make
deliveries controlled their placement and pay, provided them with delivery
carts to rent and uniforms to purchase, required little skill to perform
the job, and that the work performed constituted an integral part of the
companies' business. Therefore, the court ruled that they were employees
and entitled to overtime wages under FLSA. In another case, DOL brought
suit on behalf of cable installers against cable television providers and
cable installation companies for overtime compensation under FLSA. In this
case, the court ruled that the employer did not exhibit the type of
control needed to characterize the relationship as employee-employer, that
the workers provided their own van and other equipment, and that the job
required skilled labor. On the basis of these factors, the court denied
the claim and held that the cable installers were properly classified as
independent contractors and not entitled to protection under FLSA.5

4 Ansoumana v. Gristede's Operating Corp., 255 F. Supp. 184 (2003).

The complexity of issues involving joint employment and misclassification
of employees is illustrated by litigation involving the Microsoft
Corporation. In the late 1980s, Microsoft began to hire what the company
classified as independent contractors to fill many of its full-time
employment vacancies. After the Internal Revenue Service (IRS) determined
that these workers were common law employees in 1989 and 1990, Microsoft
terminated the employment relationship, set up an employment agency, and
converted these workers into temporary agency employees. The workers sued
Microsoft, and in 1996 the court ruled that they were employees of the
company rather than independent contractors or temporary agency
employees.6 The court then considered whether or not the employees were
eligible for the employer's saving and stock purchase plan benefits under
ERISA. The determining factor was the language included in Microsoft's
plan, which expressly made any common law employee on the U.S. payroll
eligible for benefits. However, while the court determined that the
workers were common law employees, it directed Microsoft to determine what
rights these workers, as common law employees, had under Microsoft's ERISA
plan. Eventually the parties entered into a settlement agreement in which
Microsoft paid $96.9 million.

Other cases have held that although workers may have been misclassified,
they still did not qualify for benefits under ERISA plans because they did
not qualify under the language of the plan that excluded certain types of
employees, such as temporary or leased employees.7 Some employers amended
their ERISA plans in response to the Microsoft decision to limit
participation to workers that the employers classified as employees,
whether or not the excluded workers may later be determined to be
employees by the IRS or courts. The IRS has approved the use of such
language in ERISA plans.8

5 Herman v. Mid-Atlantic Installation Services, Inc., 164 F.Supp2d 667
(2000).

6 Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir. 1996).

7 Wolf v. Coca Cola, 200 F.3d 1337 (11th Cir.2000); Bronk v. Mountain
States Tel. & Tel., Inc., 140 F. 3d 1335 (10th Cir.1998); Abraham v. Exxon
Corp., 85 F.3d 1126 (5th Cir.1996).

8 The IRS issued an unnumbered Technical Advice Memorandum on July 28,
1999, approving a clause excluding from participation in the plan
individuals whom the employer had engaged and treated as independent
contractors, even if they were later found to be employees.

Appendix III: Size and Characteristics of the Contingent Workforce
	
This table provides the following information on contingent workers:
growth rates (percentage changes) and changes in the share of the total
workforce (percentage point changes) for 1995-1999, 1999-2005, and
1995-2005.

Table 4: Changes in the Size of the Contingent Workforce

               Feb. 1995-Feb. 1999    Feb. 1999-Feb. 2005    Feb. 1995-Feb. 2005
                          Percentage             Percentage             Percentage 
                               point                  point                  point 
              Percentage      change Percentage      change Percentage      change 
                  change (percentage     change (percentage     change (percentage 
Category of   (number of    of total (number of    of total (number of    of total 
worker          workers)  workforce)   workers)  workforce)   workers)  workforce) 
Agency temps      + 0.6*      - 0.1*     + 2.4*        0.0*     + 3.0*      - 0.1* 
Direct-hire                                                                        
temps             - 4.9*       - 0.3     - 7.9*       - 0.4     - 12.4       - 0.7
On-call                                                                            
workers/ day                                                           
laborers          + 8.2*      + 0.1*     + 25.5       + 0.3     + 35.8       + 0.4
Contract                                                                           
company                                                                
workers          + 17.9*      + 0.1*     + 5.7*        0.0*     + 24.7      + 0.1*
Independent                                                                        
contractors       - 0.7*       - 0.4     + 25.4       + 1.1     + 24.5       + 0.7
Self-employed                                                                      
workers           - 13.5       - 1.1     - 2.5*       - 0.4     - 15.6       - 1.5
Standard                                                                           
part-time                                                              
workers           + 3.4*      - 0.4*      + 5.6        0.0*      + 9.2      - 0.4*
Subtotal:                                                                          
contingent                                                             
workers           - 0.9*       - 2.3      + 8.4       + 0.7      + 7.4       - 1.6
Standard                                                                           
full-time                                                              
workers           + 10.3       + 2.3      + 4.5       - 0.7     + 15.3       + 1.6
Total                                                                              
workforce          + 6.7      ------      + 5.7     -------     + 12.8     -------

Source: GAO analysis of data from the CPS February 2005 Contingent Work
Supplement.

Note: An asterisk (*) denotes that the change over this period was not
statistically significant for this category of worker at the 95 percent
confidence level.

Table 5: Characteristics of Contingent Workers (February 2005)

(Percentage unless indicated otherwise)
                                 On-call                                                        
                                 workers Contract                            Standard  Standard 
             Agency Direct-hire  and day  company Independent Self-employed part-time full-time 
              temps       temps laborers  workers contractors       workers   workers   workers
AGE          
16-19 years       3          11        7        1           1             0        20         1 
20-24 years      17          21       15       11           3             1        17         8 
25-34 years      30          25       22       25          15            13        15        24 
35-54 years      37          29       39       47          54            55        30        52 
55-64 years      11           9       11       14          19            21        10        13 
65 and older      3           5        7        2           9             9         8         2 
Mean age       37.4        35.2     38.9     40.3        46.4          47.9      36.2      40.8 
(years)                                                                               
GENDER       
Men              47          49       53       69          65            63        32        56 
Women            53          51       47       31          35            35        37        68 
RACE/ORIGIN  
White,           50          63       68       62          80            81        76        69 
non-Hispanic                                                                          
Black,           22           9        8       15           5             4         9        11 
non-Hispanic                                                                          
Hispanic         21          18       19       16           9             7        11        14 
Other,            8           9        5        7           5             9         5         6 
non-Hispanic                                                                          
EDUCATION    
Less than        18          15       20       17           8             8        21         9 
high school                                                                           
diploma                                                                               
High school      29          21       29       22          28            28        27        31 
diploma, no                                                                           
college                                                                               
Some college     32          33       28       29          29            26        35        28 
College          19          17       16       18          22            23        12        21 
degree                                                                                
Graduate          2          14        6       14          13            15         5        11 
school                                                                                
DIVISION     
New England       4           6        3        3           5             3         6         5 
Middle            8          11       12       15          11            12        15        14 
Atlantic                                                                              
E. North         17          14       14       10          15            15        19        15 
Central                                                                               
W. North          5           8        7        4           8             9         8         7 
Central                                                                               
South            19          17       15       30          19            17        16        19 
Atlantic                                                                              
E. South          7           6        7        4           5             5         5         6 
Central                                                                               
W. South         12           9       13       15          10            11         9        11 
Central                                                                               
Mountain          6           6        7        6           9             8         6         7 
Pacific          22          23       23       13          19            19        15        15 

                                    On-call                                                        
                                    workers Contract                            Standard  Standard 
                Agency Direct-hire  and day  company Independent Self-employed part-time full-time 
                 temps       temps laborers  workers contractors       workers   workers   workers
INDUSTRY        
Business            28           4        5        5           7             5         4         3 
services                                                                                 
Auto and repair      0           1        1        0           4             4         1         1 
services                                                                                 
Personal                                                                                 
services                                                                                 
-Private             2           2        1        0           2             0         1         0 
households                                                                               
-Other personal      1           1        2        2           5             6         3         2 
services                                                                                 
Arts,                0           3        4        1           3             2         3         1 
entertainment,                                                                           
recreation                                                                               
services                                                                                 
Professional services
-Hospitals           2           4        6        3           0             0         5         5 
-Health              7           3        6        5           3             7         7         5 
services                                                                                 
-Educational         1          28       18        8           2             2        10        10 
services                                                                                 
-Social              1           2        2        0           3             4         4         2 
services                                                                                 
-Other               5           9        4        5          15             8         6         7 
professional                                                                             
services                                                                                 
Agriculture          0           1        2        0           2            11         0         1 
Mining               0           0        1        0           0             0         0         1 
Construction         3           9       14       17          22             6         3         7 
Durable goods       17           3        2        8           2             4         1        10 
manufacturing                                                                            
Nondurable          12           2        3        6           1             3         2         5 
goods                                                                                    
manufacturing                                                                            
Transportation       2           2        7        2           4             3         3         5 
and warehousing                                                                          
Communications,      2           2        2        4           2             1         2         3 
information,                                                                             
Internet                                                                                 
Utilities and        1           1        1        2           0             0         0         1 
sanitation                                                                               
Wholesale trade      6           2        2        3           2             5         1         4 
Retail trade    
-Other retail        2           6        6        3           9            17        22        11 
trade                                                                                    
-Eating and          1           5        5        2           1             4        16         4 
drinking                                                                                 
establishments                                                                           
Banking and          2           1        1        2           2             2         2         4 
other finance                                                                            
Insurance and        2           2        2        5           8             7         2         4 
real estate                                                                              
Forestry and         0           0        0        0           1             1         0         0 
fisheries                                                                                
Justice, public      0           1        3        2           0             0         0         3 
order, and                                                                               
safety                                                                                   
Admin of human       1           1        0        3           0             0         0         1 
resource                                                                                 
programs                                                                                 
National             0           1        0        6           0             0         0         1 
security,                                                                                
international                                                                            
affairs                                                                                  
Other public         2           2        0        7           0             0         0         2 
administration                                                                           

                                   On-call                                                        
                                   workers Contract                            Standard  Standard 
               Agency Direct-hire  and day  company Independent Self-employed part-time full-time 
                temps       temps laborers  workers contractors       workers   workers   workers
OCCUPATION     
Management          2           5        3        4          16            29         3        10 
Business and                                                                                      
financial                                                                               
operations          6           3        2        6           6             2         2         5
Computer and                                                                                      
mathematical                                                                            
science             3           2        1       13           2             1         1         3
Architecture                                                                                      
and                                                                                     
engineering         2           1        1        6           2             0         1         2
Life,                                                                                             
physical, and                                                                           
social science      1           2        0        1           1             1         0         1
Community and                                                                                     
social service      0           2        1        1           0             0         1         2
Legal               0           1        0        0           2             3         0         1 
Education,                                                                                        
training, and                                                                           
library             2          17       14        2           2             1         7         6
Arts, design,                                                                                     
entertainment,                                                                          
sports, media       1           4        4        3           7             3         2         1
Health care                                                                                       
practitioner                                                                            
and technical       3           3        7        2           3             6         6         5
Health care                                                                                       
support             5           2        3        3           1             0         4         2
Protective                                                                                        
service             0           1        3       12           0             0         1         3
Food                                                                                              
preparation                                                                             
and serving         1           5        6        3           0             1        16         4
Building,                                                                                         
grounds                                                                                 
cleaning, and                                                                           
maintenance         5           3        6        7           5             3         4         3
Personal care                                                                                     
and service         4           6        3        1           7             8         5         2
Sales and                                                                                         
related                                                                                 
occupations         2           6        5        2          17            21        18        10
Office and                                                                                        
administrative                                                                          
support            25          15        9        5           3             5        18        15
Farming,                                                                                          
fishing, and                                                                            
forestry            1           2        2        0           1             0         0         1
Construction                                                                                      
and extraction      4           7       15       20          15             4         2         6
Installation,                                                                                     
maintenance,                                                                            
and repair          3           4        4        2           4             3         1         4
Production         17           4        3        2           2             4         3         8 
Transportation                                                                                    
and material                                                                            
moving             13           5       10        3           4             3         6         7

Source: GAO analysis of data from the CPS February 2005 Contingent Work
Supplement.

Appendix IV: Key Laws Designed to Protect Workers

This appendix provides a more detailed description of the key laws
designed for workers' protection and their applicability to members of the
contingent workforce. By definition, these laws apply only to
employees-independent contractors and self-employed workers are not
covered. However, no definitive test exists to distinguish whether a
worker is an employee or an independent contractor. In determining whether
an employment relationship exists under federal statutes, courts have
developed several criteria. These criteria have been classified as the
economic realities test, the common law test, and a combination of the two
sometimes referred to as a hybrid test.

The economic realities test looks to whether the worker is economically
dependent upon the principal or is in business for himself. The test is
not precise, leaving determinations to be made on a case-by-case basis.
The test consists of a number of factors, such as the degree of control
exercised by the employing party over the worker, the worker's opportunity
for profit or loss, the worker's capital investment in the business, the
degree of skill required for the job, and whether the worker is an
integral part of the business.

The traditional common law test examines the employing party's right to
control how the work is performed. To determine whether the employing
party has this right, courts may consider the degree of skill required to
perform the work, who supplies the tools and equipment needed to perform
the work, and the length of time the worker has been working for the
employing party.

When the tests are combined in some type of hybrid, a court typically
weighs the common law factors and some additional factors related to the
worker's economic situation, such as how the work relationship may be
terminated, whether the worker receives leave and retirement benefits, and
whether the hiring party pays Social Security taxes.

Each of the laws is discussed in more detail below, including the tests
used under each to determine whether a worker is an employee or an
independent contractor.

Family and Medical Leave Act of 1993 (29 U.S.C. 2601)

The Family and Medical Leave Act of 1993 provides various protections for
employees who need time off from their jobs because of medical problems or
the birth or adoption of a child. The act requires employers to allow
employees to take up to 12 weeks of unpaid leave for medical reasons
related to the employee or a family member or to care for a newborn or
newly adopted child without reduction of pay or benefits when he or she
returns to work. It also requires employers to maintain the same health
care coverage for employees while they are on leave that was provided when
they were actively employed. To be eligible for this coverage, employees
must have been employed for 12 months by an employer that employs 50 or
more employees who work 20 or more calendar weeks in a year and must have
worked at least 1,250 hours during the past 12 months.

To determine whether a worker is a covered employee under the law, the
courts have applied the economic realities test.

Employee Retirement Income Security Act (29 U.S.C. 1001)

The Employee Retirement Income Security Act establishes uniform standards
for employee pension and welfare benefit plans, including minimum
participation, accrual, and vesting requirements; fiduciary
responsibilities; and reporting and disclosure requirements. The act does
not require employers to provide pension or welfare benefits to employees;
it applies to any employer or employee organization engaged in commerce or
any industry affecting commerce that maintains a covered employee benefit
plan.

Contingent workers are covered by the act only if the employer allows them
to participate in a pension or welfare benefit plan. Which employees are
included in a plan depends on how the plan documents are drafted and
interpreted. If an employer wishes to exclude some or all types of
contingent workers from participating in a plan, the employer must clearly
define the excluded groups of workers, and that definition must be
properly applied. Otherwise, contingent workers whom the employer intended
to exclude may be covered.

To determine whether a worker is a covered employee under the law, the
courts have applied the common law test.

Fair Labor Standards Act (29 U.S.C. 201)

The Fair Labor Standards Act establishes minimum wage, overtime, and child
labor standards for employees. The act covers all employees of employers
engaged in commerce or the production of goods that meet a
dollar-volume-of-business requirement. The act also covers all employees
engaged in commerce or the production of goods for commerce; all employees
engaged in domestic service covered by the law; all employees of a
hospital, residential care institution, or school; and all federal, state,
and local government employees.

To determine whether a worker is a covered employee under the law, the
courts have applied the economic realities test.

National Labor Relations Act (29 U.S.C. 151)

The National Labor Relations Act guarantees the right of employees to
organize and bargain collectively. The act applies to all employers and
employees in their relationships with labor organizations whose activities
affect interstate commerce. The act does not differentiate by firm size.

The coverage issue regarding temporary workers is whether they have a
right to join the same bargaining units as permanent employees with whom
they work. Generally, agency temps who work at one site on a fairly
regular basis over a sufficient period of time can join the existing
collective bargaining unit of permanent employees if the agency (or
agencies, if more than one is involved) and the employer that hired the
workers from the agency consent to this arrangement. However, temporary
workers often do not work at one work site long enough to have an interest
in joining a union.

To determine whether a worker is a covered employee under the law, the
courts have applied the common law test.

Unemployment Insurance

The unemployment insurance system is a joint federal-state system funded
by both federal and state payroll taxes. It was established by the Social
Security Act of 1935 and was intended to provide temporary relief through
partial wage replacement for workers who lose jobs for economic reasons,
such as layoffs, and to help stabilize the economy during recessions. The
system pays benefits to workers who become unemployed and meet
state-established eligibility rules. To determine whether a worker is a
covered employee under the law, most states use a different type of test
than is used for other laws. This test is called the ABC test: workers are
considered employees unless (a) they are free from direction and control
over performance of the work; (b) the service is performed either outside
the usual course of the business for which it is performed or is performed
outside of all places of business of the enterprise for which it is
performed; and (c) the individual is customarily engaged in an independent
trade, occupation, profession, or business.

Workers' Compensation

State and federal workers' compensation programs provide benefits for wage
loss and medical care to injured workers and, in some cases, their
families. At the same time, employers' liabilities are limited strictly to
workers' compensation payments. Benefits paid depend on the nature and
extent of the injuries and the ability of injured workers to continue
working. For employees whose injuries are not serious, the only benefits
received are of a medical nature. Employees with more serious injuries or
illnesses may also be entitled to wage-loss benefits; vocational
rehabilitation benefits; and schedule payments for the permanent loss, or
loss of use of, parts or functions of the body. In addition, survivors of
an employee may receive death benefits if the employee's death resulted
from a job-related injury or illness. To determine whether a worker is a
covered employee under the law, most states use the common law test.

Occupational Safety and Health Act (29 U.S.C. 651)

The Occupational Safety and Health Act requires employers to maintain a
safe and healthful workplace and provides employees with certain rights
and responsibilities. Courts use either the economic realities test or the
common law test to determine whether someone is an employee under the act.
According to the law, the party responsible for ensuring safety is the
employer that is in direct control of the workplace and the actions of
those who work there, including contingent workers such as agency temps
and contract company workers who are supplied by another party. Thus, if
an accident occurs at the workplace, the employer that created the hazard,
not the temporary help firm or contract company, is responsible.

Title VII of the Civil Rights Act (42 U.S.C. 2000e), the Americans with
Disabilities Act (42 U.S.C. 12101), and the Age Discrimination in Employment Act
(29 U.S.C. 621)

Title VII of the Civil Rights Act, the Americans with Disabilities Act,
and the Age Discrimination in Employment Act protect all employees and job
applicants from various forms of discrimination, such as discrimination
based on race, national origin, gender, disability, or age. The Civil
Rights Act and the Americans with Disabilities Act apply to employers that
have 15 or more employees for each of 20 or more calendar weeks in a year.
The Age Discrimination in Employment Act applies to employers that have 20
or more employees for each working day in each of 20 or more calendar
weeks.

Further, each of these laws explicitly covers temporary employment
agencies. Title VII of the Civil Rights Act explicitly prohibits
employment agencies from discriminating on the basis of race, color,
religion, gender, or national origin in classifying or referring people
for employment. The Americans with Disabilities Act explicitly includes
employment agencies in the definition of entities covered by the law. The
Age Discrimination in Employment Act explicitly prohibits employment
agencies from discriminating on the basis of a person's age (if over 40)
in classifying or referring a person for employment.

To determine whether a worker is a covered employee under federal
antidiscrimination statutes, the courts have used all three tests-the
common law test, the economic realities test, and the hybrid test.
Independent contractors receive some protection from discrimination. Under
a provision of the Civil Rights Act that protects contractual rights,
independent contractors are protected against racial discrimination in
both the termination of a contract and the creation of a hostile work
environment. In joint employment situations, one employer may be liable
for the discriminatory acts of the other employer if the employer that is
being held liable controls some substantial aspect of the employee's
compensation or terms and conditions of employment.

Consolidated Omnibus Budget Reconciliation Act (29 U.S.C. 1161)

Continuation of group health plan coverage is generally required under
this act for employees who otherwise would lose coverage as a result of
certain events, such as being laid off by their employers. Individuals may
continue coverage under their former employers' group health plans at
their own expense. Depending on the qualifying event, the duration of
required coverage ranges from 18 to 36 months. In general, when a covered
employee experiences termination or reduction in hours of employment, the
continued coverage of the employee and the employee's spouse and
dependents must continue for 18 months. The act applies to all group
health plans, except those maintained by employers with fewer than 20
employees. Workers who were considered employees under the group health
plans are also employees for purposes of this act.

Health Insurance Portability and Accountability Act of 1996 (Pub. L. No.
104-191)

This act guarantees the availability and renewability of health insurance
coverage for certain individuals. It limits, and in most cases eliminates,
the waiting time before a plan covers a preexisting condition for group
health plan participants and beneficiaries who move from one job to
another and from employment to unemployment. The act also creates federal
standards for insurers, health maintenance organizations, and employer
plans, including employers who self-insure. The act does not require
employers to offer health insurance to its employees or, if they offer
health insurance, to cover part-time, seasonal, or temporary employees.
The act increases the tax deduction for health insurance for self-employed
workers, including independent contractors, to 100 percent of premiums and
provides new tax incentives to encourage individuals and employers to
purchase long-term-care insurance.

Appendix V: Comments from the Department of Labor

Appendix VI: GAO Contact and Staff Acknowledgments

GAO Contact

Robert E. Robertson, (202) 512-7215 or [email protected] .

Staff Acknowledgments

In addition to the contact named above, Brett S. Fallavollita, Linda L.
Siegel, Janice L. Peterson, and Jason R. Campbell contributed
significantly to all aspects of this report. Daniel A. Schwimer reviewed
the coverage of contingent workers under laws designed to protect workers;
Richard P. Burkard provided legal support; Paula J. Bonin, Evan B. Gilman,
Mark F. Ramage, and Joan K. Vogel assisted in analyzing the BLS data;
Thomas D. Short assisted with IRS issues; and Jonathan S. McMurray
assisted in report development.

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Worker Protection: Labor's Efforts to Enforce Protections for Day Laborers
Could Benefit from Better Data and Guidance. GAO-02-925 . Washington,
D.C.: September 26, 2002.

Private Pensions: Improving Worker Coverage and Benefits. GAO-02-225 .
Washington, D.C.: April 9, 2002.

Health Insurance: Proposals for Expanding Private and Public Coverage.
GAO-01-481T . Washington, D.C.: March 15, 2001.

Health Insurance: Characteristics and Trends in the Uninsured Population.
GAO-01-507T . Washington, D.C.: March 13, 2001.

Pension Plans: Characteristics of Persons in the Labor Force without
Pension Coverage. GAO/HEHS-00-131 . Washington, D.C.: August 22, 2000.

Contingent Workers: Incomes and Benefits Lag Behind Those of Rest of
Workforce. GAO/HEHS-00-76 . Washington, D.C.: June 30, 2000.

Fair Labor Standards Act: White-Collar Exemptions Need Adjustments for
Today's Work Place. GAO/T-HEHS-00-105 . Washington, D.C.: May 3, 2000.

Fair Labor Standards Act: White Collar Exemptions in the Modern Work
Place.  GAO/HEHS-99-164 . Washington, D.C.: September 30, 1999.

Employment-Based Health Insurance: Medium and Large Employers Can Purchase
Coverage, but Some Workers Are Not Eligible. GAO/HEHS-98-184 . Washington,
D.C.: July 27, 1998.

Private Health Insurance: Continued Erosion of Coverage Linked to Cost
Pressures.  GAO/HEHS-97-122 . Washington, D.C.: July 24, 1997.

Tax Administration: Issues in Classifying Workers as Employees or
Independent Contractors. GAO/T-GGD-96-130 . Washington, D.C.: June 20,
1996.

Tax Administration: Issues Involving Worker Classification.
GAO/T-GGD-95-224 . Washington, D.C.: August 2, 1995.

Tax Administration: Estimates of the Tax Gap for Service Providers.
GAO/GGD-95-59 . Washington, D.C.: December 28, 1994.

Tax Administration: Improving Independent Contractor Compliance with Tax
Laws.  T-GGD-94-194. Washington, D.C.: August 4, 1994.

Tax Administration: Approaches for Improving Independent Contractor
Compliance. GGD-92-108. Washington, D.C.: July 23, 1992.

Workers at Risk: Increased Numbers in Contingent Employment Lack
Insurance, Other Benefits.  GAO/HRD-91-56 . Washington, D.C.: March 8,
1991.

Tax Administration: Information Returns Can Be Used to Identify Employers
Who Misclassify Workers.  GAO/GGD-89-107 . Washington, D.C.: September 25,
1989.

(130460)

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Highlights of GAO-06-656 , a report to the Ranking Minority Member,
Committee on Health, Education, Labor, and Pensions, U.S. Senate

July 2006

EMPLOYMENT ARRANGEMENTS

Improved Outreach Could Help Ensure Proper Worker Classification

Millions of U.S. workers participate in "contingent" employment, such as
temporary or part-time work, and not in permanent or full-time jobs. The
Department of Labor (DOL) enforces several labor laws to protect these and
other workers, including the Fair Labor Standards Act (FLSA), which
provides minimum wage, overtime pay, and child labor protections. In June
2000, GAO reported that contingent workers lagged behind standard
full-time workers in terms of income, benefits, and workforce protections,
and that some employees do not receive worker protections because
employers misclassified them as independent contractors. GAO was asked to
update this report by describing (1) the size and nature of the contingent
workforce, (2) the benefits and workforce protections provided to
contingent workers, and (3) the actions that DOL takes to detect and
address employee misclassification. We analyzed DOL survey data on
contingent workers and interviewed DOL officials.

What GAO Recommends

GAO recommends that DOL (1) provide additional contact information to
facilitate the reporting of possible misclassification complaints, and (2)
evaluate the extent to which misclassification cases found through FLSA
investigations are referred to other agencies and take action to improve
as needed.

DOL generally agreed with both recommendations.

Contingent workers constituted a relatively constant proportion of the
total workforce from 1995 through 2005 and had diverse characteristics.
While the population of the contingent workforce grew by an estimated 3
million workers during this time period, the proportion of contingent
workers in the total workforce remained relatively constant at about 31
percent. In 2005, there were about 42.6 million contingent workers in the
workforce. Contingent workers vary in terms of their demographic
characteristics, industries, and occupations. For example, on average,
contingent workers range in age from about 35 years for one category of
temporary workers to about 48 years for self-employed workers. In
addition, contingent workers are employed in a wide range of industries
and occupations, including the services industry, construction, and retail
trade.

A smaller proportion of contingent workers than of standard full-time
workers has health insurance or pension benefits, or is protected by key
workforce protection laws, including laws designed to ensure proper pay
and safe, healthy, and nondiscriminatory workplaces. While 72 percent of
standard full-time workers received employer-provided health insurance in
2005, the proportion of contingent workers who received employer-provided
health insurance ranged from 9 to 50 percent, depending on the category of
contingent worker. With regard to pension benefits, 76 percent of standard
full-time workers reported working for an employer who offered a pension,
whereas 17 to 56 percent of contingent workers reported working for an
employer who offered a pension. One reason that contingent workers are
less likely to receive protections is that some laws contain requirements
that exclude certain categories of contingent workers.

DOL detects and addresses misclassification of employees by investigating
complaints, but does not always forward misclassification cases to other
federal and state agencies. Some workers do not receive worker protections
to which they are entitled because employers misclassify them as
independent contractors-a category of contingent workers excluded from
many protections-when they should be classified as employees. DOL
investigators detect and address employee misclassification primarily when
responding to FLSA minimum wage and overtime pay complaints. DOL
investigators examine whether a worker is an employee or an independent
contractor to determine coverage under FLSA. DOL relies heavily on
complaints from workers to enforce FLSA, but the FLSA workplace poster
does not contain any information on employment classification or provide a
telephone number for individuals to register complaints. Misclassification
of employees may contribute to an FLSA violation or may violate laws
enforced by other agencies, such as tax laws. DOL procedures require
officials to share information with other federal and state agencies
whenever investigators find possible violations of other laws. However,
the district offices we contacted vary in how often they forward
misclassification as a possible violation of other agencies' laws.
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