[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE MISCLASSIFICATION OF WORKERS AS
INDEPENDENT CONTRACTORS: WHAT POLICIES
AND PRACTICES BEST PROTECT WORKERS?
=======================================================================
JOINT HEARING
before the
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR AND PENSIONS
and the
SUBCOMMITTEE ON WORKFORCE PROTECTIONS
COMMITTEE ON
EDUCATION AND LABOR
U.S. House of Representatives
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, JULY 24, 2007
__________
Serial No. 110-56
__________
Printed for the use of the Committee on Education and Labor
Available on the Internet:
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COMMITTEE ON EDUCATION AND LABOR
GEORGE MILLER, California, Chairman
Dale E. Kildee, Michigan, Vice Howard P. ``Buck'' McKeon,
Chairman California,
Donald M. Payne, New Jersey Ranking Minority Member
Robert E. Andrews, New Jersey Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia Peter Hoekstra, Michigan
Lynn C. Woolsey, California Michael N. Castle, Delaware
Ruben Hinojosa, Texas Mark E. Souder, Indiana
Carolyn McCarthy, New York Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts Judy Biggert, Illinois
Dennis J. Kucinich, Ohio Todd Russell Platts, Pennsylvania
David Wu, Oregon Ric Keller, Florida
Rush D. Holt, New Jersey Joe Wilson, South Carolina
Susan A. Davis, California John Kline, Minnesota
Danny K. Davis, Illinois Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona Kenny Marchant, Texas
Timothy H. Bishop, New York Tom Price, Georgia
Linda T. Sanchez, California Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland Charles W. Boustany, Jr.,
Joe Sestak, Pennsylvania Louisiana
David Loebsack, Iowa Virginia Foxx, North Carolina
Mazie Hirono, Hawaii John R. ``Randy'' Kuhl, Jr., New
Jason Altmire, Pennsylvania York
John A. Yarmuth, Kentucky Rob Bishop, Utah
Phil Hare, Illinois David Davis, Tennessee
Yvette D. Clarke, New York Timothy Walberg, Michigan
Joe Courtney, Connecticut Dean Heller, Nevada
Carol Shea-Porter, New Hampshire
Mark Zuckerman, Staff Director
Vic Klatt, Minority Staff Director
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS
ROBERT E. ANDREWS, New Jersey, Chairman
George Miller, California John Kline, Minnesota,
Dale E. Kildee, Michigan Ranking Minority Member
Carolyn McCarthy, New York Howard P. ``Buck'' McKeon,
John F. Tierney, Massachusetts California
David Wu, Oregon Kenny Marchant, Texas
Rush D. Holt, New Jersey Charles W. Boustany, Jr.,
Linda T. Sanchez, California Louisiana
Joe Sestak, Pennsylvania David Davis, Tennessee
David Loebsack, Iowa Peter Hoekstra, Michigan
Phil Hare, Illinois Cathy McMorris Rodgers, Washington
Yvette D. Clarke, New York Tom Price, Georgia
Joe Courtney, Connecticut Virginia Foxx, North Carolina
Timothy Walberg, Michigan
SUBCOMMITTEE ON WORKFORCE PROTECTIONS
LYNN C. WOOLSEY, California, Chairwoman
Donald M. Payne, New Jersey Joe Wilson, South Carolina,
Timothy H. Bishop, New York Ranking Minority Member
Carol Shea-Porter, New Hampshire Tom Price, Georgia
Phil Hare, Illinois John Kline, Minnesota
C O N T E N T S
----------
Page
Hearing held on July 24, 2007.................................... 1
Statement of Members:
Andrews, Hon. Robert E., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Statement of the Laborers' International Union of North
America (LIUNA)........................................ 67
Kline, Hon. John, Senior Republican Member, Subcommittee on
Health, Employment, Labor and Pensions..................... 3
Prepared statement of.................................... 5
Additional statements submitted:
Associated Builders and Contractors, Inc. (ABC)...... 71
Travis Boardman...................................... 73
Randy Eystad......................................... 75
Michael P. Mannion................................... 77
National Association of Home Builders (NAHB)......... 80
William Vazquez...................................... 85
Wilson, Hon. Joe, Ranking Republican Member, Subcommittee on
Workforce Protections...................................... 8
Prepared statement of.................................... 9
Woolsey, Hon. Lynn C., Chairwoman, Subcommittee on Workforce
Protections................................................ 5
Prepared statement of.................................... 7
Statement of Witnesses:
DeCamp, Paul, Administrator of the Wage and Hour Division,
U.S. Department of Labor................................... 9
Prepared statement of.................................... 11
Socolow, David J., Commissioner, New Jersey Department of
Labor and Workforce Development............................ 49
Prepared statement of.................................... 51
Stafford, Sara, President and Sole Owner, Stafford
Construction Services, Inc................................. 41
Prepared statement of.................................... 43
Walters, Christine V., MAS, JD, SPHR, independent consultant,
FiveL Company, on behalf of the Society for Human Resource
Management................................................. 43
Prepared statement of.................................... 45
Williams, Robert V., transportation recruiting and operations
consultant, former FedEx employee.......................... 37
Prepared statement of.................................... 39
THE MISCLASSIFICATION OF WORKERS
AS INDEPENDENT CONTRACTORS:
WHAT POLICIES AND PRACTICES
BEST PROTECT WORKERS?
----------
Tuesday, July 24, 2007
U.S. House of Representatives
Subcommittee on Health, Employment, Labor and Pensions
Subcommittee on Workforce Protections
Committee on Education and Labor
Washington, DC
----------
The subcommittees met, pursuant to call, at 10:30 a.m., in
Room 2175, Rayburn House Office Building, Hon. Robert Andrews
[chairman of the Subcommittee on Health, Employment, Labor, and
Pensions] presiding.
Present from Subcommittee on Health, Employment, Labor, and
Pensions: Representatives Andrews, Kildee, Tierney, Wu, Holt,
Loebsack, Hare, Kline, McKeon, Boustany, and Walberg.
Present from Subcommittee on Workforce Protections:
Woolsey, Payne, Bishop of New York, Shea-Porter, Hare, Wilson,
and Kline.
Staff present: Aaron Albright, Press Secretary; Tylease
Alli, Hearing Clerk; Jordan Barab, Health/Safety Professional;
Jody Calemine, Labor Policy Deputy Director; Lynn Dondis,
Policy Advisor for Subcommittee on Workforce Protection; Carlos
Fenwick, Policy Advisor for Subcommittee on Health, Employment,
Labor and Pensions; Michael Gaffin, Staff Assistant, Labor;
Jeffrey Hancuff, Staff Assistant, Labor; Brian Kennedy, General
Counsel; Joe Novotny, Chief Clerk; Megan O'Reilly, Labor Policy
Advisor; Rachel Racusen, Deputy Communications Director;
Michele Varnhagen, Labor Policy Director; Robert Borden,
Minority General Counsel; Cameron Coursen, Minority Assistant
Communications Director; Steve Forde, Minority Communications
Director; Ed Gilroy, Minority Director of Workforce Policy; Rob
Gregg, Minority Legislative Assistant; Jim Paretti, Minority
Workforce Policy Counsel; Molly McLaughlin Salmi, Minority
Deputy Director of Workforce Policy; Linda Stevens, Minority
Chief Clerk/Assistant to the General Counsel; and Loren Sweatt,
Minority Professional Staff Member.
Chairman Andrews [presiding]. Ladies and gentlemen, the
subcommittee will come to order. I would ask everyone to please
take their seats.
We welcome our witnesses and the members of the public for
today's hearing.
In the last 6 years, over 2 million Americans have found
themselves in a situation where the 40-hour work-week law that
applies to virtually everyone else doesn't apply to them; where
laws that govern pensions and health care, that apply to just
about everyone else, do not apply to them; where laws that deal
with the right to collectively bargain, the right to organize,
the right to grieve, that apply to almost everyone else, does
not apply to them.
In the last 5 or 6 years, we have had an increase of more
than 2 million people who fall into the category in our
workforce of independent contractors.
Now, in some cases, that status is quite right and quite
appropriate. If someone is retained for a limited purpose,
usually for a limited time, to do a specific job function for
an employer, it is quite necessary and appropriate that that
person not be treated as an employee for reasons of
flexibility, for reasons of fair compensation, for reasons of
the appropriate organization and carrying out of the employer's
business.
But in cases where someone looks an awful lot like an
employee--is told what to do and when he or she can do it, is
given no discretion over how to conduct the affairs of the
business, whose compensation is fixed and set by the employer--
when that person looks an awful lot like an employee, we think
the law should treat them as an employee, should provide that
person with the protections and the rights that employees have
under our federal laws.
The question before the committee today was initiated by
Chairwoman Woolsey's efforts a few weeks ago. This is a joint
hearing of the Workforce Protections Subcommittee and our HELP
Subcommittee. And Chairwoman Woolsey did a great job with our
colleagues in beginning to flesh out the issue as to how
prevalent is the problem of misclassification of people. How
prevalent is it that someone who truly is an employee is being
treated as an independent contractor and, therefore, divested
of the rights that I made reference to earlier?
As a result of the good work that Ms. Woolsey did at that
hearing, she and I and some of our colleagues wrote a letter to
the United States Department of Labor, asking that the
department outline its efforts in identifying the scope of the
problem and outline its efforts to deal with reducing and
solving the problem.
The purpose of today's hearing is to get answers to those
questions that were asked in our letter in May in our first
panel. And then to proceed with the second panel, we will look
at various perspectives on the scope of the problem, the nature
of the problem, and some ideas to solve the problem.
Our first witness today, Mr. DeCamp, is the director of the
Wage and Hour Division of the Department of Labor. We are very
happy he is with us today. And we look forward to an exchange
where we can hear more about the department's efforts to
properly define the scope of this problem and to remediate its
effects.
I will say this to you in closing my remarks. The image
that is often conjured up of an independent contractor is a Web
site designer, you know, someone who designs Web sites and Web
pages for a multiplicity of clients and works out of his or her
home, and is very much on the fly, on the go; an independent
entrepreneur with a laptop and a vision and a business card and
a chance to make himself or herself a wealthy person. Long may
that person be treated as an independent contractor, because
they are.
But there are people who are mowing lawns and driving
trucks and working in garment linen factories, working in all
different places around this country, who sure do look like
employees to me. And if they have the functional job of an
employee--if they are told what to do, when to do it, how much
money they are going to make, what the work rules are, what
they can and cannot do--if they have that sort of work life as
an employee, then I think the law should treat them as an
employee. And they should get the benefits of the 40-hour work-
week and the workers' safety laws and the pension and health-
care laws and the other protections of this country.
Legislating is about drawing lines. And where we draw this
line and how we deal with remediating problems that fall on the
wrong side of the line is the legislative job of the committee.
I look forward to a full and vigorous discussion of those
issues here today.
At this point, I am going to turn to the ranking member of
the HELP Subcommittee, my friend from Minnesota, Mr. Kline, for
his opening statement.
[The statement of Mr. Andrews follows:]
Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee on
Health, Employment, Labor and Pensions
Good morning and welcome to the Joint Health, Employment, Labor,
and Pensions Subcommittee and Workforce Protections Subcommittee
hearing on ``The Misclassification of Workers as Independent
Contractors: What Policies and Practices Best Protect Workers.'' I am
delighted to share the gavel today with my colleague, Chairwoman
Woolsey.
Today, we will examine the issue of worker misclassification. This
joint venture is a follow-up to the Workforce Protections
Subcommittee's previous hearing on the misclassification or workers as
independent contractors. Today we will have the opportunity to hear the
views from the Department of Labor regarding worker misclassification
and what actions they have taken to address the problem.
Worker misclassification is a problem that adversely affects
employees, employers, taxpayers, and states. Billions of dollars of tax
revenue and unemployment insurance have been stolen by employers
seeking to avoid the costs of payroll taxes, insurance premiums, and
benefits. The witnesses' testimony today will further prove how worker
misclassification 1) strips workers of employee benefits and
protections; 2) puts good employers at a competitive disadvantage; and
3) cheats the taxpayer out of revenue. I thank the witnesses for their
testimony today and look forward to the hearing.
______
Mr. Kline. Thank you, Mr. Chairman.
Good morning to all, and welcome to our distinguished
panels of witnesses.
As a member of the Workforce Protections Subcommittee and
as the ranking member of the Health, Employment, Labor, and
Pensions Subcommittee, I am particularly interested in this
morning's joint hearing.
At a Workforce Protections Subcommittee hearing earlier
this year, we heard from a number of witnesses as to policy
issues surrounding the potential misclassification of workers
as contractors rather than employees.
I would highlight one point that I think all of our
witnesses and, indeed, many of our members agreed upon. This
point was put particularly well by Mr. Richard Shavell, who had
testified on behalf of the Associated Builders and Contractors.
He testified, ``It is critical to distinguish between
wrongful classification and misclassification. In construction,
wrongful classification by a competitor can result in a
competitive disadvantage to other contractors. Contrast this
with misclassification, which can easily occur because current
law and rules are extremely complex. Those companies not paying
employee taxes or worker compensation by wrongful
classification can undercut the competition by offering lower
bids.
``ABC in no way condones intentional misclassification by
businesses that shirk their duties to society and their
workers. We endorse a level playing field for all businesses
and workers. For those workers who are faced with improper
misclassification, we believe they should be accorded every
opportunity to have their financial situation corrected.''
I think that all of us here this morning share that view:
that the wrongful classification of workers should not be
tolerated. Where we may differ is in whether and how the law
currently allows, if not outright condones, confusion by
subjecting employers to a multitude of different tests under a
multitude of different statutes.
Perhaps that is a good question for today's hearing and one
that I certainly hope that we are going to get to.
I would also point out that a number of witnesses at our
hearing back in March, both Democrats and Republicans, made
plain their view that our focus should not be on amending the
underlying substantive laws, but rather, focusing on
enforcement and, in particular, targeted enforcement.
One witness, Ms. Catherine Ruckelshaus, the director of the
National Law Employment Project, put it very succinctly when
she testified, ``The laws are sufficiently broad and
sufficiently define 'employee' to cover most of the people I
have been talking about,'' said she, ``and most of the people
that my co-presenters have been discussing. It is really not a
question of changing the law, as much as enforcing the laws
that are on the books and doing it more strategically to plug
up these loopholes.''
And in that light, I am particularly pleased to welcome our
first witness, Paul DeCamp, the administrator of the Department
of Labor's Wage and Hour Division. I know the chairman will
reintroduce him.
The Wage and Hour Division is the lead agency tasked with
administering our nation's wage and hour laws and one of a
number of federal agencies charged with ensuring workers are
correctly classified. I am particularly interested in hearing
how the department has been strategically addressing the issue
of worker classification in a targeted way.
I look forward to Mr. DeCamp presenting to us the
challenges the department faces in doing so and offering any
suggestions as to how we may better assist the department in
its enforcement efforts.
Again, I welcome all our witnesses, and I yield back.
[The statement of Mr. Kline follows:]
Prepared Statement of Hon. John Kline, Ranking Republican Member,
Subcommittee on Health, Employment, Labor, and Pensions
Good morning, and welcome to our distinguished panel of witnesses.
As a member of the Workforce Protections Subcommittee, and as
Ranking Member of the Health, Employment, Labor, and Pensions
Subcommittee, I am particularly interested in this morning's hearing.
At a Workforce Protections Subcommittee hearing earlier this year,
we heard from a number of witnesses as to policy issues surrounding the
potential misclassification of workers as ``contractors'' rather than
``employees.'' I would highlight one point that I think all of our
witnesses--and indeed, many of our Members--agreed upon. This point was
put particularly well by Mr. Richard Shavell, who testified on behalf
of the Associated Builders and Contractors. As Mr. Shavell testified,
it is critical to distinguish between wrongful classification and mis-
classification. In construction, wrongful classification by a
competitor can result in a competitive disadvantage to other
contractors. Contrast this with misclassification, which can easily
occur because current law and rules are extremely complex. Those
companies not paying employee taxes or worker' compensation by wrongful
classification can undercut the competition by offering lower bids. ABC
in no way condones intentional misclassification by businesses that
shirk their duties to society and their workers. We endorse a level
playing field for all businesses and workers. For those workers who are
faced with improper misclassification we believe they should be
accorded every opportunity to have their financial situation corrected.
I think that all of us here this morning share that view--that the
wrongful classification of workers should not be tolerated. Where we
may differ is in whether and how the law currently allows, if not
outright condones, confusion by subjecting employers to a multitude of
different tests under a multitude of different statutes. Perhaps that
is a good question for today's hearing, one that I hope our witnesses
will address.
I would also point out that a number of witnesses at our hearing
back in March,--both Democrat and Republican--made plain their view
that our focus should not be on amending the underlying, substantive
laws, but rather focusing on enforcement, and in particular, targeted
enforcement. One witness, Ms. Catherine Ruckelshaus, the Director of
the National Law Employment Project, put it very succinctly when she
testified:
The laws are sufficiently broad and sufficiently define employee to
cover most of the people I have been talking about and most of the
people that my co-presenters have been discussing. It is really not a
question of changing the law as much as enforcing the laws that are on
the books and doing it more strategically, to plug up these loopholes.
In that light, I am particularly pleased to welcome our first
witness, Paul DeCamp, the Administrator of the Department of Labor's
Wage and Hour Division. The Wage and Hour Division is the lead agency
tasked with administering our nation's wage and hour laws and one of a
number of federal agencies charged with ensuring workers are correctly
classified. I am particularly interested in hearing how the Department
has been strategically addressing the issue of worker classification in
a targeted way. I look forward to Mr. DeCamp presenting to us the
challenges the Department faces in doing so and offering any
suggestions as to how we may better assist the Department in its
enforcement efforts.
I welcome each of our witnesses this morning, and yield back my
time.
______
Chairman Andrews. Thank you, Mr. Kline.
When she assumed the chairmanship of the Workforce
Protections Subcommittee, Chairwoman Woolsey launched a
vigorous effort to regenerate oversight and legislative review
of the laws that protect people in the workplace. She has done
some outstanding work already on public-sector employee safety.
She has helped to guide through some important legislation
already in that area. And I am honored to share this joint
hearing with her today.
The gentlewoman from California.
Ms. Woolsey. Thank you, Mr. Chairman.
And welcome to all of our witnesses.
This is going to be a very useful, productive joint hearing
this morning.
As you know, and as the chairman said, the Workforce
Protections Subcommittee held a hearing on this very important
issue of misclassification of workers as independent
contractors in March.
It seems like just yesterday, right, Mr. Chairman?
And we are really pleased to be here with this joint
committee because we are going to continue to look at the
issue. It became more important, not less important, after our
first hearing.
Today, we will have the opportunity to hear from the
administration. And we will hear from others, also, about this
serious problem. And it is a problem that hurts our workers,
but not only our workers, but also honest contractors and all
of society as states and federal governments lose billions of
dollars in lost revenues by this misclassification.
After the last hearing, Mr. Andrews and I wrote a letter to
Department of Labor asking for information about the
misclassification. We got the department's response. It was
just a little over a week ago, in time for this hearing. Thank
you.
And I am pleased that Mr. DeCamp is here to present answers
to the questions that we asked.
But I have some very serious reservations about whether the
department is really dealing with this problem in an adequate
manner. And what we need to find out today is: if the
department can't deal with it, what does the Congress need to
do to make it possible for the overreaching agency to do the
right thing?
And, at the outset, I would like to say that there are true
independent contractors and that this is not about them. Nobody
questions that. This is about the countless workers who are
really employees but have been deliberately misclassified by
employers because those employers want to avoid the costs
associated with an employee, such as workers' compensation
insurance, payment into Social Security and Medicare systems.
The number-one reason that employers deliberately
misclassify is to avoid paying workers' compensation and
otherwise avoid workplace injury and disability disputes. So if
a worker gets seriously injured--and make no mistake, this
practice usually affects mostly low-income workers--there is no
income that he or she can go to when they can't work. And there
is likely no health insurance to help with the medical
expenses. But the employer lowers its costs.
In fact Mr. Wade Horn, a contractor who testified at the
hearing in March, said that when companies misclassify their
employees, they expect to reduce their labor costs between 15
and 20 percent.
In March, our witnesses were principally from the building
trades. They told us how widespread miscalculation is in that
industry. But we know for certain misclassification occurs
across a wide range of industries.
For example, Representative Stupak, chair of the
Subcommittee on Oversight and Investigations on the Energy and
Commerce Committee, has been investigating the widespread
misclassification of jockeys as independent contractors.
I am very glad that Mr. Williams is here today to testify
about his experiences with FedEx. My own state of California is
waging a battle against FedEx's practice of misclassifying its
couriers as independent contractors. And in the year 2004, the
California Employment Development Department issued a payroll
tax assessment of $7.8 million against the company. And they
did that because it failed to pay payroll taxes for appropriate
employees.
In California, misclassification is an enormous problem.
But we are an enormous state. The California insurance
commissioner has reported that 30 percent of employers in the
state do not carry workers' compensation insurance, and that is
one of the sure signs that those employers' workers are being
treated as independent contractors.
This problem has so concerned my state that there is a bill
in the assembly, State Assembly Bill 622, which, if passed,
will make willful misclassification illegal. And it will assess
penalties of up to $15,000 per violation and up to $25,000 for
those employers who have engaged in a pattern of practice of
misclassification. Our very own attorney general has started a
program to protect vulnerable workers from unscrupulous
employers throughout this process.
But, unfortunately, other states are having problems with
misclassification, as well. And it is a national problem. It
has far-reaching consequences.
And I have great confidence that we are working to find out
why we can't do something about it. But first we have to find
out what we need to do about it.
Thank you very much, Mr. Chairman.
[The statement of Ms. Woolsey follows:]
Prepared Statement of Hon. Lynn C. Woolsey, Chairwoman, Subcommittee on
Workforce Protections
Thank you Chairman Andrews and welcome to all of the witnesses for
joining us here today.
As you know, my Workforce Protections Subcommittee held a hearing
on this very important issue of misclassification of workers as
independent contractors in March.
And I am very glad that--through this Joint Subcommittee hearing--
we are continuing to look at this issue.
Today we will have an opportunity to hear from the Administration
and others about this serious problem, which hurts not only our
workers, but also honest contractors and all of society as state and
federal governments lose billions of dollars in lost revenues.
After the last hearing, Mr. Andrews and I wrote a letter to DOL
asking for information about misclassification.
We got the Department's response a little over a week ago. It was a
late reply but in time for this hearing.
I am very pleased that Mr. DeCamp from DOL is present to answer
questions about DOL's response because I have serious reservations
about whether the Department is dealing with this problem in an
adequate manner.
At the outset let me say that there are true independent
contractors out there--this is not about them.
This is about the countless other workers who are really employees
but have been deliberately misclassified by employers because those
employers want to avoid the costs associated with an employee, such as
workers compensation insurance and payment into the Social Security and
Medicare systems.
So if a worker gets seriously injured--and make no mistake, this
practice affects mostly low-income workers--there is no income when he
can't work and likely no health insurance to help with medical
expenses.
But the employer lowers its costs.
In fact, Mr. Wade Horn, a contractor who testified at the hearing
in March said that when companies misclassify their employees, they
expect to reduce their labor costs between 15 and 20 percent.
In March, our witnesses were principally from the building trades
and they told us how widespread misclassification is in that industry.
But misclassification occurs across a wide range of industries.
For example, Representative Stupak, Chair of the Subcommittee on
Oversight and Investigations on the Energy and Commerce Committee has
been investigating the widespread misclassification of jockeys as
independent contractors.
I am very glad that Mr. Williams is here to testify about his
experiences with Fed-Ex.
My own state of California is waging a battle against Fed Ex's
practice of misclassifying its couriers as independent contractors.
And in 2004, the California Employment Development Department
issued a payroll tax assessment of $7.8 million against the Company
because it failed to pay payroll taxes on employees that they had
misclassified as independent contractors.
In California, misclassification is an enormous problem.
The Insurance Commissioner has reported that 30% of employers in
the State do not carry worker's compensation insurance--one of the sure
signs that those employers' workers are being treated as independent
contractors.
This problem has so concerned my State that there is a bill in the
State Assembly, S.B. 622, which if passed will make willful
misclassification illegal and assesses civil penalties of up to $15,000
per violation and up to $25,000 per violation for those employers have
engaged in a pattern or practice of misclassification.
And our Attorney General has started a program to protect
vulnerable workers from unscrupulous employers.
I am confident that this hearing will bring us closer to solutions
to it.
______
Chairman Andrews. Thank you, Madam Chairman. I appreciate
it.
I will now turn to the ranking member of the Workforce
Protections Subcommittee, our friend from South Carolina, Mr.
Wilson?
Mr. Wilson. Thank you, Mr. Chairman, and thank you, Madam
Chairman, for conducting this hearing today.
Good morning. In the interest of moving on to hear directly
from our distinguished panel of witnesses this morning, I will
keep my remarks brief.
I look forward to hearing from our distinguished witnesses
and, in particular, welcome a discussion of the current state
of law as it relates to the classification of workers as
employees or independent contractors.
As I said at our subcommittee's last hearing on this topic,
a point borne out by the testimony of witnesses at that
hearing, I expect that there may be many areas in which we
agree and areas in which we disagree. I was particularly
interested to note at our last hearing that there was
significant agreement among the witnesses, Democrat and
Republican, as to a number of points.
First, that the law relating to the classification of a
worker as a contractor or employee is complicated, often
confusing and, in many instances, not at all clear as to the
proper outcome.
Second, that no one defends the practice of an employer
purposefully or intentionally misclassifying workers.
Third, many agree that the laws, as written, are adequate
to address these concerns. And many agree that our focus should
be not on changing the laws or statutes we have on the books.
And finally, there was general agreement that the issue
here may be one of enforcement, particularly targeted
enforcement.
In that light, I especially welcome Wage and Hour
Administrator Paul DeCamp. And I look forward to him telling us
what his agency, which is but one of many charged with
administrating the laws relating to contractor status, is doing
to ensure that the law is being followed and administrated
properly.
So with that in mind, I look forward to today's hearing and
the testimony of our two panels of witnesses. And I yield back
my time.
[The statement of Mr. Wilson follows:]
Prepared Statement of Hon. Joe Wilson, Ranking Republican Member,
Subcommittee on Workforce Protections
Good morning. In the interests of moving on to hear directly from
our distinguished panel of witnesses this morning, I will keep my
remarks brief.
I look forward to hearing from our distinguished witnesses, and in
particular welcome a discussion of the current state of the law as
relates to the classification of workers as employees or independent
contractors.
As I said at our Subcommittee's last hearing on this topic--a point
borne out by the testimony of witnesses at that hearing--I expect that
there may be areas in which we agree, and areas in which we disagree. I
was particularly interested to note at our last hearing that there was
significant agreement among witnesses, Democrat and Republican, as to a
number of points:
First, that the law relating to the classification of a worker as a
contractor or employee is complicated, often confusing, and in many
instances not at all clear as to the proper outcome;
Second, that no one defends the practice of an employer
purposefully or intentionally misclassifying workers;
Third, that the laws, as written, are adequate to address these
concerns, and our focus should not be on changing the laws or trying to
``create'' a failure in the statutes we have on the books;
And finally, there was agreement that the issue here may be one of
enforcement, particularly targeted enforcement. In that light, I
especially welcome Wage and Hour Administrator DeCamp, and look forward
to him telling us what his agency--which is but one of many charged
with administering the laws relating to contractor status--is doing to
ensure that the law is being followed and administered properly.
So with that said, I look forward to today's hearing and the
testimony of our two panels of witnesses and yield back my time.
______
Chairman Andrews. I thank Mr. Wilson.
And we welcome Mr. DeCamp to the subcommittees.
Mr. DeCamp, your written statement is accepted into the
record, without objection, in its entirety. We would ask if you
could summarize your written remarks in about 5 minutes.
I think you have testified here before and know the light
system. When the yellow light goes on, you have about a minute
left, and when the red light goes on, we would ask you to
summarize.
Paul DeCamp is the administrator of the Wage and Hour
Division of the United States Department of Labor, a post he
has held since 2006. Prior to his appointment to this position
by President Bush, Mr. DeCamp was a senior policy advisor to
the assistant secretary of labor for employment standards.
He also practiced law with the firm of Gibson, Dunn and
Crutcher in Los Angeles and here in Washington, where he
focused on employment matters. Mr. DeCamp received his B.A.
from Harvard and his J.D. from Columbia University. But he
overcame these liabilities----
[Laughter.]
He clerked for the Honorable Alan E. Norris for the Sixth
Circuit Court of Appeals.
Mr. DeCamp, we are delighted to have you with us this
morning. Welcome to the subcommittees.
STATEMENT OF PAUL DECAMP, ADMINISTRATOR OF THE WAGE AND HOUR
DIVISION, U.S. DEPARTMENT OF LABOR
Mr. DeCamp. Thank you.
Chairman Andrews, Chairwoman Woolsey, Ranking Members
Wilson and Kline, and distinguished members of the
subcommittees, thank you for the opportunity to appear before
you today to discuss the misclassification of workers as
independent contractors.
This type of misclassification can lead to a number of
harms. Misclassified workers may find themselves without access
to employers' benefits plans and without the protection of
workers' compensation or unemployment insurance.
Businesses that comply with the law may be at a significant
disadvantage with respect to competitors who elect to lower
their operating costs by calling their employees independent
contractors.
And the federal and state governments potentially lose out
on tax revenues, at least to the extent that the misdesignated
workers do not pay the taxes that their employers should have
withheld.
One important point to understand at the outset is that
misdesignation of employees as independent contractors is not,
in and of itself, a violation of any of the approximately 70
laws that the Wage and Hour Division enforces.
If, for example, an individual works 40 or fewer hours in a
work-week and receives compensation at least equal to the
minimum wage, there is no violation of the Fair Labor Standards
Act--the law that accounts for more than 80 percent of the
agency's cases--even if the worker is misdesignated.
Therefore, the Wage and Hour Division historically has not
focused resources on the independent contractor issue, per se.
Instead, we look for the violations of our laws, such as
failure to pay the required minimum wage or overtime, or the
improper denial of family or medical leave, or the unauthorized
transportation of migrant farm workers.
Approximately 60 percent of the Wage and Hour Division's
enforcement centers on low-wage industries, where violations of
the laws we enforce tend to be the most prevalent. The agency
devotes more than one-third of its enforcement resources to
nine of those industries, including such sectors as janitorial
services, construction and landscaping. The agency's experience
has been that many of these same low-wage industries tend to
have a high incidence of misdesignation of employees as
independent contractors.
In short, the Wage and Hour Division vigorously protects
workers whose rights may be jeopardized by misdesignation as
independent contractors. We do so, however, by focusing on
their rights under the federal wage and hour laws.
The Wage and Hour Division's enforcement work represents a
combination of investigating worker complaints and conducting
investigations on the agency's own initiative in the absence of
a complaint.
The agency recognizes that low-wage workers, among others,
are often unlikely to report wage and hour violations for a
variety of reasons. Therefore, we supplement our complaint-
based investigations with strategically targeted cases directed
at those industries and employers where we have reason to
believe violations are going unreported.
Every year, the agency devotes extensive management
resources to our annual strategic planning process, which is
how we determine the types of issues and industries to focus on
in the coming year. Those directed cases constitute around 20
percent of our caseload.
We also make available to workers and employers a
significant amount of information regarding the issue of
employee versus independent contractor. On our Web site, we
have fact sheets that explain the applicable rules. Much of
this information is available in Spanish, Chinese, Thai, and
Vietnamese.
We also have an interactive advisor on our Web site that
allows a user to answer some questions and then receive
guidance regarding how a worker should be classified. Our Web
site also includes a chapter from our field operations handbook
regarding, among other things, the employment relationship.
In addition, the agency conducts approximately 2,000
training and outreach events each year. When we address workers
or businesses in industries where misdesignation as independent
contractors is a significant concern, we provide information on
that issue.
One final point that I would like to discuss involves
communication with other government entities. The Wage and Hour
Division is very reluctant to provide information to other
agencies where doing so might jeopardize our enforcement
mission.
In order to be able to protect the wage and hour rights of
all workers, we need information from workers regarding
violations. If workers are hesitant to report violations to us,
it becomes much more difficult to maintain the integrity of the
labor standards set forth in our statutes.
Many of the employers we investigate are in low-wage
industries that employ ever-increasing numbers of undocumented
workers. We, therefore, need to be very careful to avoid taking
steps that would have the unintended consequence of deterring
those workers from seeking our assistance.
If workers believe that they may be worse off for having
contacted the Wage and Hour Division, we will not hear from
them. And then workers lose, as a result. It is important to
our agency that we avoid that outcome.
Thank you. And I will be happy to answer any questions that
the subcommittees may have.
[The statement of Mr. DeCamp follows:]
Prepared Statement of Paul DeCamp, Administrator of the Wage and Hour
Division, U.S. Department of Labor
Chairwoman Woolsey, Chairman Andrews, Ranking Members Wilson and
Kline, and distinguished members of the Subcommittees: Thank you for
the opportunity to discuss the efforts of the Department of Labor's
Wage and Hour Division (WHD) to promote compliance with the Nation's
labor standards laws. WHD has a strong record of enforcement on behalf
of workers in this country, including employees who have been
misclassified as independent contractors.
WHD employs a number of strategies for ensuring that employees are
paid in accordance with the laws WHD enforces. Many of these strategies
address worker classification issues. Before discussing these
strategies, however, it is important to understand the backdrop against
which these strategies are implemented. The misclassification of an
employee as an independent contractor is not itself a violation of the
Fair Labor Standards Act (FLSA) or the many other laws that WHD
enforces. The Government Accountability Office (GAO) acknowledged this
fact in its 2006 audit, Employment Relationships: Improved Outreach
Could Help Ensure Proper Worker Classification (GAO-06-656). In that
report, GAO also accurately noted that, despite the fact that such
misclassification is not a violation of the FLSA, WHD nevertheless
detects and addresses the issue of employees who have been
misclassified as independent contractors in its investigations of
employer compliance with the FLSA. It is critical to understanding
WHD's approach to enforcing the provisions of the various statutes for
which it is responsible that one also understand that the act of
misclassification is not a violation of the FLSA.
Determining An Employment Relationship Under The Federal Wage And Hour
Laws
Under most labor standards laws, an employer-employee relationship
must be established in order for the law's provisions to apply. The
FLSA, which establishes minimum wage, overtime, and child labor
protections, defines ``employee'' more broadly than virtually any other
federal statute. In cases such as Rutherford Food Corp. v. McComb, 331
U.S. 722 (1947), United States v. Silk, 331 U.S. 704 (1947), and
Bartels v. Birmingham, 332 U.S. 126 (1947), the U.S. Supreme Court
provided guidance for determining whether a worker is an employee under
the FLSA, and those rulings continue to inform how WHD and the courts
analyze the issue today. The Court provided that an employee, as
distinguished from a person who is engaged in a business of his or her
own (i.e., an independent contractor), is one who, as a matter of
economic reality, is dependent on the business that he or she serves.
The Court further indicated that there is no single rule or test
for determining whether an individual is an independent contractor or
an employee for purposes of the FLSA. Instead, the determination must
be based on the totality of the circumstances and not on a single
criterion. The relevant factors include the following:
The extent to which the services rendered are an integral
part of the principal's business;
The permanency of the relationship;
The amount of the alleged contractor's investment in
facilities and equipment;
The nature and degree of control by the principal;
The alleged contractor's opportunities for profit and
loss;
The amount of initiative, judgment, or foresight in open
market competition with others required for the success of the claimed
independent contractor; and
The degree of independent business organization and
operation.
See, e.g., Silk, 331 U.S. at 716; Brock v. Mr. W Fireworks, 814
F.2d 1042 (5th Cir. 1987); Donovan v. DialAmerica Mktg., 757 F.2d 1376
(3d Cir. 1985).
I mention these specific factors for two reasons. First, all WHD
investigators must use these criteria to establish an employment
relationship to pursue remedies on behalf of workers under most of the
statutes the agency enforces, including the FLSA and the Family and
Medical Leave Act (FMLA). As a consequence, investigators will, at
various stages throughout the investigation, examine how an employer
classifies its workers. For example, investigators will ask for
information during the initial conference with an employer to establish
the employer's classification practices. Investigators will review
records including without limitation payroll records, cash
disbursements journals, check registers, and 1099s to ensure that all
workers are identified and that any worker not listed on the payroll is
properly compensated. As a normal part of investigations, WHD
investigators will tour an employer's establishment and question
workers about their pay, their duties, and their working conditions, as
well as those of their co-workers, looking for, among other things,
potentially misclassified employees. As GAO noted in its audit, when
WHD investigators suspect that employers are not properly classifying
workers as employees, the investigator will pursue several avenues of
investigation to ascertain whether a violation of a wage and hour
statute has occurred.
The second reason for highlighting the FLSA employment relationship
factors is to distinguish these criteria from the test used by the
Internal Revenue Service (IRS) in applying the common law ``right to
control'' test often used by the courts and from the definitions and
standards set forth in other statutes. WHD acknowledges that the issue
of employee misclassification raises a number of concerns wholly
outside the responsibility or authority of WHD. The misclassification
of workers may affect some state programs such as worker compensation
and unemployment insurance programs, in addition to other federal and
state worker protection statutes. Finally, misclassification issues may
involve the IRS and the Social Security Administration.
Consequently, in establishing an employment relationship under the
FLSA, there may be instances where WHD investigators identify potential
misclassification issues of other programs or statutes. WHD has no
authority or expertise, however, to interpret or to enforce provisions
outside its jurisdiction. In many instances, the misclassification of a
worker under the FLSA will not, given the broad interpretation of the
FLSA, result in a violation of another statute or program.
WHD Strategies For Enforcing Labor Standards Provisions Relating To
Independent Contractor Issues
The labor standards that WHD enforces provide basic protections for
all workers in this country. Although they differ in scope, all of the
statutes enforced by WHD are intended to protect the welfare of the
Nation's workforce and to ensure fair compensation for work performed.
Minimum wage, overtime, and child labor cases constitute the majority
of WHD's enforcement responsibilities. FLSA cases represent
approximately 84 percent of all WHD cases, and FMLA investigations an
additional one percent. The Migrant and Seasonal Agricultural Worker
Protection Act (MSPA), the Davis-Bacon Act (DBA), and the McNamara-
O'Hara Service Contract Act (SCA) are other key statutes enforced by
WHD.
Misclassified workers may be identified during the course of
investigations that cover many provisions and statutes enforced by WHD.
For example, WHD investigators must establish an employment
relationship under the FMLA and most of the MSPA provisions.
Investigations into compliance with these program areas necessarily
contain an element of inquiry into the status of workers as employees.
Under DBA and SCA, however, WHD does not need to establish such an
employment relationship. According to the statutory language of the
DBA, laborers and mechanics are entitled to prevailing wage rates
``regardless of the contractual relationship that is alleged to exist
between a contractor or subcontractor and such persons.'' Similar
language applies to service employees performing on Federal service
contracts. Under these two statutes, the individuals performing work
are entitled to prevailing wage and fringe benefit compensation even if
they are classified as independent contractors.
Because erroneous classification of an employee as an independent
contractor is not itself a violation of the federal wage and hour laws,
WHD does not maintain data regarding how many cases present that issue.
Thus, WHD cannot provide statistics regarding the prevalence of
misclassification. However, there have been instances in which a
misclassification resulted in a minimum wage or overtime violation.
These cases clearly demonstrate WHD's attention to potential violations
that may result from the improper designation of workers. The following
are some recent examples:
In November 2006, WHD collected nearly $75,000 in back
wages for 76 employees of an Ohio construction contractor that had
misclassified its workers as independent contractors.
In October 2006, a Houston construction company paid
nearly $130,900 in back wages to 81 employees who had been
misclassified.
The Department sued a Houston drywall company in August
2006, to recover over $500,000 in back wages on behalf of misclassified
employees who were working to rebuild the Mississippi Gulf Coast
casinos following Hurricane Katrina.
In a similar case involving the employees working to
rebuild the Gulf Coast region, WHD collected over $362,000 in back
wages from three construction firms that had misclassified employees as
independent contractors.
In March 2006, the Department sued a Glendale, California,
janitorial company for $900,000 in back wages that resulted from the
company's improper practice of classifying the workers as independent
contractors.
WHD has, for a number of years, prioritized its statutory
enforcement responsibilities to maximize protections for workers,
including the most vulnerable in the workforce: low-wage, immigrant,
and young workers. WHD receives approximately 30,000 complaints during
a fiscal year and utilizes approximately 70% to 78% of the program's
enforcement resources to resolve complaints. In addition to its
responsibilities to respond to allegations of noncompliance, WHD has
devoted between 22% and 30% of its enforcement resources to targeted
investigations (i.e., investigation initiated without a complaint), the
focus of which is in low-wage industries that employ large numbers of
vulnerable, low-skilled workers.
These industries, such as construction, janitorial, restaurants,
landscaping, agriculture, garment manufacturing, and health care, are
often characterized by the employment of immigrant workers who are
particularly vulnerable to exploitation, as well as young workers who
are not fully versed in FLSA protections. Investigations in these
industries tend to disclose high rates of FLSA minimum wage and
overtime violations. Moreover, it is the experience of WHD that
undocumented workers, many of whom may have been misclassified as
independent contractors or have been engaged in contingent employment
relationships, account for an increasing percentage of employees in
these industries.
WHD initially focused its low-wage program on the three nationally
targeted industries of garment manufacturing, agriculture, and health
care. While compliance efforts continue in those identified industries,
in FY 2004 WHD began expanding its low-wage program to include a
broader group of identified low-wage industries. Working with external
evaluators, WHD identified approximately 33 low-wage industries in
which workers were most likely to be the subject of a minimum wage or
overtime violation. This research enabled the agency's local and
regional offices to identify and to target in their geographic areas
industries with the most serious compliance issues.
In FY 2006, WHD collected nearly $50.6 million in back wages for
approximately 86,700 workers in nine of the larger group of low-wage
industries, an increase in back wages collected in the same low-wage
industries of over 10% as compared to the previous fiscal year. Over a
third of WHD enforcement resources are attributed to investigations in
nine low-wage industries, which include day care, restaurants,
janitorial services, landscaping, and temporary help. This fiscal year,
WHD is conducting over 100 initiatives in low-wage industries. These
compliance initiatives are concentrated in restaurants, retail,
construction, janitorial, hotels and motels, and health care. WHD
offices in garment manufacturing centers are continuing their
enforcement efforts to increase compliance in that industry. WHD
offices also have enforcement and compliance assistance activities in
agriculture and reforestation. Again, these industries share common
characteristics with the industries in which employees are most likely
to be misclassified as independent contractors.
As a complement to its enforcement activities, WHD has an active
compliance assistance program that takes advantage of opportunities to
educate employers and employees about the laws that it enforces. WHD
outreach to the employer and employee community is a critical component
of its overall compliance program because it aims to ensure that
employers have information on the statutory and regulatory requirements
in a clear and concise manner and that employees are versed in their
rights and the remedies available to them. In its 2006 audit, GAO
acknowledged WHD's outreach to workers and to employers on employment
relationship concepts and the agency's procedures for its field staff
in identifying and reporting potential misclassification issues to
other Federal agencies.
Among the examples of compliance assistance information noted by
GAO is Fact Sheet 13: Employment Relationship Under the Fair Labor
Standards Act (FLSA), which describes the factors involved in
determining whether an individual is an employee under the FLSA and
where to find additional information or help in making such a
determination. This fact sheet is available in Chinese, Korean,
Spanish, Thai, and Vietnamese, as well as English. The Employment
Relationship fact sheet and others like it, including various industry
specific fact sheets, are available on WHD's web site. The Employment
Laws Assistance for Workers and Small Businesses (elaws) FLSA Advisor,
also on the web site, is another tool that provides an interactive
mechanism for employers and workers to determine whether a worker is an
employee under the FLSA.
In addition to these electronic and printed materials, WHD field
personnel participate in a variety of outreach activities such as
seminars, training programs, and community-based activities, including
Spanish-language radio and television programs. WHD distributes worker
rights cards to day laborers, health care workers, garment workers, and
farmworkers, among others, in order to inform workers of their rights
and to prevent misclassification from happening in the first place.
Justice and Equality in the Workplace Program
To further increase awareness of relevant labor laws, to encourage
greater employer compliance with those laws, and to assist vulnerable
workers in achieving the protections to which they are entitled, WHD
has also developed strategic partnerships and collaborations with
businesses and trade associations; labor unions; federal, state and
local government agencies; faith- and community-based organizations;
and foreign agencies. Just one example is the established in Houston,
Texas, to educate low-wage immigrant and non-immigrant workers about
their rights under federal law and to bring the employers of these
workers into compliance through education and enforcement.
In summary, WHD balances three complementary strategies--compliance
assistance, partnerships and collaborations, and strong complaint-based
and targeted enforcement--to promote and achieve compliance on behalf
of all employees, including those who have been misclassified as
independent contractors.
WHD Response To GAO Recommendations To Improve Outreach To Facilitate
Proper Worker Classification
As mentioned previously, GAO examined WHD's role in identifying and
addressing instances in which workers were misclassified as independent
contractors. While recognizing WHD's efforts in addressing instances of
worker misclassification under the FLSA, GAO had two recommendations
for WHD. Both have been addressed by WHD.
First, GAO recommended that because WHD's enforcement program was
primarily complaint-based, the FLSA poster should be modified to
provide additional contact information. This revision was intended to
facilitate the reporting of possible misclassification complaints that
also alleged minimum wage or overtime violations. WHD agreed with the
recommendation, and the new FLSA poster prominently displays the
agency's toll-free number and web site address. Calls to the toll-free
number are answered by call center staff who refer complainants to the
appropriate WHD local office. The call center has Spanish-speaking
customer service representatives and an interpreter service that
supports 150 languages.
Second, GAO recommended that WHD evaluate the extent to which
misclassification cases identified through FLSA investigations are
referred to the appropriate federal or state agency potentially
affected by employee misclassification, and take action to make
improvements as necessary. GAO also suggested that WHD build upon
efforts by its district offices currently engaged in such referrals.
Finally, GAO indicated that any referral of cases should include
notifying the employer that the misclassification case has been
forwarded to the appropriate agency.
WHD agreed with GAO that there is value in sharing potential
employee misclassification with appropriate federal and state programs.
As a result, WHD reviewed its internal processes for referral of
potential employee misclassification to other agencies with all first-
line field managers during a national managers training conference in
May 2007. To ensure that all WHD district offices refer employee
misclassifications that could lead to potential violations of laws
enforced by other agencies, the first-line managers were reminded to
follow the agency's longstanding Field Operations Handbook instructions
and to refer such violations using the established form WH-124.
We believe that an explicit policy of automatic referrals to all
other agencies, however, could have an adverse impact on WHD's mission
and ultimately harm those workers whom the agency is tasked with
protecting. If it becomes common knowledge that WHD routinely refers
potential violations to some agencies it would hinder the agency's
ability to persuade employees to report violations of the wage and hour
laws or otherwise voluntarily provide workplace information. Moreover,
employers would be less likely to produce copies of written documents
or records if they believed such documents were going to other law
enforcement authorities for reasons unrelated to the labor standards
investigation. As a result, WHD would be required to compel the release
of information through the courts, a timely and costly means of
enforcing federal labor standards. In addition, because the definition
of ``employee'' under the FLSA is more inclusive than the definition
used in many other statutes, a determination of misdesignation of an
employee as an independent contractor by WHD may not be applicable for
other purposes. Accordingly, WHD disagrees with GAO that referral is
appropriate in all instances and believes that determinations as to
whether to refer a matter to another agency must be made after
considering the particular circumstances. In terms of the worker
protections that WHD is trying to ensure, there are tradeoffs in
reporting to other agencies, and whether or not reports are made
represents the outcome of a balancing of benefits and costs for the
workers the agency is trying to help.
WHD also does not agree with GAO's recommendation that employers be
notified when WHD refers potential misclassification cases involving
laws not enforced by the WHD to another agency. As WHD explained, this
type of process would place WHD staff in the untenable position of
explaining or defending a referral based upon interpretations of laws
concerning which WHD has neither expertise nor interpretive or
enforcement authority.
Future WHD Compliance Activities
Over the last several years, WHD has planned a number of compliance
initiatives in low-wage industries to address the more common
violations, such as off-the-clock violations and misclassification of
executive, administrative, and professional employees as exempt
personnel. In support of its compliance priorities in low-wage
industries, WHD's FY 2008 performance plan focuses on addressing the
violations that may arise from employment relationships not designated
as such, especially those involving contingent workforces,
misclassified employees, and subcontracting structures. Each of the
agency's regional and local district offices' low-wage initiatives will
include compliance activities in at least one of the low-wage
industries in which independent contractor misclassifications are
common. WHD is committed to promoting compliance in low-wage industries
and to ensuring that the designation of workers as independent
contractors does not result in violations of the labor standards laws
that we enforce.
Madam Chairwoman, Mister Chairman, this concludes my prepared
remarks. I will be happy to answer any questions that you or the
Members of the Subcommittee may have.
______
Chairman Andrews. Thank you very much, Mr. DeCamp. We
appreciate it.
On page four of your testimony, you indicate that the
division receives about 30,000 complaints a year. And then the
resolution of those complaints absorbs between 70 and 78
percent of your enforcement resources. Between 22 and 30
percent of your enforcement resources are to targeted
investigations.
How many targeted investigations do you do in a year?
Mr. DeCamp. I think it varies, depending on the year,
depending on the resources available, but somewhere in the
neighborhood, I believe, of 7,000 to 10,000 a year.
Chairman Andrews. Of the 7,000 to 10,000 a year, how many
are for violations of the Fair Labor Standards Act?
Mr. DeCamp. That is about 80 percent of our caseload, 5,000
to 6,000 probably.
Chairman Andrews. Okay. So it would be 80 percent of that?
Mr. DeCamp. Or more.
Chairman Andrews. And a precondition to pursuing an FLSA
claim is that there be an employer-employee relationship,
correct?
Mr. DeCamp. Correct.
Chairman Andrews. So of those FLSA investigations that you
have conducted, how many of them yield the result that there is
a misclassification of an employee who should be under FLSA but
isn't?
Mr. DeCamp. We don't really track the cases that way
because independent contractor versus employee is a coverage
issue, rather than a violation issue. So we haven't
historically kept records of how the violations came about.
Chairman Andrews. I would think if you did some data-mining
you would be able to figure that out, right, because if you
follow up on an FLSA violation claim, by definition, the person
is an employee, right? You wouldn't be pursuing the claim if
you conclude the person is not an employee.
Mr. DeCamp. If we get to the end of the investigation and
have concluded that, yes, the person is an employee, then, yes,
we would have found that person is covered.
Chairman Andrews. So some subset of those investigations
that you get to the end, you have made a prior determination
that the person is an employee or there has been some dispute
about that, right?
Mr. DeCamp. Yes, except that information isn't necessarily
reflected in the case file or in the records.
Chairman Andrews. So if one of your inspectors goes into an
employer and says, ``These 12 people are not being paid
overtime,'' the employer says, ``Well, they are not employees;
they are independent contractors,'' there is nothing in your
case file that would say that that defense was raised?
Mr. DeCamp. There might or there might not be. And it is
not in the computer records, which is the basis from which we
would really pull data together.
Chairman Andrews. Would you favor a statutory change that
would require you to keep that kind of record?
Mr. DeCamp. I take no position on that.
Chairman Andrews. You think it would be a good idea?
Mr. DeCamp. I don't know that it would help our enforcement
mission in terms of protecting the workers.
Chairman Andrews. Well, let us look at this for a moment.
In New Jersey, in 2006, 871 audits of the construction
industry were conducted. And in 41 percent of those cases, the
finding was that there was a misclassification of workers.
Do you have any basis to either agree or disagree with--if
one were to put forth the proposition that that is typical of
across the country, are you in a position to agree or disagree
with that statement?
Mr. DeCamp. I don't know in terms of the specific numbers
whether the New Jersey results would generalize nationwide. But
I would agree, certainly, that in construction, that is a low-
wage industry with a high incidence of misdesignation.
Chairman Andrews. So you think it would be fairly probable
there would be a high incidence of misclassification?
Mr. DeCamp. Yes.
Chairman Andrews. Okay.
Another thing that you say in your testimony repeatedly is
that misclassification of an employee as an independent
contractor is not, in and of itself, a violation of the FLSA,
correct?
Mr. DeCamp. Correct.
Chairman Andrews. Should we make it a violation of the
FLSA?
Mr. DeCamp. Well, it depends on what the policies of the
FLSA are. Currently, the FLSA is about making sure that people
are getting minimum wage and overtime, among other things.
Chairman Andrews. Well, which people?
Mr. DeCamp. Covered employees.
Chairman Andrews. Okay. So if there is a dispute about
systematic misclassification of covered employees, wouldn't it
be logical--if the public policy behind that statute is to say
that people who are in an employer-employee relationship should
get overtime, should get minimum wage, should get the other
protections, wouldn't it be logical to make it one of the
enforcement duties to make that determination?
Mr. DeCamp. Again, it is an issue of whether the workers
have been harmed. If----
Chairman Andrews. Well, they have been harmed, haven't
they? If someone has been misclassified and not being treated
as an employee, and they don't get overtime for their 41st
hour, they have been harmed, right?
Mr. DeCamp. Well, sure. And in that case, we would assert
an overtime violation under the FLSA.
Chairman Andrews. So would you favor making a violation of
the FLSA the misclassification of employees? Is that a good
idea?
Mr. DeCamp. I don't think it is because we already protect
the workers by enforcing their rights to minimum wage and to
overtime.
Chairman Andrews. But how do you protect the workers if
they have been misclassified? Because you just told us that you
don't keep records of that. So if someone had been
misclassified and the investigation was not properly handled,
you wouldn't know, would you?
Mr. DeCamp. If the worker has been misclassified, then we
would assert an employment relationship, and then we would look
to see whether their rights to minimum wage or overtime had
been violated.
Chairman Andrews. But you don't know in how many cases you
have done that because you don't keep track of it. You assume
that your field people have done that, but you don't know, do
you?
Mr. DeCamp. I don't know whether people have kept track of
the independent contractor issue. It is not part of the
computer database.
Chairman Andrews. No. But if an employer has raised a
defense that someone is an independent contractor, not an
employee, your database doesn't let you keep track of how you
have resolved that defense, does it?
Mr. DeCamp. I don't believe that it does.
Chairman Andrews. Okay. Thank you.
I see my time is up. Mr. Kline is recognized for 5 minutes.
Mr. Kline. Thank you, Mr. Chairman.
And thank you, Mr. DeCamp.
We are in these continuing discussions of lawyers and
lawyers here, so I will admit, once again, that I am not one,
so I need to cut down to some sort of basics here.
We heard in the previous hearing, I think one of our
colleagues said that the issue of whether an individual worker
is a contractor or an employee isn't that complex. Would you
agree with that?
Mr. DeCamp. I think it really depends on the situation. I
think there are many employment relationships where it is
perfectly clear who is an employee and who wouldn't be. I think
there are certain industries where it becomes difficult to draw
the lines. I think construction and some of the industries that
we have talked about present some of the more challenging gray
areas.
Mr. Kline. So in some cases it may be, in fact, quite
complex, and others it might be pretty straightforward. I think
Mr. Andrews indicated some cases where it might be pretty
straightforward and others where it is not clear at all. He
talked about people mowing lawns. Well, sometimes that may be
clear that they are an employee, and sometimes it is clear that
they are an independent contractor. So just what industry you
are in and what job you are doing may not be the best
indication of that.
Now, let us get to a couple of things here, because I am
going to run out of time.
In its examination of misclassification cases, the GAO made
a number of recommendations to the Wage and Hour Division. Can
you explain in more detail what these recommendations were and
how the division has responded to GAO's recommendations?
Mr. DeCamp. There were really two recommendations the GAO
made in the report.
One of the recommendations was to include contact
information on our workplace poster that would explain to
workers how to contact the Wage and Hour Division in order to
pursue issues, to present a complaint. We have addressed that
by including the toll-free number for the Wage and Hour
Division on our poster.
The second recommendation was that we regularize, I guess
would be the best way to put it, our processes for
communicating information about potential violations to other
agencies. That is an issue where we continue to examine how
best to approach that issue, because there are pros and cons to
dealing with other agencies, such as IRS or other agencies, as
well.
We need to balance the need to enforce and protect those
other laws that are outside our agency's jurisdiction with the
need to maintain the integrity of our enforcement mission.
Mr. Kline. Okay. Thank you.
Now, I want to go back, because I am still thinking about
this, how your division works. Let us take a for-instance case,
a hypothetical. You have someone working for a company, Company
A, and they are working as an independent contractor. But, in
your judgement, they have been misclassified.
Mr. DeCamp. Okay.
Mr. Kline. You are not concerned with that as a matter of a
violation of law. But if that person who has been misclassified
is making less than minimum wage, for example, what would you
do? What would your department do?
Mr. DeCamp. We would assert a minimum-wage violation and
pursue back wages or any other remedies that were appropriate.
Mr. Kline. Okay. So even though they are an independent
contractor, and neither the worker nor their employer is
breaking a law because of that--or not being held accountable
because of your department--nevertheless, because they were
getting less than minimum wage, your department would take
action. Is that correct?
Mr. DeCamp. Well, we would say that they are being held
accountable for the substantive violation of the Fair Labor
Standards Act, the minimum-wage violation.
Mr. Kline. Right. But the misclassification itself is not
an issue with you, and so, because of that, you are not
recording that. It is not in your computer database.
Mr. DeCamp. Right----
Mr. Kline. But the fact that there was a violation that
they were not paid the minimum wage or perhaps weren't paid
overtime, those the employer is held accountable for. Is that
correct?
Mr. DeCamp. Right. Technically, the Fair Labor Standards
Act does not require that employees be classified one way or
another. It requires that employees who are genuinely employees
under the law receive overtime and receive minimum wage as
required by the law.
Mr. Kline. Okay. I see my yellow light is coming on.
Let me just explore something else with you. You have cases
where people are reluctant to come forward and make a
complaint. You probably also have cases where you have workers
who prefer that status to the employee status and wouldn't come
forward either. Is that correct?
Mr. DeCamp. That is probably fair to assume.
Mr. Kline. Okay. I yield back.
Chairman Andrews. Thank you very much.
I recognize the gentlewoman, the chairperson of the Labor
Standards Subcommittee, Ms. Woolsey, for 5 minutes.
Ms. Woolsey. I feel like we are going backwards, Mr.
Chairman. We get to a point where we know we have a problem.
And we ask the agency, the department who we think should be
responsible for protecting all workers, and all we hear is that
it ain't their responsibility.
So let me ask you who, then, if not the Department of
Labor, is responsible for protecting all employees? And whose
mission is it to investigate? And if we, the Congress, and if
our laws are making it impossible for you to do your job, what
is it we need to change?
Because these answers are not acceptable. The answers to
our questions in the letter were the same kind of gray mushy
mush. It is probably not your fault; maybe you can't be any
clearer than this.
We have to get clear. We know we have workers that are
called one thing and are another. And they are not getting
their full benefit from being a working American.
So give us some guidance. What can we do?
Mr. DeCamp. Well, again, I think the agencies that enforce
the particular statutes are the ones who protect the workers.
For example, the wage and hour rights: The Wage and Hour
Division very aggressively pursues cases in low-wage industries
where misdesignation of independent contractors is common. We
protect those rights to minimum wage, to overtime.
Ms. Woolsey. But you don't know who they are.
Mr. DeCamp. We do.
Ms. Woolsey. You don't keep track of them.
Mr. DeCamp. We do know who they are because we are very
active in the workplaces where these people are working, where
these issues arise. We are active in the industries. So we go
to the worksites. And we don't care how an employer wants to
designate a worker, as an independent contractor or an
employee.
Ms. Woolsey. Well, then let me ask it another way. Why are
there so many of them still? What is wrong with the way you are
doing your jobs?
Mr. DeCamp. I wouldn't say there is anything wrong with the
way we are doing the job. I think it is partly a resource
issue, frankly. I would love to see the agency able to do more
investigations, to have more investigators, to be more active.
And that is mainly a resource constraint.
And, frankly, you know, the administration has asked for
additional resources. And I hope that we will receive
additional resources so that we can do more of these
investigations.
Ms. Woolsey. Well, get back to us about that. That is what
we are trying to find out. What do we need to do?
Mr. DeCamp. Again, I think it is about getting more
investigators on board so that we can do more targeted
investigations. I think targeted investigations in low-wage
industries are the most important tool that we have to try to
protect these workers, because many low-wage workers don't come
to us. They have concerns about immigration status or other
concerns where they don't come to us.
Ms. Woolsey. Well, what does an inspector do? Do they need
to be called into the place of employment? Do they need to
interview the workers? Do they need to interview the employer?
Mr. DeCamp. Right, well, investigations can come about in a
couple of different ways. One is that we may receive a
complaint from a worker or from another interested party, in
which case that might spur an investigation.
Another way is that we may, as part of our strategic
planning process, decide we need to target this industry this
year. And so, without a complaint, we might go into several
workplaces and conduct an investigation, which would involve
examining records, interviewing workers, interviewing all sorts
of personnel to try to figure out what is going on in the
workplace.
Ms. Woolsey. And, well, how long have you been in this
position, Mr. DeCamp?
Mr. DeCamp. Since August of last year.
Ms. Woolsey. Okay. Give us some examples of a success
story, where you made a difference for a misclassified group of
employees.
Mr. DeCamp. Well, the department filed a lawsuit recently
against Benitez Drywall Company, where the issue was
misdesignation of employees as independent contractors. So we
have pursued remedies for them in court.
I have outlined, actually, in the testimony on page four, a
number of recoveries that we have had, or also litigations that
we have commenced.
We have another case in Glendale, California, a janitorial
company, where we sued them for $900,000 in back wages.
Chairman Andrews. Will the gentlelady yield?
Ms. Woolsey. Yes, I will.
Chairman Andrews. Were those two cases initiated by the
department, or were they a result of complaints by workers?
Mr. DeCamp. We actually don't disclose that information
because of concerns about retaliation for the workers involved.
I can tell you that on----
Chairman Andrews. Okay. But if they were initiated by the
department, you wouldn't have that concern, would you?
Mr. DeCamp. I am sorry. I didn't understand.
Chairman Andrews. If the cases were initiated by the
department, you know, that would not be an issue, would it? In
other words, you respond to complaints, and then you initiate
some audits.
Mr. DeCamp. Right.
Chairman Andrews. Were these initiated by audits, or were
they complaints?
Mr. DeCamp. Well, this is what I am saying. If we identify
only the cases that were initiated by the department, that also
identifies which cases were initiated by complaints.
[Laughter.]
Chairman Andrews. Okay.
Ms. Woolsey. Mr. Chairman, may I reclaim my time?
Is there follow-up? Do you know what that industry is doing
now? Do you know what like industries are doing because of the
initial complaint?
Mr. DeCamp. Well, whether or not it is a complaint, in
those cases, they certainly received a lot of publicity. We are
hoping that that has a spillover effect to increase compliance.
But we know we need to remain very active in janitorial
work, in construction, and in these other low-wage industries.
A continuing enforcement presence is going to be critical in
those industries.
Ms. Woolsey. My time has expired.
Chairman Andrews. The chair recognizes the gentleman from
South Carolina, Mr. Wilson, for 5 minutes.
Mr. Wilson. Thank you, Mr. Chairman.
And I want to join with my colleague from Minnesota,
Colonel Kline, and express, as a fellow attorney, how happy I
am to be in the presence of so many fine attorneys.
As we begin this morning, we have heard testimony about the
IRS 20-factor test, as well as other tests used by other
federal agencies and departments.
Can you tell us, are all of these tests consistent? What
factors does IRS look at that Wage and Hour Division does not?
And, perhaps most important, do each of these tests always
produce the same result?
Mr. DeCamp. To take the last question first, my
understanding is that the tests do not necessarily yield the
same result in all cases.
As I mentioned before, there are many situations where the
tests would all come out the same way regarding somebody who is
clearly an employee as an employee.
But in the grayer areas--in construction, in some of these
other types of industries that we are talking about where
compliance is a particular concern--there may be differences in
the outcomes under the tests.
The test that we use under the Fair Labor Standards Act is
the economic realities test, which was set forth by the Supreme
Court in a number of cases beginning in the 1940s. And what
that is really looking at is: Is the worker functioning as an
independent business, or is the worker functioning more as a
traditional employee?
The IRS test--and I am not even certain that they still use
the 20-factor test--is dealing with the common law right-to-
control test, which has a different focus. I am not an expert
in what factors the IRS uses. But I think that, given that they
are looking at these statutes from more of a revenue than a
wage perspective, I suspect that that is more of a focus of
their inquiry. But I can't get into details of the IRS test. I
am not an expert on that.
Mr. Wilson. You had indicated correctly that IRS is looking
at the financial side of it. Is there anything that Wage and
Hour specifically looks at that they wouldn't look at?
Mr. DeCamp. Again, I can talk about what Wage and Hour
looks at, but I am truly not familiar with the way IRS goes
about its task.
Mr. Wilson. Setting aside the issue of lost revenue, what
sorts of damages will an employee who is misclassified be
entitled to? In the absence of minimum-wage or overtime
violations, are there other damages that misclassified workers
suffer? Are these enforced by the Wage and Hour Division?
Mr. DeCamp. Again, with regard to the statutes that the
Wage and Hour Division enforces, our focus is going to be on
minimum wage and overtime primarily under the Fair Labor
Standards Act. We also deal with other types of issues under
the Family Medical Leave Act and the other 70 or so statutes
that we enforce.
Generally, we are talking about back wages, and we may be
talking about liquidated damages. We may be talking about other
remedies that would be available for violations.
But I wasn't sure whether the premise of your question was
that there was no overtime or minimum-wage violation.
Mr. Wilson. Right.
Mr. DeCamp. There may also be other issues that are outside
the scope of Wage and Hour's jurisdiction, such as
contributions to benefits plans, tax payments, you know,
employment insurance payments, unemployment insurance payments,
workers' comp. These may be harms that a worker would suffer if
the worker is misdesignated under those statutes, under the IRS
statutes or under state or other insurance programs.
Mr. Wilson. And it is so important that persons know their
rights. Practically, how does this work? Is there a poster that
is placed at workplaces? How do people know?
Mr. DeCamp. Well, we have a number of pamphlets and
brochures and information on our Web site that helps to clarify
this issue. We have fact sheets on our Web site that explain
the difference between an employee and independent contractor,
focusing on the tests that the Supreme Court has articulated
for our statute.
We have a chapter from our field operations handbook that
explains the employment relationship. We also have a lot of
informational programs that we put on where we will talk to
workers, we will talk to employers, and we will explain these
tests and we will take questions to try to clarify.
We also have, as I mentioned in my opening statement, an
advisor on our Web site, where, by responding to a few
questions, the Web site will give guidance to a worker or to an
employer or anyone else about the proper designation status.
Mr. Wilson. And there are training schools for technical
students that I think would come right into this. Are the
rights explained to students as they are taking courses in
technical schools?
Mr. DeCamp. I don't know about technical schools.
Mr. Wilson. I just think that would be a way to reach
really bright young people who are learning skills.
I yield the balance of my time.
Chairman Andrews. I thank the gentleman for yielding. I
think that is an interesting idea about some training course,
perhaps something we could pursue together in the Higher
Education Bill.
Mr. Wilson. Yes.
Chairman Andrews. That is a good idea.
The chair recognizes the gentleman from Michigan, Mr.
Kildee, for 5 minutes.
Mr. Kildee. Thank you, Mr. Chairman.
Mr. DeCamp, you talked about a lack of resources to respond
to complaints. Is that a lack of depth of response or just a
lack of any response at all to the complaints?
Mr. DeCamp. I think the more resources that we have, the
more investigations we can do and the more thorough we can be
in the investigations that we do.
Mr. Kildee. Are some not investigated at all because of a
lack of resources, or is it a question of the depth of the
response?
Mr. DeCamp. We investigate the complaints we receive. And
then with the resources that are available over and above
responding to the complaints, that is how we do our targeted
investigations.
So the more resources we have over and above those that are
necessary to respond to the complaints we receive, the more
targeted investigations we can do.
Mr. Kildee. Were your budgetary requests this year higher
than what you had received previous years?
Mr. DeCamp. Yes, by about 10 percent.
Mr. Kildee. And did the budget sent to the Congress reflect
that difference?
Mr. DeCamp. Yes, sir.
Mr. Kildee. I thank you very much.
Chairman Andrews. I thank the gentleman for his time.
I recognize the gentleman from Louisiana, Dr. Boustany, for
5 minutes.
Dr. Boustany. Thank you, sir.
I guess we have to admit that the workforce or the
workplace is a very complex and diverse area with regard to
relations among workers and those who deal with the
transactions of, you know, paying out for work and so forth.
And I am struck by the fact that the tests that were talked
about did not always yield the same results.
And so there are a number of variables out here that really
complicate this. And God bless you for trying to figure it all
out. It seems very complicated to me. I am just a heart
surgeon. [Laughter.]
I would also think that workforce shortages which we are
seeing, particularly in the construction area, certainly in my
state of Louisiana and I think nationwide, would also create a
different type of variable in this that would have some impact
on whether somebody is misclassified versus wrongfully
classified.
Because if you have a workforce shortage with plumbers or
carpenters or some group like that, then clearly you will get a
lot of free agents out there trying to do things. So trying to
sort through this would seem to be very difficult.
I wanted to talk to you about the strategic targeting a
little bit and explore that. Could you tell us a little bit
more about the process? You said that you have a strategic
planning session each year. You devote I forget how much of
your resources to that? Could you tell us a little bit more
about the process and how you go through that?
Mr. DeCamp. Well, each year we try to plan our targeted
enforcement priorities for the coming fiscal year. Now, it is
an annual process. It takes several months.
And it is an iterative process where we will get our senior
leadership team involving career professionals, as well as the
leadership of the agency, together in the same room to
brainstorm, largely to talk about, you know, are there
particular industries where we are seeing emerging problems of
compliance? Has there been confusion? Is there willful conduct
in a particular industry or a particular region? Or other types
of issues where we feel that expenditure of resources and
targeted investigations can really affect compliance in a
positive way.
And so we have several sessions over the course of the year
where we refine our plans for targeted enforcement.
And we know that each year we are going to focus on low-
wage industries. We know that each year we are going to focus
on agriculture, child labor and several other areas that
traditionally don't necessarily lead to high volumes of
complaints for a variety of reasons. We know we need to be
active in those areas or else the rights will go unprotected.
And so we try, on an annual basis, to fine-tune those
enforcement plans and figure out, you know, this year is re-
forestation a problem, H2B workers in the Pacific Northwest or
Gulf Coast work, in light of some of the federal government
contracting issues, you know, in and around the Hurricane
Katrina area? And we try to focus on what are the real
compliance problems where expenditure of targeted, directed
resources would be most beneficial.
Dr. Boustany. Thank you.
Have you seen any trends with regard to workforce shortage
in how this is playing out?
Mr. DeCamp. Well, certainly in the Gulf Coast. We have seen
issues in Louisiana, Mississippi, Alabama of a large influx of
inexperienced employers who are not used to the rules, who
don't know the rules and don't necessarily care about the rules
applicable to government contracting or the other federal wage
and hour laws. Many of these folks may be trying to comply with
the law, and many of them don't know the law.
And what we see is--and we see this across the board in
industries--that compliance rates for newer businesses, smaller
businesses, tend to be lower, in part because the wage and hour
laws--not just the FLSA, but across the board--tend to be
fairly voluminous, fairly complicated. And we are dealing with
many employers who haven't yet invested in compliance with wage
and hour laws, and so they make mistakes. And sometimes it is
willful; sometimes it is accidental.
But what we have seen in the Gulf Coast especially is a lot
of contractors who are less like traditional businesses and
more like folks who aggregate teams of workers and bring them
to a worksite to be integrated into an existing contracting
regime.
And so, one thing that we have tried to do to address that
issue is to be more aggressive in asserting joint employment so
that these workers are employees, not just of the contractor
who rounds them up, but of the higher-level contractors on the
project who are actually directing the work.
Dr. Boustany. And one final question. Year to year, have
you seen variances in the results of your targeted enforcement
program, or strategic targeting program, or is it fairly
consistent?
Mr. DeCamp. Well, I think it is fairly consistent in terms
of the violation rates that we see on targeted cases.
We are always looking to improve our targeting so that we
have a higher likelihood that, when we are going to expend
resources and send an investigator into a workplace, that it is
actually a workplace where there is a problem, as opposed to a
workplace where everybody is in compliance. So we are always
looking to improve that.
Dr. Boustany. Thank you.
And, Mr. Chairman, I would submit maybe there is an
education component here for new employers and small employers
that might be of benefit.
So I yield back. Thank you.
Chairman Andrews. I thank the gentleman for his time.
And the chair recognizes the gentleman from Illinois, Mr.
Hare, for 5 minutes.
Mr. Hare. Thank you, Mr. Chairman.
Mr. DeCamp, I just have three questions for you.
You stated that you have a record of aggressive enforcement
in protecting the workforce. And of the more than 132,000
workers who were misclassified in the 2008 national U.I. tax
audit, can you tell me in how many of those cases did the
Department of Labor conduct a follow-up investigation to
determine whether those workers were receiving adequate back
pay?
Mr. DeCamp. I don't have that information.
Mr. Hare. Could you get that for us?
Mr. DeCamp. We can look and see whether we can provide that
information.
Mr. Hare. I would appreciate that.
You also said in your testimony that a policy of automatic
referrals would discourage employees from reporting violations
of wage and hour laws and to provide other information. Can you
explain this to me? Because I am a little bit perplexed by
that.
Mr. DeCamp. The main issue comes about when we are dealing
with undocumented workers. If we take information that we
receive involving undocumented workers and refer that
information over to ICE or refer it over to IRS, for example,
then those workers themselves may find themselves in jeopardy
of being arrested and deported for their immigration
violations.
The last thing that undocumented workers want to do,
generally, is to be dealing with the federal government in any
of its respects. But certainly they don't want to be dealing
with enforcement agencies dealing with the immigration laws.
The same concern arises when a lot of undocumented workers
use fraudulent Social Security numbers, for example. So if the
IRS or other agencies start investigating employer records
dealing with tax payments, and they start to notice that, you
know, three workers for this employer have the same Social
Security number, that may then lead to prosecution or at least
further inquiry and scrutiny of those workers, which may make
the workers very uncomfortable.
And if word gets out that Wage and Hour is providing
information in significant quantities to other agencies, then
workers may elect to forgo their wage and hour rights so as to
avoid having to deal with enforcement of immigration laws.
Mr. Hare. You also said that employers would be less likely
to produce copies of written documents or the records if they
believe the documents are going to other law enforcement
authorities. Well, what if they were required to do so?
Mr. DeCamp. What if who were required to do so?
Mr. Hare. If the employers----
Mr. DeCamp. If they were required to give us the documents?
Mr. Hare. Yes.
Mr. DeCamp. Well, right now, when we get the documents, it
is generally a very cooperative process. We don't have to use
subpoenas. We don't have to use formal legal process to get
that information. We can use those processes if we need to, if
an employer refuses to give us information. But we generally
don't have to go the formal route to get documents.
I think that if we were to more aggressively use employer
documents to refer them to other agencies, employers would be
more likely to require a formal process, which would then
present a severe resource drain in terms of the number of
investigations that we can conduct.
Mr. Hare. And then just one final question before I run out
of time.
You said that, you know, you need some additional personnel
or the resources. Can you tell us how many additional
investigators would you need, in your professional opinion, to
adequately do what it is you want to do? I mean, how short are
you?
Mr. DeCamp. It is hard to know what the right number is. I
know that the right number is north of where we are now. And I
think that the request that we have now seeks about 40
additional investigators. But I think that we need to go well
beyond that at some point.
There is also an issue of if we get too many investigators
at once, that actually has negative effects for the agency,
because training resources are very intensive, for example.
Chairman Andrews. Will the gentleman yield?
Mr. Hare. I certainly would.
Chairman Andrews. If I could just take some of his time.
You made the statement earlier about needing more. These
data are for overall inspectors, not just this target, but I
want you to explain this to us.
In fiscal 2001, there were 4,334 positions requested for
inspectors. For fiscal 2006, the request was 4,282, from the
administration. For fiscal 2007, the request was 3,889. Now, it
is back up to 4,082 for fiscal 2008.
So the number of people the administration asked for went
down from 2006 to 2007, and in 2006 was considerably less than
what you inherited when you took over in fiscal 2001.
You have been asking for fewer people, haven't you?
Mr. DeCamp. With all due respect, those are not the Wage
and Hour numbers. Those are not the numbers of investigators
that have been requested for Wage and Hour. That might include
personnel for ESA.
Chairman Andrews. They are.
Mr. DeCamp. But that is not reflective of the number of
investigators that we have been requesting. We actually did
request----
Chairman Andrews. But the numbers of personnel that you
have been asking is going down generally, right?
Mr. DeCamp. But we have also asked for increases in the
Wage and Hour investigators.
Chairman Andrews. That is how your presentation was made to
the Appropriations Committee?
Mr. DeCamp. I don't know how the presentations were made in
previous years, but I can say that, in terms of the 2008
request, the 2007 request, we have specifically asked for
increased----
Chairman Andrews. Okay.
Mr. DeCamp. We asked for specific amounts for increased
numbers of investigators for Wage and Hour.
Chairman Andrews. But not in the overall.
I thank the gentleman for his time.
Mr. Hare. I yield back, Mr. Chairman.
Chairman Andrews. I would recognize the gentleman from
Michigan, Mr. Walberg, for 5 minutes.
Mr. Walberg. Thank you, Mr. Chair. I have no questions at
this time.
Chairman Andrews. The chair would recognize the gentleman
from New York, Mr. Bishop, for 5 minutes.
Mr. Bishop. Thank you.
I just want to quickly follow up. When you are saying ``the
request that we made'' with respect to inspectors, is the
``we'' here the Wage and Hour Division making a request to OMB,
or is the ``we'' here the administration making a request to
Congress?
Mr. DeCamp. The latter.
Mr. Bishop. Thank you.
I want to pursue this issue of automatic referral. And I
want to use a specific case. And it is the case that is raised
by a witness on the second panel. I don't know whether you have
had access to the testimony, but Mr. Williams outlined the case
in which I think, to any reasonable person, he was an employee.
The relationship that he had with his employer was a
traditional employer-employee relationship. And, as I say, I
think that would be the case to a layman. I think it would be
the case by looking at the ABC test, by looking at the IRS 20-
point test.
Let us assume that his testimony were submitted to the Wage
and Hour Division. And let us assume that you had sufficient
staffing to pursue an investigation.
Your investigation, if I understand the constraints under
which you feel you are working, would limit your findings, so
to speak, to whether or not he was being paid minimum wage,
whether or not he was being paid overtime, and so on. Is that
correct?
Mr. DeCamp. I think that is largely correct. We wouldn't
require a finding of independent contractor versus employee.
Mr. Bishop. Let us assume that you look at this. And he is
being paid overtime, and minimum wage is not a problem. But
clearly he is an employee. Therefore, his employer is not
paying in to the Social Security Trust Fund, not paying into
the Medicare Trust Fund.
What does Wage and Hour Division do with that finding? Do
they refer?
Mr. DeCamp. We might. We might refer it to IRS.
Mr. Bishop. Stay on that for a second. Why would there be
hesitation? Why is your answer you ``might''? Why isn't it
``absolutely''?
Mr. DeCamp. I think what we would need to do in a case like
that is to balance whether referring would do more harm than
good, in particular, with the workers.
Mr. Bishop. Okay. I understand the testimony you just gave
about exposing illegal immigrants to retaliation and so on.
But, again, this is a national reputable company. And this is
clearly a U.S. national that we are dealing with here who is
being treated as an independent contractor.
So I guess my frustration is--and this goes to the question
Ms. Woolsey asked--if it isn't the Department of Labor that is
going to act on what is clearly, at least to this person,
clearly an egregious violation, what agency within the federal
government can either employees turn to or can the Congress
turn to?
Mr. DeCamp. Well, again, first of all, there is a
significant chance that in a case like that, we would refer the
matter to IRS, given the facts that you have described. In
addition, the IRS and the state agencies dealing with
unemployment insurance certainly have jurisdiction to enforce
their laws. And they can do that, as well.
Mr. Bishop. Okay.
The commissioner of labor for New Jersey, Mr. Socolow, in
his testimony, he recommends that the federal government take
action in five areas. One of them is that we establish a strong
universal federal definition of an employee.
What is your response to that?
Mr. DeCamp. Not knowing enough about the tax laws or the
other laws to understand whether there are differences in the
policies that would dictate a different outcome, I think it
would certainly make things easier for everybody if there were
one definition.
Mr. Bishop. And would that enhance your--by ``your,'' the
Wage and Hour Division--would that enable or enhance your
enforcement capabilities?
Mr. DeCamp. I don't think it would enhance our enforcement
capabilities. But it would make it clearer when we ought to be
considering referring information over to other agencies.
One issue is that, because the tests are different, we
don't know, for example, in every case--now, maybe in a clear
case, that is a different matter--but in one of these gray
areas, we have a broader definition of ``employee'' under the
FLSA than exists under most other laws.
We don't want to be referring information over to other
agencies that might not even be a violation of their laws. And
we don't train our investigators in the tests used by the other
laws.
Mr. Bishop. I am about to run out of time, but I want to
ask you one more quick question.
On the issue of resources, we just had a hearing in the
Budget Committee in which the people from CMS estimated that
for every dollar of enforcement they receive, they will get
back somewhere between $4 and $13 of savings.
Has your division conducted any form of assessment of that
kind of ratio?
Mr. DeCamp. Not that I am aware of. We just know that we
want to be able to do more investigations.
Mr. Bishop. Okay. Thank you.
I am out of time. Thank you, Mr. Chairman.
Chairman Andrews. Thank you very much.
Next on our list is the gentleman from Iowa, Mr. Loebsack,
for 5 minutes.
Mr. Loebsack. Thank you, Mr. Chair. I have no questions.
Chairman Andrews. Next on our list is the gentlelady from
New Hampshire, Ms. Shea-Porter, for 5 minutes.
Ms. Shea-Porter. Thank you.
You know, without trying to sound facetious, I have to
wonder if you are working for the same government that we are
working for. And I will tell you some of my concerns here, and
ask you to please address them.
For example, we know that we have the largest deficit in
history. And the IRS reports that they are losing an estimated
$2.72 billion in 2006 alone. And yet I heard you say that you
might report it to the IRS and, then again, you might not. And
you also do not train your workers about these violations and
where to take them.
Are we all on the same page, working for the same
government, with the same goals?
Mr. DeCamp. Right. I appreciate the question.
There is certainly a tension there. We certainly appreciate
the importance of all of the federal laws, including the
immigration laws, the revenue laws and the other laws. And I
don't want my testimony to be misunderstood as suggesting that
we somehow don't value those laws.
Our approach to not referring every case is more a focus of
the pragmatic consequences of referring matters and thereby
deterring workers from reporting violations. That is the
concern.
Ms. Shea-Porter. Well, I have trouble with that answer,
also. Because earlier, you said your mission of protecting the
workers--and I need to ask you how. If we don't protect them
about accidents and Medicare and Social Security and
unemployment compensation and retirement and benefits, exactly
how are you protecting them?
Mr. DeCamp. Well, the concern is that if we are deterring
workers from coming forward to us--because, frankly, we know
that the workers would much rather not come to us at all than
risk being deported or having other adverse consequences like
that--if we deter workers from coming to us, then we are going
to be getting less good information about violations in the
workplace.
And if the labor standards for the undocumented workers and
other low-wage workers are not protected, that undermines the
labor standards for all the workers. And that is the concern.
We are not just concerned about the one worker who may have
the issue. We are concerned about the integrity of the labor
standards for all the workers in the workplace. And to protect
those standards, we need to protect the undocumented worker and
every other worker.
Ms. Shea-Porter. Well, I will tell you that it smacks of
protecting the people who are breaking these rules.
And also, as somebody who did a lot of social work, there
are ways to protect identities without, you know, having them
lose their jobs. What have you pursued? Have you looked at ways
to be able to allow employees to announce these violations
without having them prosecuted or lose their status?
What exactly are you doing to take steps? Because to do
nothing is not acceptable.
Mr. DeCamp. Well, we certainly conduct investigations, and
we enforce our laws vigorously.
We don't require necessarily employees to submit a
complaint with their name on it. We will take information
sometimes from media sources, sometimes from workers reporting
things anonymously. We get out there and we investigate and we
protect those rights.
The concern comes into play if we refer a matter over to
another enforcement agency that then comes in and starts
scrutinizing the employer's records and sees that, you know,
there are problems with the Social Security numbers or problems
with I-9s or problems with other issues.
Then, even if we haven't, you know, announced the identity
of any particular worker who is complaining, the fact that the
worker is part of a workplace that is now being investigated by
another enforcement agency may put that worker in jeopardy for
having tax problems or immigration problems. And that would
have a very chilling effect on workers.
Ms. Shea-Porter. Have you worked with communities that work
with, say, illegal immigrants or people who have green cards?
Is there anything specific that you are doing with these
organizations so that they could protect them?
Mr. DeCamp. Well, absolutely. We do a lot of outreach to
exactly that kind of group: to religious groups, to groups that
advocate on behalf of immigrants, in particular, undocumented
workers. We do a lot of outreach to educate those individuals
and those groups about the protections that apply for those
workers under our laws.
Ms. Shea-Porter. Well, I will tell you, I am sure you could
accomplish that and still do what your mission is. And I am
disturbed that you haven't done that.
Earlier, you were talking about not wanting to bring in
more people because--and let me see if I had this right--that
it is intensive training. When you are talking about how many
people do you really need, and you said something along the
lines of: Well, it is intensive training. So we wouldn't really
want to bring in too many because it is a rigorous process.
Do you recall saying that? Am I quoting you right?
Mr. DeCamp. Well, what I said was that if we add staff too
quickly, if we add investigators too quickly, it overwhelms the
agency. Because in talking about how it is resource-intensive,
we want to grow. But if we grow too quickly, it overwhelms the
capacity of the agency to absorb these investigators.
Ms. Shea-Porter. Well, I have to say that you can look at
all kinds of work like that--say, air traffic controllers.
Remember when they all were let go for a while, and they
managed to bring a lot in because they knew they needed them?
It was essential.
And I would suggest that it is essential. And it almost
sounds like stonewalling, whether it is the intention of the
agency or not. By saying that we can't have these people come
help us because they would be a burden on us sounds, at best,
weak.
Thank you. My time has ended. Thank you.
Mr. DeCamp. Can I respond to that briefly?
Chairman Andrews. Of course.
Mr. DeCamp. The training process is very intensive. As I
noted, it takes about 3 years, because of so many laws that we
enforce, to get investigators fully trained.
In addition, during their training, before they are really
fully ready to go out and conduct investigations on their own,
they are often accompanied by senior investigators, who then
have to mentor them and teach them how to conduct
investigations properly. That is part of why it is a drain.
We want to grow our staff, certainly. We want to have more
investigators. But we have to do it in a way that is not
overwhelming the agency by bringing in so many inexperienced
investigators that they can't really do their job and, at the
same time, they drag down the productivity of our senior
investigators.
Ms. Shea-Porter. Well, one last comment. When you talk
about productivity, the Department of Labor found a 50 percent
increase in the number of misclassified workers in the past 6
years--a 50 percent increase. I would say that, whether it
drags down your supervisors' productivity or not, it is
probably a good time to start.
Thank you.
Chairman Andrews. I thank the gentlelady.
The gentleman from Massachusetts has no questions, is that
correct?
Mr. Tierney. Yes.
Chairman Andrews. The gentleman, my friend from New Jersey,
Mr. Payne, is recognized for 5 minutes.
Mr. Payne. Thank you very much, Mr. Chairman.
And sorry that I missed your testimony.
However, just generally speaking, we have seen in a number
of areas of employment the question of the workers being
considered in a different category, as independent contractors.
When I was elected to Congress, in my federal building, the
Peter Rodino Building--that was my predecessor and a good
friend of mine, and every day I went into the building, I
certainly remembered him because the building had his name.
But the terrible thing that occurred was that when I began,
the federal government decided to privatize the custodial
workforce. People had worked there for many, many years, had
benefits. And it was really a very disturbing thing because
then they turned to contractors.
And it took about 6 months before they put out bids, or a
year or so. But the same people--the same work that was done,
people had reduced salaries, had no benefits.
It might have been a great day for the GAO or the Office of
Budget, but it was a terrible day for those hardworking people
who had worked, had stayed on the job, took pride in their
work, worked to send their children to school, where, in the
flip of a pen, they lost health benefits, they lost pensions.
They had to do more than the previous--the workload, at less
money.
Now, I just wonder, just quickly, I understand you did
outreach and you sort of did some surveys. So, let me just ask
you this. Can you quantify what effect your outreach efforts
have had on misclassification of workers?
I mean, mine, it was less misclassification, but it is all
in the same general trend. We are pushing down wages.
You know, this country was great because people tended to
be able to do better as time went on. Now, there are people who
are doing better, believe me. I mean, these funds on Wall
Street are going through the roof.
However, the typical, average, hardworking person that
lives in my city of Newark, New Jersey, is doing worse every
year. The cost of fuel goes up. Cost of housing goes through
the roof. And they are taken out of jobs that is reducing their
benefit.
How in the world can we continue to do this?
We have got some serious external problems with terrorism
and people hating us around the world and all that. Internally,
we are turning our backs on our own people right here, which
just complicates the situation.
So let me just ask you, since my time is probably expiring,
what has been the effect of your outreach efforts? What effect
have they had on misclassification of workers? Because it
appears that the number of misclassified workers have increased
pretty steadily since 2000, so what is going on?
Mr. DeCamp. Well, I don't think that we have data that
would quantify the effects of outreach. But it is important to
keep in mind that outreach is not all that we do in this area.
We also devote about 60 percent of our enforcement resources to
low-wage industries, including the custodial industry that you
mentioned, and construction and landscaping and many of the
other industries where this misdesignation issue is a concern.
Mr. Payne. Just concluding, you know, on Wall Street, where
a union, SEIU 32BJ, was attempting to organize the custodians
and the doormen at these condos in the area. You know, the
owners fought them tooth and nail to prevent the custodians
from being organized because maybe they will take away from
their profits.
I mean, it is a sad day in this country when we continually
see hardworking people being beaten down daily.
Thank you, Mr. Chairman.
Chairman Andrews. Thank you, Mr. Payne.
The chair recognizes the gentleman from Oregon, Mr. Wu, for
5 minutes.
Mr. Wu. Thank you, Mr. Chairman.
I would like to ask the witness from the Department of
Labor about the factors that are considered by the federal
government in a determination of whether someone is an
independent contractor.
When I was practicing law in Oregon, I believe Oregon has
roughly half the number of factors to be considered about
whether someone is an independent contractor than the IRS.
What factors does DOL look to to make the determination of
whether someone is an independent contractor or not? And how
much weight is given to each factor?
Mr. DeCamp. Well, actually, this is set forth on page two
of the written testimony, but I will be happy to address that.
Mr. Wu. So I understand.
Mr. DeCamp. I will just read through them. One is the
extent to----
Mr. Wu. Why don't you just tell me?
Mr. DeCamp. All right. Well, I mean, the main concern is
the extent to which the business is operating as a business
versus operating as an employee would be.
So we are looking at ability to gain profit and control the
revenue stream. We are looking at the ability to assign one's
own work versus being directed as to what to do. We are looking
at the permanency of the relationship.
We are looking at the extent of investment by the
individual in the supplies and tools and other costs of doing
business, other materials for doing business, versus, you know,
is another entity providing that kind of material.
Those are really the main factors.
Mr. Wu. In terms of immediate factors that one might look
to, for example, if someone is holding out their business to
others, they would have business cards. Are those things that
you look at?
Mr. DeCamp. That would be part of the mix, yes, sir.
Mr. Wu. Okay. And if someone were to mischaracterize
someone as an independent contractor as opposed to an employee,
how large is the discrepancy in costs to the employer and the
costs to the employee?
Mr. DeCamp. I don't think that is an issue that the
department has described. I know that some other witnesses, in
the previous hearing, have weighed in on that issue.
Mr. Wu. Do you have any knowledge of this?
Mr. DeCamp. Not in my capacity, no.
Mr. Wu. So you have no idea how much tax savings or tax
costs is incurred by an employer or incurred by the independent
contractor/employee.
Mr. DeCamp. All I know is what was attested to at the
previous hearing, sir.
Mr. Wu. Which is what?
Mr. DeCamp. I think they were saying on the order of 15 to
20 percent.
Mr. Wu. That seems a little low.
Mr. DeCamp. I think that is what was said. I am not
disputing the numbers or vouching for the numbers. I am just
saying that is my understanding of what was said.
Mr. Wu. When the marginal tax rate is in the what, mid-to
low-30s, and then there are taxes for FICA and FUTA and all the
other things that come off the paycheck?
Mr. DeCamp. Sir, I am agreeing with your premise that there
are economic incentives to----
Mr. Wu. I am just trying to get my arms around it. And you
are from the Department of Labor, so I sort of thought you
might know.
Mr. DeCamp. It is not an issue that the Wage and Hour
Division studies. It is not relevant to our enforcement
mission.
Mr. Wu. The gross savings isn't relevant to your
enforcement mission?
Mr. DeCamp. In other words, we are looking at: Is this a
worker who is an employee under the statute? And, if so, were
the worker's rights under the statute protected?
That is our concern, not why did the employer do it,
necessarily, unless it was willful. And then there are added
penalties that would come into play, if we are talking about a
willful violation.
Mr. Wu. So you don't care about the size of the motivation,
if you will?
Mr. DeCamp. That would bear on whether the violation was
willful. In which case, for example, a longer statute of
limitations could apply.
Mr. Wu. Well, it would also bear on the size of the problem
that you have. Don't you think?
Mr. DeCamp. When we are looking at remedies for the worker,
we are looking at whatever minimum wage or overtime the worker
was denied. In terms of the employer's motivation for doing so,
if we conclude that the violation was willful, we could pursue
back wages for 3 years instead of 2. We would be more likely to
pursue liquidated damages in a case like that----
Mr. Wu. I am just trying to understand the scope of the
problem. And if an employer saves 10 percent, that doesn't seem
like that is much motivation, but if an employer saves 50
percent or 100 percent, you know, that is a different scale of
problem.
I am just trying to get my arms around this. And I thought
you would have those kind of numbers right off the top of your
head.
Mr. DeCamp. Again, that doesn't affect how we would carry
out our enforcement mission. We are looking to protect the
workers under the statutes and----
Mr. Wu. How long have you been working in this arena?
Mr. DeCamp. I have been involved in labor and employment
law since about 1995.
Mr. Wu. Okay. So in 12 years, you have never had reason to
inquire as to the scope of potential savings that employers or
contractors would experience as a result of characterizing or
mischaracterizing the relationship?
Mr. DeCamp. That is correct, sir.
Mr. Wu. Thank you.
Chairman Andrews. The gentleman's time has expired.
Thank you, Mr. DeCamp, for your testimony here this
morning. I know the committee will be interacting with you as
we go down the line on this issue. And I thank you very much
for your attendance this morning.
Mr. DeCamp. Thank you.
Chairman Andrews. Thank you.
I am going to ask if the witnesses from the second panel
would approach the table and wait for their name tags to be set
up.
I am going to turn over the prerogative of the chair to my
friend from California, Ms. Woolsey, and she will conduct the
balance of the hearing.
Ms. Woolsey [presiding]. As Chairman Andrews said, if you
have not testified here before, you may note that we have a
lighting system, 5-minute rule. And everyone, including
members, is limited to 5 minutes of presentation and
questioning.
The green light is illuminated when you begin to speak.
When you see the yellow light, it means you have 1 minute
remaining. When you see the red light, it means your time is
expired and you need to conclude your testimony. You don't have
to stop mid-sentence, believe me.
Be certain, as you testify, to turn on your microphone.
Otherwise, we will all be yapping after you from up here, and
you will wonder what we are trying to tell you. So just turn it
on, and then we can hear you.
And now we would like to introduce our witnesses. And
Chairman Andrews will introduce David Socolow.
Chairman Andrews. I appreciate that privilege.
David Socolow is the commissioner of labor for the state of
New Jersey. He is a graduate of Harvard University. Again,
someone else has overcome that liability to be with us today.
[Laughter.]
I am especially proud of David for several reasons. He and
I had the privilege of working together here in Washington when
he served first as my legislative director, then my chief of
staff.
He then went to work for Secretary of Labor-elect Herman.
He worked for the state of New Jersey's Unemployment Division
and was the director of that division for a number of years,
and became our commissioner of labor last summer.
He is an outstanding public servant. He is an authority in
this field. He has done a great job on this issue in the state
of New Jersey.
And I must confess some personal affection. He is fortunate
enough to be married to my sister-in-law, Erin. [Laughter.]
And they have two spectacular children, one of whom is my
goddaughter. And we are just very proud of the work that he has
done. I am delighted he is here with us today.
David, welcome. Great to have you with us.
Ms. Woolsey. We welcome you, too, David.
Robert Williams is currently a transportation recruiting
and operations consultant to numerous transport companies in
New England. Between the year 2000 and the year 2005, he worked
first as a temporary driver and then as a contracted driver for
FedEx Home Delivery in Northborough, Massachusetts. Prior to
that position, he worked for over 30 years in a number of
senior management positions at UPS, Federal Express, Airborne
Express, and United States Line. Mr. Williams served for 28
years in the U.S. Reserve and retired as a sergeant major in
1996.
Sara Stafford is president of Stafford Construction located
in Saugus, Massachusetts. In 1993, after working as manager for
a supply company for 13 years, Ms. Stafford opened her own
union drywall and plastering contracting firm. Her company's
portfolio involves about 50 percent public and 50 percent
private work. Sara Stafford has been a resident of Raleigh,
Massachusetts, for 15 years.
Christine Walters is an independent consultant in human
resources and employment law at the FiveL Company in Glyndon,
Maryland, and is testifying on behalf of the Society of Human
Resources Management. Ms. Walters has over 20 years of combined
experience in H.R. administration, management law and teaching.
She has been gauged as an expert witness regularly, presenting
at conferences across the country. And she is a columnist for
national publications. Walters serves in a variety of volunteer
leadership roles at the national, state and local levels for
the society and is currently on its employee relations panel.
Thank you all for being here.
We will begin with you, Mr. Williams.
STATEMENT OF ROBERT WILLIAMS, TRANSPORTATION RECRUITING AND
OPERATIONS CONSULTANT, FORMER FEDEX EMPLOYEE
Mr. Williams. Thank you, Chairman Andrews and Chairwoman
Woolsey, for inviting me to testify today. Thanks also to the
members of the subcommittees who are interested in the
misclassification issue that is hurting so many FedEx Ground
and Home Delivery drivers today.
After retiring, I read an advertisement in the Worcester
Telegram and Gazette in April of 2001 for independent
contractors at the FedEx Home Delivery in Northborough, Mass.
The ad basically stated, ``Run your own business. Become a
business owner with a national leader. Be your own boss.''
When I applied for the position as an independent
contractor, I was told there were none available at present.
The manager offered to train me as a temporary driver before I
could become a contractor and do any work at all at FedEx Home
Delivery. I completed the mandatory training course and went to
work as a temporary driver.
I was paid by the hour as a temp for a firm called Adecco
and eligible for overtime. I was furnished a uniform and rental
van supplied by FedEx, but I was not a FedEx employee. I did
not pay any expenses while a temp. State and federal
withholding were taken out of my weekly check by Adecco.
I continued working as a temporary driver until June 2002,
when a route position became available. At that time, I signed
a FedEx Home Delivery standard contractor operating agreement.
I purchased a small commercial van that had to be white and
inspected by FedEx for approval.
After utilizing this van for a period of time, I was told
it would no longer accommodate the number of packages for my
area. I was told I would have to have a larger vehicle.
So, through FedEx, I leased a larger vehicle called a P400.
This vehicle was painted white and had all of the FedEx logos
on permanent decals. This vehicle was also arranged for by
FedEx, who took care of all of the paperwork.
I worked with this new van until October 15, 2002, when I
was involved in a serious accident and hospitalized. I did not
return to work for 13 months. I did not pursue worker's
compensation. I was not able to work until early November 2003,
and returned as a temporary driver.
I worked on and off as a temporary driver, driving a rental
van supplied by FedEx and being paid by the temp agency Adecco.
I was offered a different route and soon became a so-called
contractor again in June 2004.
I was told I had to lease or buy a much larger truck than I
had before. This new truck was called a P500 and was obtainable
only through FedEx. It was white and colored with logos,
numbered in a FedEx series, and showed USDOT markings on it.
FedEx had a supply of these vehicles in their Manchester,
New Hampshire, terminal. And FedEx arranged the financing
through one of the leasing companies they offered. The whole
transaction, leasing arrangements, and credit information, et
cetera, all flowed through FedEx.
This was the only type of vehicle that FedEx approved.
There were no exceptions.
As a contractor, I was responsible for the cost of the
vehicle, for the fuel, for the tires, for the maintenance, and
all of the operating costs, including breakdown and emergency
expenditures. I paid a worker's accident policy in lieu of
workman's comp weekly deductions. I also paid weekly for
liability insurance for protective insurance.
These expenses were taken out of my settlement by FedEx.
There were no other insurance services or policies that were
made available to us. We were told we could get our own
insurance. But having personally checked with a number of
insurers, I found the cost prohibitive.
Additional expenses that were taken out from time to time
were for uniforms, scanners, claims against me, mapping
software, random drug-testing, annual DOT inspection, and
truck-washing.
No taxes or Social Security were ever deducted from my
settlements. We were issued a 1099 form annually. I was
responsible for reporting my federal and state tax to the
federal and state tax authorities.
In the holiday period of 2004, things began to change
drastically. We were being monitored more and more by the use
of the scanner. The scanner was a tracking device used to
monitor our daily delivery areas.
We are required each morning to report early to load our
trucks. The number of packages and stops were the means by
which were compensated. We were paid by the package, and not an
hourly wage.
FedEx Home Delivery controls the number of packages tended
to the drivers and controls the amount a driver can make
through their computer systems. This means of controlling a
driver is ongoing today.
There were many times when FedEx managers would not allow
us to leave the building and go out on our routes until all the
packages were accounted for. This could severely impact our
earnings by reducing the time we would have to make deliveries.
Packages were added or subtracted to our routes, affecting our
earnings on a daily basis.
I remain in contact with numerous drivers who are still
with FedEx Home Delivery throughout the country. I contact many
drivers in the New England area on a regular basis, especially
Northborough, Mass. The same issues, treatment and procedures I
experienced still go on today.
Due to my many years of working in the transportation
industry, I understand clearly the differences between an
employee and an independent contractor. The control that FedEx
Home Delivery had over me and over the drivers it has today
shows these drivers are controlled like employees but called
contractors.
FedEx Home Delivery drivers must pay for uniforms worn to
FedEx standards with a black belt, proper shoes, no sneakers.
They must purchase or lease a FedEx truck, purchased by
FedEx, prescribed by FedEx for size, color and logos,
numbering, et cetera.
To purchase or lease a FedEx scanner--this is a mandatory
item. The daily package deliveries cannot be performed without
it. It is monitored by FedEx.
Drivers must pay for all maintenance prescribed by FedEx
and USDOT. Drivers must furnish all fuel, tires and other costs
related to the operation of their vehicle.
Drivers must pay for a weekly worker's accident policy and
liability policy deducted by FedEx to protective insurance.
Drivers who cannot work on a given day and cannot find a
FedEx-approved temp driver are regularly threatened with
contract terminations.
To me, the biggest personal issue I had was the time-off
program. Drivers--can I continue?
Ms. Woolsey. You need to sum up now, Mr. Williams. And then
you will bring some of that into your questions and answers.
Mr. Williams. All right.
I could now just finish up and say I was terminated by
FedEx in December 2005. The National Labor Relations had
ordered an election before the company fired me and a number of
other people who were attempting to support the union. The
board filed a complaint against FedEx for illegally terminating
me for protected union activities.
There are more charges pending against the company for
unfair labor practices in the Northborough location. A hearing
is set for August.
After I was terminated, I filed for unemployment benefits
in Massachusetts, and I did receive those benefits. I was the
first one to do so under the FedEx Ground or Home Delivery.
Many present FedEx Ground or Home Delivery drivers would be
too scared of the company's reaction if they testified. I am
here to state my professional opinion with over 45 years of
experience in the industry. The FedEx Ground model rests
clearly on the misclassification of its drivers as so-called
contractors.
Thank you.
[The statement of Mr. Williams follows:]
Prepared Statement of Robert V. Williams, Transportation Recruiting and
Operations Consultant, Former FedEx Employee
Thank you Chairman Andrews and Chairwoman Woolsey for inviting me
to testify today. Thanks also to the members of the Subcommittees who
are interested in the misclassification issue that is hurting so many
FedEx Ground and Home Delivery drivers today.
After retiring, I read an advertisement in the Worcester Telegram
and Gazette in April 2001 for Independent Contractors at FedEx Home
Delivery in Northboro, MA. The ad basically stated: ``Run your own
business, Become a business owner with a national leader, Be your own
boss''. When I applied for a position as an ``Independent Contractor''
I was told that there were none available at present. The manager
offered to train me as a temporary driver before I could become a
``contractor'' and do any driving work at FedEx Home Delivery.
I completed the mandatory training course and went to work as a
temporary driver. I was paid by the hour by a temp firm named ADECCO
and eligible for overtime. I was furnished a uniform and rental van
supplied by FedEx but was not a FedEx employee. I did not pay for any
expenses while a temp. State and federal withholding were taken out of
my weekly check by ADECCO.
I continued working as a temporary driver until June of 2002, when
a route position became available. At that time, I signed a FedEx Home
Delivery standard contractor operating agreement. I purchased a small
commercial van that had to be white and inspected by FedEx for
approval.
After utilizing this van for a period of time, I was told it no
longer could accommodate the number of packages for my area. I was told
I had to have a larger vehicle, so through FedEx I leased a larger
vehicle called a P400. This vehicle was painted white and had all of
the FedEx logos on permanent decals. This vehicle was also arranged for
by FedEx who took care of all the paperwork. I worked with this new van
until October 15, 2002, when I was involved in a serious accident, and
hospitalized.
I did not return to work for 13 months. I did not pursue workers
compensation. I was not able to work until early November of 2003, and
returned as a temporary driver. I worked on and off as a temporary
driver, driving a rental van supplied by FedEx and being paid by the
temp agency ADECCO.
I was offered a different route and became a so-called
``contractor'' again in June 2004. I was told I had to lease or buy a
much larger truck called a P500. This vehicle, only attainable through
FedEx, was white in color with logos, numbered in a FedEx series and
showed USDOT markings on it. FedEx had a supply of vehicles at their
Manchester, NH terminal, and FedEx arranged financing with one of the
leasing companies it offered. The whole transaction, leasing
arrangements, the credit information, etc., all flowed through FedEx.
This was the only type of vehicle that FedEx approved. There were no
exceptions.
As a ``contractor'' for FedEx, I was responsible for the cost of
the vehicle, for the fuel, for the tires, for the maintenance, and all
operating costs, including breakdown and emergency expenditures. I paid
for a worker's accident policy, in lieu of Workmen's Comp weekly
deductions and I also paid weekly for liability insurance from
Protective Insurance. These expenses were taken out of my settlement by
FedEx. There were no other insurance services or policies that were
made available to us.
We were told we could get our own insurance, but having personally
checked a number of insurers, I found it to be cost prohibitive.
Additional expenses taken from my settlement were for uniforms,
scanners, claims against me, mapping software, random drug testing,
annual DOT inspection and truck washing.
No taxes or Social Security were ever deducted from our
settlements. We were issued a 1099 form annually. I was responsible for
reporting my income to federal and state tax authorities.
In the Holiday period of 2004, things started to change
drastically. We were being monitored more and more by the use of the
scanner. The scanner was used as a tracking device to monitor our daily
delivery areas. We were required each morning to report early to load
our trucks. The number of packages and stops were the means by which we
were compensated. We were paid by the package and not an hourly wage.
FedEx Home Delivery controls the number of packages tendered to drivers
and controls the amount a driver can make through their computer
systems. This means of controlling drivers is on going today. There
were many times when FedEx managers would not allow us to leave and go
out on our routes until all packages were accounted for. This could
severely impact our earnings by reducing the time we would be able to
make deliveries. Packages were added or subtracted to our routes,
affecting our earnings on a daily basis.
I remain in contact with numerous drivers who are still with FedEx
Home Delivery throughout the country. I contact many drivers in the New
England area on a regular basis especially Northboro, MA. The same
issues, treatment and procedures I experienced still go on today.
Due to my many years of working in the transportation industry, I
understand clearly the differences between an employee and independent
contractor. The control that FedEx Home Delivery had over me and has
over the drivers today shows that the drivers are controlled like
employees but called ``contractors.''
FedEx Home delivery drivers must pay for uniforms worn to
FedEx standard, with a black belt, proper shoes, no sneakers.
Purchase or lease a FedEx truck; prescribed by FedEx for
size, color, logos, numbering, etc.
Purchase or lease a FedEx scanner; this is a mandatory
item. The daily package delivery duties cannot be performed without it
and it is monitored by FedEx.
Drivers must pay for all maintenance prescribed by FedEx
and USDOT. Drivers must furnish all fuel, tires, and any other costs
related to the operation of the vehicle.
Drivers must pay for a workers accident policy, and
liability policies, deducted by FedEx to Protective Insurance Company.
Drivers who cannot work on any given day and cannot find a
FedEx approved temp driver are regularly threatened with contract
termination.
To me the biggest personal issue I had was the Time Off program.
Drivers participate at the rate of $17.50 per week to join into the
``Drivers Time off'' program. Time off requests are made in May of each
year according to ``contractor'' seniority. Any holiday falling in the
week off would be included as part of the week off with no
compensation. A ``contractor'' who signs up for the time off program,
must remain in the program for the entire year. All selected weeks must
be honored by ``contractors'' and managers. So we were paying FedEx to
book two weeks away from delivering with no return to us. No interest
was paid on this account. We don't know where this money went. No one
in management could explain how the program really worked.
In August 2005, FedEx terminated the Senior Manager who had been
there approximately 3 years. He was replaced by a number of additional
roving managers, until a new manager was appointed, in September. At
this point, nearly all drivers signed authorization cards to join
Teamster Local Union 170. From the time that FedEx was notified of
these actions by the drivers there was a drastic change in management.
This continued through November 2005 when a hearing was held by the
NLRB. I testified at that hearing as I am testifying today. We were
found to be employees.
I was terminated by FedEx in December 2005. The National Labor
Relations Board ordered an election but after the company fired me and
a number of other union supporters the election was postponed. The
Board filed a complaint that charged FedEx for illegally terminating me
for protected union activities. There are more charges pending against
the company for unfair labor practices at the Northboro location. A
hearing is set for August.
After I was terminated, I filed for unemployment benefits in
Massachusetts. The state investigated my work conditions. The company
argued that I was a so-called ``contractor'' and not eligible for
benefits. The state concluded that FedEx controlled me as an employee
and I was awarded unemployment. Since that ruling, other FedEx Ground
and Home Delivery drivers have also been found eligible for
Massachusetts unemployment coverage. With the Chairman's permission, I
ask that the Massachusetts ruling in my unemployment case be submitted
with my statement for the record.
Many present FedEx Ground or Home Delivery drivers would be too
scared of the company's reaction if they testified. I am here to state
my professional opinion. With over 45 years of experience in the
industry, the FedEx Ground model rests clearly on the misclassification
of its drivers as so-called ``contractors.'' Thank you.
______
Ms. Woolsey. Thank you, Mr. Williams.
Ms. Stafford? Turn on your microphone.
STATEMENT OF SARA STAFFORD, PRESIDENT, STAFFORD CONSTRUCTION
SERVICES, INC.
Ms. Stafford. Thank you, Chairwoman Woolsey and Chairman
Andrews and the members of the subcommittees. It is a pleasure
to address you here today on this important issue.
I have been in the construction industry for about 30
years. I am the president and sole owner of the Stafford
Construction Services Incorporated. Primarily, we are a
subcontractor working in the union arena. And we do drywall
plastering, metal framing, that type of thing, in the
metropolitan Boston area. I do both public and private work.
I am a union company. I have been since the day I opened my
business 14 years ago. And I have agreements with the New
England Regional Council of Carpenters, as well as three other
unions.
The construction industry is particularly prone to illegal
practices. And the industry is very competitive, with jobs
frequently being awarded to the lowest bidder. Under those
circumstances, it is difficult to compete against others that
misclassify workers as independent contractors.
We at Stafford play by the rules. And for the 50 to 70
employees that work for me that means regular audits of my
employment records are shown to the union. They are shown to my
workers' compensation company. They are shown to my bank. My
bonding company has access to them. It is an open book.
We have common interests in having a market of high
standards and fair competition as a rule. The basic rule is
abiding by the law. And my company's employees are all on the
payroll.
They get overtime pay and workers' compensation. We pay
federal and state unemployment taxes, Social Security,
Medicare, and we withhold state and federal from every dollar
that we pay out in employment. And many of these funds, of
course, go to the support of the health benefits for these
underinsured people.
That is okay because that is the law. But it becomes
difficult when I have to compete against other companies that
routinely misclassify their workforce and do none of those
things. Automatically, they get at least a 30 percent advantage
in labor costs and this all goes to profits.
The bill for this gap in taxes paid and employee benefits
comes due to every employer, like myself, that follows the
rules. It is an unequal taxation through misclassification of
employees.
Another rule basic to many responsible companies, like
mine, is to provide employees with good family medical and
retirement plans, a foreign concept to most businesses that
misclassify workers.
The result of that kind of conduct is not difficult to
fathom.
More of the insurance and tax burden is put on responsible
employers, such as myself, that play by the rules, because less
people are paying into the system. Also, my company has lost
work and my employees have lost income because the bids were
won by employers that misclassify workers.
There are whole market segments, such as residential
construction, that are almost impossible for legitimate
companies to enter into, especially in the interior trades.
That is not fair and more concern needs to be shown to law-
abiding companies. Otherwise, they will either have to go out
of business or become one of the cheaters.
And what about the workers? Misclassified workers don't
have the benefits of union protection. They do not have a cop
on the beat, so to speak, that will make sure that the employer
is playing by the rules. If they want union representation,
their irresponsible employer will make them jump through hoops
to prove that they are employees.
That is the driving force behind the continuing
misclassification problem in our industry.
As I said earlier, I have a common interest with the union
to provide high standards and to make sure the competition in
the construction industry is fair. When union representation is
made more difficult by misclassification, then
misclassification becomes an even bigger problem, threatening
the existence of employers like me who are paying into the
system and hoping that the system will recognize the need for a
level playing field.
Thank you.
[The statement of Ms. Stafford follows:]
Prepared Statement of Sara Stafford, President and Sole Owner, Stafford
Construction Services, Inc.
Chairwoman Woolsey, Chairman Andrews and members of the
subcommittees it is a pleasure to address you today on an important
subject adversely affecting the construction industry--the
misclassification of workers as independent contractors.
I have been in the construction industry for many years. I am the
President and sole owner of Stafford Construction Services, Inc.
Primarily, we do interior framing, drywall and plastering in
metropolitan Boston. I am a union company--I have collective-bargaining
agreements with local unions of the New England Regional Council of
Carpenters as well as three other unions.
The construction industry is particularly prone to illegal
practices. The industry is very competitive, with jobs frequently
awarded to the lowest bidder. Under those circumstances, it is
difficult to compete against others that misclassify their workers' as
independent contractors.
I play by the rules, and I work with a union that makes sure that
is the case. Don't be mistaken, I'm not complaining. We have a common
interest in having a market where high standards and fair competition
are the rule. And a basic rule is abiding by the law. My company's
employees are all on the payroll. They get overtime pay and workers'
compensation coverage and we pay federal and state unemployment, Social
Security and Medicare taxes and we withhold state and federal income
taxes. That is okay, because that is the law. But it becomes difficult
when I have to compete against other companies that routinely
misclassify their workforce and do none of those things. Automatically,
they get a least a 30 percent advantage on labor costs.
Another rule, basic to many responsible companies like mine, is to
provide employees with a good family medical and retirement plans--a
foreign concept to companies that misclassify workers.
The results of that kind of conduct are not difficult to fathom.
More of the insurance and tax burden is put on responsible employers
(union and non-union) that play by the rules because less people are
paying into the system. Also, my company has lost work, and my
employees have lost income because bids were won by employers that
misclassify workers. There are whole market segments, like residential
construction, that are almost impossible for legitimate interior
companies like mine to work in. That is not fair, and more concern
needs to be shown to law-abiding companies. Otherwise; they will either
go out of business or join the cheaters.
And what about the workers? Misclassified workers don't have the
benefits of union protection. They do not have a cop-on-the beat, so to
speak, that will make sure their employer plays by the rules. If they
want union representation their irresponsible employer will make them
jump through hoops to prove that they are employees. That is a driving
force behind the continuing misclassification problem harming our
industry.
As I said earlier, I have a common interest with the union to
promote high standards and to make sure competition in the construction
industry is fair. When union representation is made more difficult by
misclassification then misclassification becomes an ever bigger problem
threatening the existence of employers like me who play by the rules.
______
Ms. Woolsey. Thank you, Ms. Stafford.
Ms. Walters?
STATEMENT OF CHRISTINE WALTERS, CONSULTANT, FiveL COMPANY
Ms. Walters. Thank you, Madam Chair, Chairman Andrews,
Ranking Members Wilson and Kline, and distinguished members of
the committee. Thank you for this opportunity to testify on the
issue of misclassification of employees and independent
contractors. And I do commend your two subcommittees for
holding this joint hearing on this important issue.
My name is Christine Walters, and by way of introduction, I
would share with you that I have over 20 years of experience in
human resources or H.R. administration, management law, and
teaching.
Today, I work as an independent human resources and
employment law consultant with FiveL Company. And I served as
an adjunct faculty member of the Johns Hopkins University
teaching graduate, undergraduate and certification level
courses from 1999 through 2006.
Today, I appear before you on behalf of the Society for
Human Resource Management, or SHRM.
Today, as organizations compete in an everchanging global
marketplace, labor costs are never far from mind. In addition
to managing these costs, many employers in a variety of
industries are also facing a lack of talented, skilled people
to compete in today's economy.
With this changing landscape come new challenges for human
resource professionals and employers to reach out and find new
employment relationships that may not mirror the traditional
models, including part-time employment, flex-time, and
telecommuting schedules. Employers may also use leased
employees, direct hire temps, per diem workers, as well as
independent contractors to meet a particular workforce need.
While these types of working relationships are of value to
employers, they help meet the individual employees' and
workers' needs, as well.
Sandwich-generation workers--those caring for their own
children, as well as their parents--seek working hours that
meet their demanding personal needs. Entrepreneurs seek a work
situation that gives them mobility and an opportunity to engage
in multiple working relationships. And some workers just like
the flexibility that the independent contractor status
provides.
With the increased interest in these various working
relationships, more employers are faced with making the
sometimes complicated classification analysis. In my
experience, employers do, on occasion, unwittingly misclassify
employees as independent contractors.
Much of the difficulty in making an accurate determination
lies with the fact that there is not a single definition of an
employee. Rather, there are numerous definitions and statutes
which apply, depending upon the context in which you are asking
the questions, including the IRS's 1099 rule, or 20-factor
test, National Labor Relations Act, Americans with Disabilities
Act, in addition to federal court interpretations under the
Fair Labor Standards Act, Title VII of the Civil Rights Act of
1964, the Family Medical Leave Act, and the Age Discrimination
in Employment Act.
The problem with much of the above, however, is that the
tests applied come after the working relationship has been
established. There is little guidance for employers to use,
other than the IRS guidance, to apply when the working
relationship is first formed. So the dilemma arises when an
employer properly uses the IRS guidance, but is later
challenged, and when a different test is used, is held to have
misclassified a worker.
Finally, add to the above state definitions, such as in
each state's unemployment insurance code, where you will likely
find yet another definition of employee.
The use of independent contractors is a common practice in
some industries. Health care, particularly hospitals, often
uses per diem or contract nurses to supplement emergent
unforeseen staffing shortages, such as in the case of an
external disaster.
Or consider a small business owner with 10 employees that
provides audio-visual support services to clients. Of its 10
employees, the organization employs just one sound engineer,
who is a highly skilled and valued employee.
One day, that employee tells the business owner that he
wants to start his own business. The employee offers that, ``In
lieu of resigning, I will continue to work for you on an as-
needed, part-time basis, as an independent contractor.''
The parties agree, and both are delighted, until that
business owner is advised by legal counsel of the possible
pitfalls of proceeding with this type of relationship. And the
relationship does not proceed.
While my experience demonstrates that the vast majority of
employers are trying to comply with the law, I recognize that
there may be some employers and perhaps some industries in
which there are deliberate attempts to skirt the law. I do not
think, however, that additional legislation attempting to
clarify the law would provide the intended benefit.
Additional law in this area is likely to only add to the
existing confusion. And I think we need to focus on
clarification, education and enforcement.
Thank you.
[The statement of Ms. Walters follows:]
Prepared Statement of Christine V. Walters, MAS, JD, SPHR, Independent
Consultant, FiveL Company, On Behalf of the Society for Human Resource
Management
Introduction
Chairpersons Woolsey and Andrews, Ranking Members Wilson and Kline,
distinguished members of the committee. Thank you for this opportunity
to testify on the issue of misclassification of employees as
independent contractors (IC). I commend your two subcommittees for
holding this joint hearing on this important topic. My comments today
will focus on my experience with employers who have faced challenges
during or after this classification process
My name is Christine Walters. By way of introduction, I have over
20 years combined experience in HR administration, management, law and
teaching. Today I work as an independent human resources and employment
law consultant with the FiveL Company and served as an adjunct faculty
member of the Johns Hopkins University teaching a variety of courses in
graduate, undergraduate and certification level programs from 1999 to
2006.
I appear today on behalf of the Society for Human Resource
Management (SHRM). SHRM is the world's largest association devoted to
human resource management. Representing more than 225,000 individual
members, the Society's mission is to serve the needs of HR
professionals by providing the most essential and comprehensive
resources available. As an influential voice, the Society's mission is
also to advance the human resource profession to ensure that HR is
recognized as an essential partner in developing and executing
organizational strategy. Founded in 1948, SHRM currently has more than
550 affiliated chapters within the United States and members in more
than 100 countries.
SHRM is well positioned to provide insight on how employers
classify individuals as employees or ICs. HR professionals are
responsible for applying the law to the situation in their workplace
and properly determining, through a mix of factors, whether a person
should be classified as an employee or an IC.
The Workplace of the 21st Century
As organizations compete in today's ever changing global
marketplace, labor costs are never far from mind. In addition to
managing these costs, many employers in a variety of industries are
also facing a lack of talented, skilled, people to compete in today's
economy. With this changing landscape come new challenges for human
resources professionals and employers to reach out and find new
employment relationships that may not mirror the traditional models.
Depending on the needs of employers and employees, these working
arrangements may include part-time employment, or flex-time and
telecommuting schedules. In some instances, employers may also use
leased employees, direct-hire temps, agency temps, per diem workers, as
well as IC's to meet a particular workforce need. Employers may hire
contingent workers for a variety of reasons including filling temporary
absences, dealing with workload fluctuations, meeting employee requests
for part-time work, and continuing to utilize the skills of an employee
who has left employment.
While these types of working relationships are of value to
employers, they help to meet individual employees and workers needs as
well. Sandwich generation workers, those caring for this own children
as well as their parents, seek working hours that meet their demanding
personal needs; entrepreneurs seek a work situation that gives them
mobility and opportunity to engage in multiple working relationships;
and some workers just like the flexibility that the IC status provides.
Regardless of the motivations, however, every new working relationship
brings with it the challenge of asking the right questions to ensure
the working relationship is being properly classified as an employee or
non-employee worker.
Classification Challenges
With the increased interest in these various working relationships,
more employers are faced with making the sometimes complicated
classification analysis. In my experience, employers do on occasion
unwittingly, misclassify employees as independent contractors.
Much of the difficulty in making an accurate determination lies
with the fact that there is not a single definition of an employee;
rather, there are numerous definitions and statutes which apply
depending on the context in which you are asking the question. Section
825.105 of the federal Family and Medical Leave Act (FMLA) regulations
provide, ``The courts have said that there is no definition that solves
all problems as to the limitations of the employer-employee
relationship under the Act; and that determination of the relation
cannot be based on ``isolated factors'' or upon a single characteristic
or ``technical concepts'', but depends ``upon the circumstances of the
whole activity'' including the underlying ``economic reality.''
In 1992, the U.S. Supreme Court reiterated its position that, where
a statute contains the term ``employee'' and does not ``helpfully
define it, this Court presumes that Congress means an agency law
definition unless it clearly indicates otherwise.'' The Court then
reiterated the following factors, ``In determining whether a hired
party is an employee under the general common law of agency * * *''
1. the hiring party's right to control the manner and means by
which the product is accomplished. Among the other factors relevant to
this inquiry are the;
2. skill required;
3. the source of the instrumentalities and tools;
4. the location of the work;
5. the duration of the relationship between the parties;
6. whether the hiring party has the right to assign additional
projects to the hired party;
7. the extent of the hired party's discretion over when and how
long to work;
8. the method of payment;
9. the hired party's role in hiring and paying assistants;
10. whether the work is part of the regular business of the hiring
party;
11. whether the hiring party is in business;
12. the provision of employee benefits; and
13. the tax treatment of the hired party. Nationwide Mutual Ins.
Co. v. Darden, 503 U.S. 318 (1992)
Then in 2003, the U.S. Supreme Court, in a separate decision,
citing guidance from the U.S. Equal Employment Opportunity Commission,
used a different test when trying to assess whether a managing partner
of a firm (physician practice) should be counted as an employee for
purposes of the Americans with Disabilities Act These factors include
whether:
1. The organization can hire/fire the individual or set the rules
and regulations of the individual's work
2. And, if so, to what extent organization supervises the
individual's work;
3. The individual reports to someone higher in the organization;
4. And, if so, to what extent the individual is able to influence
the organization;
5. The parties intended that the individual be an employee, as
expressed in written agreements or contracts;
6. The individual shares in the profits, losses, and liabilities of
the organization (Clackamas Gastroenterology Associates, P.C. v. Wells
(April 22, 2003).)
The Internal Revenue Service (IRS) historically has used another
test, the s 1099-Rule or 20 factor test to ensure the working
relationship is being properly classified as an employee or non-
employee worker. Those 20 factors include:
1. Is the individual, who is providing services, required to comply
with instructions concerning when, where and how the work is to be
done?
2. Is the individual provided with training to enable him or her to
perform a job in a particular manner?
3. Are the services that are performed by the individual integrated
into your business' operations?
4. Must the services be rendered personally by the individual?
5. Does your business hire, supervise or pay assistants to help the
individual performing the services under contract?
6. Is the relationship between the individual and the person for
whom he or she performs services a continuing relationship?
7. Does the employer/company set the hours of work for the
individual?
8. Is the individual required to devote full time to the person for
whom he or she performs services?
9. Does the individual perform work on your business premises?
10. Does the employer/company direct the order or sequence in which
the work must be done?
11. Are regular oral or written reports required?
12. Is the method of payment at set intervals of regular amounts?
13. Are business or traveling expenses of the individual
reimbursed?
14. Does the employer/company furnish tools and materials necessary
for the provision of services?
15. Does the individual performing services lack a significant
investment in resources used to perform services?
16. Is the individual providing the services without realizing a
profit or loss from his services?
17. Is the individual restricted from providing services for a
number of firms at the same time?
18. Has the individual not made his/her services available to the
general public?
19. Is the individual who is providing services, subject to
dismissal for reasons other than non-performance of contract
specifications?
20. Can the individual providing services terminate his or her
relationship at any time without incurring a liability for failure to
complete a job?
Still other situations may require review under the National Labor
Relations Act.
Then you have the federal courts. When assessing a working
relationship under the federal Fair Labor Standards Act the ``Right to
Control'' or ``Manner and Means'' tests are usually applied. When
assessing a working relationship under Title VII of the Civil Rights
Act of 1964, the FMLA or the Age Discrimination in Employment Act, the
``Economic Realities'' test is usually applied. While slightly
different, all three of the tests have four common factors:
Who had power to hire and fire?
Who supervised and controlled employees' work schedules
and conditions of employment?
Who determined rate and method of payment?
Who maintained employee records?
The problem with much of the above, however, is that the tests
applied come after the working relationship has been established. There
is little guidance for employers to use, other than the IRS guidance to
apply when the working relationship is first formed. So the dilemma
arises when an employer properly uses the IRS guidance but is later
challenged and, when a different test is used, is held to have
misclassified a worker.
Finally, add to the above, state definitions such as in each
state's unemployment insurance code. There you will likely find yet
another definition of employee.
The use of independent contractors is a common practice in some
industries. Health care, particularly hospitals often use per diem or
contractors nurses to supplement emergent, unforeseen staffing
shortages, such as in the case of an external disaster. These health
care workers often work two, three or more different jobs, choosing
their preferred shifts and work schedules at each health care
institution.
Consider a small business owner with ten employees that provides
audio-visual support services to clients. Of its ten employees, the
organization employs just one sound engineer. The engineer is highly
skilled, quick and remarkably adept at assessing a problem and fixing
it. He is a highly valued employee. One day that employee tells the
business owner that he wants to start his own business specializing in
sound engineering only. They agree this would not be direct
competition. The employee needs significant periods of time off from
work to begin marketing and setting up his new business. The employer's
policies do not provide for the kind of time off that this employee
wants. The employee then offers that in lieu of his resigning, his
willingness to be available to work on an independent contactor on an
as-needed basis. The employer is delighted to be able retain access to
this worker's skills and agrees to the relationship. They then agree to
a part-time on-call work schedule, agree the (former) employee may
continue to use and have access to company equipment, will be paid on
the same basis but as an independent contractor. Both parties are
delighted to have worked out an arrangement that is amenable to both.
That is, until the business owners is advised by legal counsel of the
possible pitfalls of proceeding with this type of relationship. The
business owner now has to decide, does he risk a possible determination
that he may have misclassified this worker in order to keep this highly
skilled worker or does he take no risk but keep the worker and both are
happy?
There are many other similar stories to share: workers who want or
need income while they are between jobs; mothers returning to the
workforce after a number of years and seeking a flexible or occasional
opportunity to gain working experience before returning to full time
status; and more.
SHRM and FiveL Educational Efforts on the Issue
As the largest association for human resource professionals, SHRM
provides extensive resources and educational opportunities to help our
members comply with workplace laws. Understanding how to properly
classify workers is an issue in constant demand by SHRM members. Last
year, our knowledge center received approximately 1, 485 calls about
independent contractors--questions ranging from ``I have a former
employee that I would like to keep on in an independent contractor
status, how do I do it?'' to ``What forms do I need to file with the
IRS and DOL?'' .SHRM hosts several educational conferences a year and
we offer educational sessions on the topic of worker classification. In
addition, our online products are constantly updated and include our
``Independent Contractor Toolkit'' containing articles, frequently
asked questions, links to IRS and DOL resources, checklists and sample
agreements. In my experience and that of SHRM, employers are sincere in
their attempts to comply with the law. Similarly, in my capacity as a
consultant, I have given numerous educational presentations to
audiences comprised from industry groups, local chambers of commerce
and professional associations, like SHRM, on this topic. I have also
posted IRS publications 1779 and 15-A on my website and direct new
clients and other to these for guidance, and in some cases IRS Form SS-
8.
Possible Solutions to Problem of Misclassification: Unintentional and
Intentional
While my experience demonstrates that the vast majority of
employers are honestly trying to comply with the law, I recognize that
there are some employers and perhaps some industries in which there are
deliberate attempts to skirt the law. I do not think, however, that
additional legislation attempting to clarify the law would provide the
intended benefit. Instead, additional law in this area is likely to
only add to the existing confusion. Instead, solutions need to focus on
the education and the enforcement aspects of the problem.
In many ways, the confusion created by the multiple agency and
statutory jurisdiction over the issue of who qualifies as an
independent contractor is similar to confusion and overlap created by
requirements under the Health Insurance Portability and Accountability
Act. In this situation, the Departments of Labor, Health and Human
Services and the Internal Revenue Service were faced with issuing
guidance on this new, and complex law. The agencies working together,
issued joint guidance to the regulated community on the various
requirements of the law. The same needs to be done with worker
classification. Joint guidance from the various agencies on the
classification of employees would greatly assist employers in complying
with the law.
Secondly, increased and targeted education should be combined with
increased and targeted enforcement. I concur with the general consensus
that emerged from the March 27 Workforce Protection Subcommittee
hearing that additional legislation is not needed and the focus should
be on improved enforcement, clarification and information-sharing.
Enforcement of existing law should not only be increased, it should be
coordinated among the relevant federal agencies.
Employers need a one-stop shop for guidance on employee
classification. This combined with enhanced and targeted enforcement
would go a long way toward addressing current problems with
misclassification.
Again, I thank the subcommittees for listening to our perspective
on the issue of misclassification of employees and SHRM looks forward
to working with you on this issue. I will be happy to answer any
questions you may have.
______
Ms. Woolsey. Mr. Socolow?
STATEMENT OF DAVID SOCOLOW, NEW JERSEY COMMISSIONER OF LABOR
Mr. Socolow. Thank you, Chairwoman Woolsey, Chairman
Andrews, honorable members of the subcommittees. Good morning.
It is my honor to appear before you to discuss this problem of
independent contractors.
And before I begin, I want to recognize some of the other
wonderful New Jerseyans here. Not only Congressman Andrews,
Congressman Payne, Congressman Holt who was here before, and
even the minority counsel, Mr. Paretti.
So I wanted just to send greetings to all of you----
Chairman Andrews. We should strike the rest of his
testimony. [Laughter.]
Mr. Socolow [continuing]. Send greetings to all of you,
from New Jersey and from Governor Corzine.
Companies that misclassify workers as independent
contractors in order to lower their labor costs hurt their
workers, hurt the public, and unfairly gain an advantage in the
marketplace.
And much has been said already. I will not reiterate all
that is in my written testimony on how workers are, in fact,
harmed by misclassification.
Governor Corzine of New Jersey has led our state in an
important initiative to protect workers by fighting independent
contractor misclassification and rooting out the abuses of the
underground economy.
Our governor has recognized that the misclassification of
employees as independent contractors, in addition to putting
workers at risk and unfairly disadvantaging honest employers,
costs the state millions of dollars in foregone tax revenue.
And my full testimony does lay out the prevalence of this
problem.
Let me just say briefly that, even in our random audits of
this problem, 38 percent of employers were found to be
misclassifying their workers and much, much higher rates of
misclassification found in certain industries. And so our
auditors will tell you, and I will testify today, that this
cannot possibly all be merely unwitting or inadvertent
misclassification.
And also, by and large, this is not the request of the
employee coming to their employer asking to be treated as a
1099 contractor or misclassified. This is something done to
workers by their employers.
We are addressing the challenge, as I said.
The governor directed me, when I took office in January of
2006, to form a task force, which included our Unemployment
Insurance Tax group, our Wage and Hour Division in the
Department of Labor, Workers' Compensation, and also our State
Division of Taxation, which is in the Treasury Department, to
identify the common areas of concern and develop a process to
jointly refer cases and share information. By leveraging the
resources and findings of each agency, one agency's findings
can be used by the other without the need to duplicate the
entire investigative process.
And following up on Governor Corzine's initiative, a new
law now provides that New Jersey's gross income tax law, wage
and hour laws, unemployment insurance law, temporary disability
insurance law, all use the same legal test to distinguish
between an independent contractor and an employee: the ABC
test. And, again, therefore, by using the same legal
definition, Division of Taxation staff can use the audit
findings of our labor unemployment insurance tax auditors
without the unnecessary duplication of effort.
We have also begun cross-matching audit data with workers'
compensation data to identify employers who are not properly
providing workers' compensation coverage for their employees.
And, most recently, just on July 13, 2007, Governor Corzine
signed into law the Construction Industry Independent
Contractor Act, which provides even stronger enforcement tools
and, for the first time in our state, criminal penalties for
employers who cheat their employees, the government, and their
competitors by misclassifying workers as independent
contractors in the construction industry.
I have included in my testimony five recommendations for
action by the Congress and for your consideration to reduce the
misclassification of workers as independent contractors.
The first one is, as I mentioned, we recently amended our
statutes to have a unified ABC test, a strong test to determine
the employer-employee relationship and whether or not an
employee is, in fact, an employee or an independent contractor.
We recommend that the federal law should also use that test.
The second recommendation that I made is to enhance
collaboration. And I want to say, particularly, we heard the
testimony earlier of the federal Department of Labor Wage and
Hour Division that they are still thinking about whether or not
to implement the GAO's recommendation that they refer potential
cases of misclassification to their sister agencies.
In this regard, I want to urge that they stop thinking and
start actually referring those cases in all cases. If not to
the IRS--and they made some points about whether there might be
a chilling effect of referring to the IRS--then, at a minimum,
to their sister agency within the Department of Labor, which is
the Employment and Training Administration, which has
jurisdiction over unemployment insurance.
Because we certainly in the state U.I. agencies could use
those referrals to collect unpaid tax contributions to the U.I.
trust funds, and certainly then in states like New Jersey where
we are sharing all those referrals, we could use them to
collect state income tax. We could use them to insure that Wage
and Hour Division rules were followed.
By increased data sharing, joint enforcement efforts,
unified definition of the employer-employee relationship, and a
collaborative approach, you really can bring a broad array of
resources to bear on this problem.
Another comment that I had made related to the safe harbor
provision, we certainly think that it is well past time to
reform that provision, which really, in the IRS test, lets a
lot of employers get away with misclassifying their workers.
And I also want to just say about the comment that was made
by the U.S. Department of Labor Wage and Hour Division
mentioned something----
Ms. Woolsey. Mr. Socolow?
Mr. Socolow. Yes.
Ms. Woolsey. Somebody will ask you that question.
Mr. Socolow. Sure. Absolutely. And then----
Ms. Woolsey. We are actually going to have votes in a few
minutes, so even if you are Mr. Andrews's brother-in-law----
[Laughter.]
Mr. Socolow. Then let me just quickly finish my final
point, Madam Chairwoman, with your indulgence, is that we do
believe that if the USDOL expanded the types of unemployment
insurance tax audits that could count toward the statistics,
that would provide an incentive to state U.I. tax agencies to
increase their enforcement.
Thank you very much.
[The statement of Mr. Socolow follows:]
Prepared Statement of David J. Socolow, Commissioner, New Jersey
Department of Labor and Workforce Development
Chairman Andrews, Chairwoman Woolsey, honorable Members of the
Subcommittees: good morning. I am David J. Socolow, New Jersey's
Commissioner of the Department of Labor and Workforce Development. I am
honored to have the opportunity to appear before you today to discuss
the problem of misclassification of workers as independent contractors.
Our state and national labor laws are designed to protect all of
the nation's workers. Unfortunately, it has become all too common for
unscrupulous employers to find loopholes in order to unfairly reduce
their tax burden and increase their profits, while risking their
workers' future health, safety, and security. Companies that
misclassify workers as independent contractors to lower their labor
costs hurt their workers, hurt the public, and unfairly gain an
advantage in the marketplace.
New Jersey Governor Jon S. Corzine has led our state in an
important initiative to protect workers by fighting independent
contractor misclassification and rooting out the abuses of the
underground economy. Our Governor recognizes that the misclassification
of employees as independent contractors, in addition to putting workers
at risk and unfairly disadvantaging honest employers, costs the state
millions of dollars in foregone tax revenue.
Employer Avoidance of the Obligations of the Employer-Employee
Relationship
There are two related employee practices by which employees are
improperly classified: (1) those workers who should get a W-2 form from
their employer but instead are given a 1099 form and treated as if they
were self-employed: and (2) those workers paid in cash ``off the
books.'' In both of these situations, workers are denied their rights
as employees, including the right to organized representation, safety
and health protections on the job, family and medical leave,
whistleblower protections, vital social insurance benefits and health
insurance and retirement benefits offered to employees.
When employers misclassify their employees, those workers and their
families are left vulnerable when they are in greatest need of the
benefits routinely accrued through employment. The practice not only
threatens the ability of honest businesses to effectively compete, but
it also leads to reduced tax revenue and less funding for benefit
programs.
In our experience in New Jersey, employee-employer relationships
are being deliberately severed by employers driven by the quest to
improve their bottom line. Many employers are intentionally, and
illegally, cutting their legitimate business costs by choosing to treat
bona-fide employees as if they were self-employed contractors. In so
doing, these employers leave it to their employees to pay for social
insurance programs and take on their own tax withholding liabilities.
While some misclassification may be due to legitimate misunderstanding
of the law, the primary reason that most employers choose to
misclassify employees is a desire to avoid the employer costs of
payroll taxes for social security, unemployment and disability
insurance as well as worker's compensation insurance premiums.
Deliberate misclassification of employees as independent
contractors is not the benign issue that offenders engaging in this
practice would have us believe. Even if, as several have argued, some
workers voluntarily participate and find this practice advantageous, it
still does not remove any of the injuriousness of misclassification.
Many employees who find themselves misclassified are ill-prepared and
undereducated as to the responsibilities of self-employment.
A report released by Cornell University in April of this year
indicated that ``[w]ith less tax revenues flowing into government
coffers, public resources are strained. State unemployment insurance
systems, for example, are forced to compensate by raising contribution
rates for employers who comply with the regulations. According to the
Government Accountability Office, underpayment of Social Security,
unemployment insurance, and income taxes in 2006 due to
misclassification amounted to an estimated $2.72 billion; the
researchers here argue that the real cost is substantially higher,
particularly when losses at the state level are factored in.''
Employers who pay workers in cash ``off the books'' create
additional difficulties. When an employer issues a 1099 form to an
individual, enforcement agencies at least have a paper trail to follow.
Individuals who work ``off the books'' for cash payment are hidden
still further in the underground economy. Sometimes these workers are
exploited because they are undocumented residents. Other times
employers hire a worker for a short time without keeping proper
records, paying insurance premiums, or arranging for withholding.
How prevalent is the problem?
In the New Jersey Department of Labor and Workforce Development's
recent yearly audits of 2.2 percent of employers--around 6,000
annually--we have found either independent contractor misclassification
or workers being paid in cash ``off the books'' in 42 percent of cases.
Even among the more than 750 employers selected totally at random for
an audit, 38 percent of these firms violated the law by misclassifying
their employees. The Department also conducts approximately 1,500
targeted investigations annually. Some of these investigations are
triggered when misclassified workers apply for unemployment insurance,
temporary disability, or workers' compensation benefits that they
assumed their employers were paying on their behalf. When these workers
attempt to file for benefits, their claims are often initially denied
because they are not recorded in the system as an employee. In most
cases, subsequent investigations show that the individual was
misclassified and should have been treated as an employee.
Overall, in 2006, our audits found nearly 25,000 workers
misclassified and uncovered more than half-a-billion dollars in
misclassified or unreported wages ($565 million). In 2005, New Jersey's
audits found 28,286 misclassified workers, with misclassified or
unreported wages of $644 million. In calendar year 2004, these audits
turned up more than 26,000 workers whose employers misclassified their
employment and failed to provide these workers with New Jersey
unemployment and disability insurance coverage.
We find an even greater level of non-compliance when we target our
investigations to industries known to have widespread abuses. This
practice first attracted our attention as a result of audit patterns
and complaints about building contractors filed with the Division of
Wage and Hour Compliance, which led the Department to uncover a
significant number of misclassification violations in the construction
industry. In 2006, out of 871 audits and investigations in the
construction industry, 41 percent found misclassification of employees,
identifying nearly 3,000 misclassified construction workers, $78.2
million in under-reported gross wages and $2.1 million in under-
reported contributions. However, the misclassification of employees is
no longer primarily limited to the construction industry. We have also
found significant patterns of violation in food processing plants,
courier services, dental assistants, waitresses, nail salons, nurses,
secretaries and landscaping.
For example, the New Jersey Department of Labor and Workforce
Development recently conducted a program of unannounced investigations
of nail salons and found workers not properly classified as employees
in more than two-thirds of all establishments examined (350
investigations, 240 assessments). Field investigations of several
hundred landscapers disclosed failure to classify worker as employees
in nearly 62 percent of all businesses examined. Our investigations of
dentists found that 53 percent of the employers improperly treated
their dental assistants as independent contractors and not employees.
The Department has also greatly benefited from data-sharing with the
Internal Revenue Service (IRS). Investigations initiated as the result
of analysis of 1099 information provided by the IRS since 2003 resulted
in findings of non-compliance in 75 percent of cases (111 cases, 84
assessments).
In another example, for unemployment insurance tax purposes, New
Jersey law treats an employee leasing company as the employer of the
workers of its various clients. The tax accounts of the client
companies are then recorded as inactive accounts while the leasing
company reports the payroll for the workers. Our examination of
inactive client company records, however, has disclosed that many of
these companies continue making payments for services, generally to
``independent contractors'' or other temporary workers not included on
the new payroll reports from the employee leasing company. Our recent
investigations have found this type of non-compliance in 61.5 percent
of all these investigations (367 investigations, 226 assessments).
The New Jersey Department of Labor and Workforce Development also
has uncovered significant patterns of employers' misclassification of
workers through monthly enforcement sweeps by our State Division of
Wage and Hour Compliance. These enforcement efforts are targeted in the
residential and commercial construction sectors, the garment and
apparel industry and large-scale farming operations. Employers who
refuse to provide timesheets or payroll records are issued subpoenas.
Employers who ignore the subpoenas are subject to prosecution as
disorderly persons for a first offense and even more serious criminal
penalties for subsequent or egregious violations. During the first six
months of 2007, the Wage and Hour Compliance Task Force has made 158
referrals to the New Jersey Division of Workers' Compensation and 228
referrals to the Unemployment Insurance Division of Employer Accounts
for suspected misclassification of workers.
We find that employees who are misclassified rarely feel that they
are in a position to demand that they be correctly classified as an
employee. By contrast, true independent contractors choose to be self-
employed. They not only receive a 1099 form that they use to declare
their income for taxes but also must assume much of the tax and
insurance liabilities normally paid by employers, including paying both
the employer and employee portions of Social Security taxes,
contributing to unemployment insurance, and providing their own
workers' compensation insurance. True independent contractors set their
compensation at levels high enough to cover payroll taxes, insurance
and other expenses for which they are responsible. This is not possible
for employees who are expected to work for their employer as
independent contractors while receiving relatively the same pay as an
hourly worker.
How we are addressing the challenge
In April 2006, soon after taking office, New Jersey Governor
Corzine directed the Treasury Department's Division of Taxation and the
Department of Labor and Workforce Development to work together to
combat the practice of misclassification of employees. We formed a task
force that included the Divisions of Employer Accounts, Wage and Hour
Compliance, Workers' Compensation, and Taxation to identify common
areas of concern and develop a process to exchange information. By
leveraging the resources and findings of each agency, findings from one
department could be used by the other without the need to duplicate the
entire investigative process. The sharing of information among agencies
and programs is an important part of this initiative, which aims to
break down ``silos'' within government and have the various agencies of
government cooperate on tips, leads, and investigations.
Following up on the Governor's initiative, last summer the
Legislature sent a bill to the Governor's desk to support our efforts.
This law, P.L. 2006, Chapter 85, now provides that New Jersey's Gross
Income Tax law, wage and hour laws, Unemployment Insurance law, and
Temporary Disability Insurance law use the identical legal test to
decide whether an individual is an employee or an independent
contractor--the ``ABC test.''
Under the ``ABC test,'' an individual paid for services is presumed
to be an employee unless he or she meets all three characteristics of a
self-employed, independent contractor. These are: (A) that the
individual has been and will continue to be free from control or
direction over the performance of such service, both under his contract
of service and in fact; (B) The service provided is either outside the
usual course of the business for which service is performed, or that
the service is performed outside of all the places of business of the
enterprise for which such service is performed; and
(C) The individual is customarily engaged in an independently
established trade, occupation, profession or business, so that the
individual would not routinely become unemployed when his or her
relationship with this particular employer ended.
Because these sister state agencies use the same legal definition
of a true independent contractor, Division of Taxation staff, for
example, can use the Labor Department's findings to enforce the income
tax law without the unnecessary duplication of effort. The Division of
Taxation is also able to use the findings of compliance audits by Labor
Department auditors to pursue income taxes owed to the state. The Labor
Department also can follow up on audits by the Division of Taxation to
ensure that employees are properly paid and covered for Unemployment
Insurance and Temporary Disability Insurance benefits.
Additionally, we have recently begun a cross match of audit data
with Workers' Compensation data to identify employers who are not
properly providing Workers' Compensation coverage for their employees.
This innovative data-sharing procedure has led to more than 75
investigations of employers involving more than 1,300 workers.
Investigators from both Wage and Hour and Employer Accounts now check
for Workers' Compensation Insurance coverage. In addition, by sharing
tax-audit information with the Compensation Rating and Inspection
Bureau that oversees Workers' Compensation insurance premiums, the
State can better identify employers who are underpaying Workers'
Compensation premiums.
New Jersey was also an original volunteer, one of four states, to
join a partnership with the Internal Revenue Service in dealing with
Questionable Employer Tax Practices, or QETP. This federal-state
partnership is developing and implementing a federal/state approach to
addressing worker misclassification and other attempts to avoid
employment taxes. Our State has gained positive results from previous
exchanges of information from the IRS. As mentioned above, 75% of the
leads from these IRS 1099 data have found non-compliance. We anticipate
similar results under the QETP federal-state partnership, which has
been designed to enhance enforcement of tax laws, protect accurate
worker classifications and discover and address tax avoidance schemes
through the sharing of information and by leveraging federal and
individual state resources.
Most recently, on July 13, 2007, Governor Corzine signed into law
the Construction Industry Independent Contractor Act (P.L. 2007, c.
114). This law provides even stronger enforcement tools and more
effective penalties, including criminal penalties for the first time,
for employers who cheat their employees, their government and
competitors by misclassifying workers as independent contractors. Under
this law, a contractor that has knowingly misclassified workers can be
guilty of a crime of the second degree. Such a contractor can be held
liable to make up any loss to the employees if they were underpaid in
connection with the misclassification. The law also authorizes the
Commissioner of Labor and Workforce Development to assess and collect
administrative penalties, up to $2,500 for a first violation and up to
$5,000 for each subsequent violation. Contractors that engage in this
practice can be made ineligible to receive public contracts.
Recommendations for Federal Action
The Congress should address five areas that can be improved to
reduce the misclassification of workers as independent contractors:
1. Establish a strong, universal federal definition of employee: As
I mentioned, New Jersey recently amended its statutes to have
enforcement agencies use the strong ``ABC test'' to determine the
employee-employer relationship. Similarly, federal laws should adopt
the ``ABC test,'' as used in New Jersey, to distinguish an employee
from an independent contractor. A strong, consistent test for
independent contract status would enhance federal enforcement of such
laws as the National Labor Relations Act, the Civil Rights Act, the
Internal Revenue Code, the Fair Labor Standards Act, the Occupational
Safety and Health Act, and the Employee Retirement Income Security Act.
2. Enhance collaboration: New Jersey's aggressive multi-agency
approach to addressing the problem of employee misclassification
provides a model for improved coordination among federal enforcement
agencies. New Jersey's increased data sharing, joint enforcement
efforts, unified definition of the employee-employer relationship, and
our collaborative approach bring a broad array of resources to bear on
this problem. Similarly, federal agencies should adopt universal
standards for all investigators that clarify the procedures for
referring misclassification cases to the other appropriate federal and
state agencies charged with enforcement. This recommendation was also
made in May 2007 by the GAO in its testimony on employee
misclassification to the Subcommittees on Income Security and Family
Support and on Select Revenue Measures, which referenced GAO's finding
that USDOL district offices have varying referral procedures and
inconsistently referred misclassification cases.
3. Amend Section 530 of the Revenue Act of 1978: Section 530,
commonly referred to as the ``safe harbor'' provision, prevents the IRS
from reclassifying workers prospectively as employees, contains
deficient reporting requirements on employers who make payments to
independent contractors, and establishes insufficient penalties for
employers who pay their workers under the table and fail to file
1099's. Section 530 also allows employers to misclassify workers as
independent contractors in certain industries, regardless of the
employment relationship, if, in a particular industry, there is a
``long-standing recognized practice'' of classifying the workers as
independent contractors or if the employer underwent an IRS audit
anytime in the past. Reforms to Section 530 are long overdue and both
the GAO and the IRS are on record urging reforms that would increase
the effectiveness of compliance programs and increase collection of tax
revenue by the US Treasury.
4. Empower workers to assist in ensuring proper classification:
Workers and their representatives should have the option of receiving
an employee status determination from the IRS to ensure their proper
classification. When requesting a determination, the workers should
have their confidentiality maintained to the greatest extent possible,
should be protected from retaliation by employers when requesting a
determination, and should be afforded appeal rights. Also, the Fair
Labor Standards Act workplace poster should be revised to include
information that informs workers how and where to file complaints.
5. Increase enforcement: The USDOL should expand the types of
unemployment insurance tax audits that states may count in the
statistics reported to USDOL, including those audits that fail to find
a source document (such as a cancelled check or an original time
sheet). This would provide state unemployment insurance agencies with
an incentive to pursue audits in cases where employers fail to produce
or maintain payroll records. Additionally, enforcement by USDOL's Wage
and Hour Division could be improved by establishing adequate
administrative penalties for the knowing and willful misclassification
of workers and for record-keeping violations. The New Jersey Division
of Wage and Hour Compliance has enjoyed the statutory authority to
assess and collect administrative penalties since 1991 and this has
proven to be a useful compliance tool. Lastly, the USDOL should be
urged to target enforcement in industry sectors known to have high
rates of misclassification and to assist states in their enforcement
efforts through supplemental funding.
I thank you for the opportunity to testify and I would be happy to
answer any questions you may have.
______
Ms. Woolsey. Thank you very much.
We are going to have votes soon. But we are going to have
questions until we get down to the last minutes of having to
run, and then we will come back.
Ms. Walters, I, too, am a human resources manager for over
20 years. Now, I have been here for 15, so I have been away
from it for a while. But it was always clear to me--I mean, my
company had 800 employees. We started with 12, and I grew up to
800 before I started my own independent consulting firm. And I
could always tell when my clients knew the difference between
an independent contractor and not. And I would guide them to do
the right thing.
It is complex. And it is more complex now when we have--
just about any kid that has parents, if they are lucky to have
two--are in the workforce. And we have to do things so that
parents can bridge work and family. But we don't have to, at
the same time, take away the protections that these employees
need and deserve.
And they might be glad to have flex-time, absolutely. But
if that means when they have an accident, they don't have any
kind of health protection, what good is that?
So what we are trying to do here is ask you--I am going to
ask you what your association is doing to--I mean, do you have
a task force that would be working on how to help the federal
government make clear what would be a part-time employee that
is misclassified? How are you doing that?
That is what your association needs to be working on. Not
telling us we shouldn't do it, that we should leave it just as
complicated as it is. That is ridiculous.
Have you looked at Mr. Socolow's five actions? Those are
great actions. I would love to have your association's opinions
on those.
Ms. Walters. A flight of ideas in response.
One, for example, the society absolutely doesn't mean to
just leave things the way they are. And I don't want you to
hear that as my testimony today.
As an example, guidance on HIPAA compliance: The Department
of Labor, Health and Human Services, and the Internal Revenue
Service worked together to provide guidance to the regulated
community on various aspects of HIPAA compliance. I think that
was a great move. It was a multi-agency initiative to, again,
provide clarification, education on how employers can best
comply.
That is, day to day, every day the commitment of the
society is to serve the professional and advance the
profession. And we do that when we provide education and
information to help employers comply with the law, not skirt
the law.
It is trying to figure out with when there is, you know,
economic realities test and a manner and means test, an IRS
1099 rule, how do I know, you know, it is difficult to comply.
Which test do I use?
Ms. Woolsey. But if you would yield to me just a little
bit. I am asking you, are you looking at providing some
information that would streamline this so that, indeed, you
don't have--I mean, like Mr. Socolow has?
Ms. Walters. The society today--SHRM provides on its Web
site--I think not dissimilar from what I heard perhaps the
representative from the Department of Labor describe provides--
we actually have an independent contractor toolkit that our
members can go to the Web site and receive guidance and
information. We post the IRS Publication 1779, Publication 15-
A.
So, again, trying to be proactive to provide as much
education and information as we can on this topic.
Ms. Woolsey. So, Mr. Socolow, would you like to finish that
one thought I cut off before I pass the microphone?
Mr. Socolow. Yes, Chairwoman Woolsey. Thank you very much.
The final point I had wanted to make was about this point,
which was made repeatedly, by the U.S. Department of Labor Wage
and Hour Division that misclassifying an employee is not, in
and of itself, a violation of any of the 70-plus laws that they
enforce.
In New Jersey, we have a statutory authority under our wage
and hour laws to assess administrative penalties for
essentially failing to keep records. And if you are not
counting somebody on your payroll books as an employee, you are
not keeping records on them. That, in and of itself, is a
violation of wage and hour laws.
And if the Congress sees fit, it seems that that would be
an area to give the Wage and Hour Division, which is going to
be probably the first line of defense against these problems, a
new tool--a tool we enjoy in New Jersey and have since 1991--to
go after the employers that are willfully and wrongly doing
this.
Ms. Woolsey. Thank you so much.
Mr. Wilson?
Mr. Wilson. Thank you, Madam Chairman.
And, again, thank you for being here today.
In particular, before I was selected, I served as a real
estate attorney. I worked with the construction industry, Ms.
Stafford, very closely. And in our region, construction is just
the basis, I believe, of the sound economy we have, the booming
economy we have. It is the tax base for the schools. Just
everything comes together.
And so I want to make sure that what we are doing is
beneficial to the people working and to the economy--and again,
that is why I appreciate drywall--everything that you do.
And so keeping that in mind, Ms. Walters, what would be the
impact on the construction industry if Congress were to get it
wrong or legislate a solution that threatens the viability of
bona fide independent contractor status?
Ms. Walters. I think I wouldn't want to respond to a
particular industry. But I think there is a potential for
multiple industries that if there is legislation, as you put
it, that doesn't quite get it right, the impact could be then
for those that are today properly classified as independent
contractors may lose that status, may walk away from the status
not wanting to do so, for fear of, I guess, being reclassified
as an employee and not wanting that relationship either.
Mr. Wilson. And, again, I want your input on that because
construction, hospitality, landscaping, all of these are
extraordinary opportunities for people at ground level. And
then they can, as Ms. Stafford, own their own business. So that
is great.
At our last hearing, we heard from one representative of a
trade association that those efforts of his association were
made to assist its members in compliance with the wage and hour
classification laws.
Can you expand, in your testimony, Ms. Walters, as to the
activities of the Society for Human Resources Management in
helping its members ensure that the laws are being followed
correctly?
Ms. Walters. Sure, yes. Again, as I mentioned, on the
society's Web site there is actually an independent contractor
toolkit. That toolkit provides a variety of resources,
including links to governmental agencies, government
publications.
The society also sponsors conferences every year,
throughout the year, multiple conferences. I have had the
honor, as have others, in presenting and providing educational
programs and information on managing your contingent workforce,
the different types of working relationships, how to determine
whether a working relationship is or is not an employment
relationship--some of the factors to consider there.
Mr. Wilson. And, Ms. Walters, the question was asked at our
first panel and now I am going to ask you, and that is that at
a Workforce Protections Subcommittee hearing earlier this year,
one person noted that the question of whether an individual
worker is a contractor or an employee isn't that complex. Based
on your 20 years of experience as a human resources
professional, do you agree?
Ms. Walters. I think it is nice we have heard consensus
here this afternoon--or at least I have heard consensus--that
it can be simple and it can be complex. And it is always a
case-by-case analysis.
And what can appear today to be a very straightforward,
appropriate independent contractor relationship may in 4
months, 6 months evolve into something that looks very
different than what we intended today. Some are clearcut, and
some are not.
So I think it can be very complex.
Mr. Wilson. Thank you very much.
Ms. Walters. Thanks.
Ms. Woolsey. Mr. Andrews?
Chairman Andrews. Thank you very much. I appreciate that.
Thank you, first of all, everyone, for their testimony.
Ms. Walters, early in your statement, you talk about the
problem of a lot of the complexity coming from the fact that
there is not one definition of what an employer is; many
different statutes, many different definitions.
Then on page nine of your statement, you say that you do
not think that additional legislation attempting to clarify the
law would provide the intended benefit.
I have trouble reconciling those two points. What is wrong
with Mr. Socolow's suggestion that there be a single, strong,
clear, unitary definition of what an employer is? Why shouldn't
we do that?
Ms. Walters. I think part of the concern would be one, I
think it would be a fascinating process to watch for Congress--
I guess the question is, what would supersede what?
If we were to abolish--and I am not sure that is what I am
hearing today is a suggestion to take ERISA and ADA and FMLA
and all the different federal statutes, abolish every
definition federal and then state also, and have one definition
that would apply to everything.
Chairman Andrews. I am going to let him speak to it
himself. I don't think that is the proposal. I think that the
idea was to have a uniform definition without abolishing
something.
Mr. Socolow, what exactly are you proposing?
Mr. Socolow. I think that the difference is between a
definition of an employee versus a definition of independent
contractor, right?
The ABC test that we have in New Jersey, that a number of
other states use as well, and that, as I said, we now use for
taxation and for unemployment and a number of other things, the
ABC test is just about distinguishing whether or not someone is
an independent contractor.
There are plenty of other definitions you can have about
what is covered by FMLA and what isn't. But it seems to me that
for the purposes of defining an independent contractor, the ABC
test is clear. It has got lots and lots of case law that now is
behind it. And it works.
Chairman Andrews. I think under the ABC test Mr. Williams
probably wouldn't be sitting here today. I think that his facts
were crystal-clear that he would have been treated as an
employee.
Mr. Socolow. As is evidenced by the fact that he received
unemployment compensation, which was determined, I am almost
certain, by the ABC test.
Chairman Andrews. So I think, as a practical matter, for
Mr. Williams's case, it would have given him more justice more
quickly, which, I think, is what we want to accomplish.
And, Ms. Stafford, if I can ask you, would a single
definition of employer under these various statutes be easier
for you to deal with as a businesswoman?
Ms. Stafford. Absolutely. I think that it seems to me that
it centers so much around the 1099. If I were this committee, I
would be looking hard at the 1099 and what employers really use
that as a tool for.
It seems to me that that is the disconnect between people
that pay taxes and make sure that they withhold taxes from
employees to people that hand out 1099s like they are
irrelevant pieces of paper that people never pay taxes on. And
it is not followed up, apparently not, not at 38 percent, as
Mr. Socolow----
Chairman Andrews. Mr. Williams, you were about to say
something. What I wanted to ask you was, did you ever doubt in
your ordeal that your employer intended to misclassify you, or
do you think the employer was just mistaken in interpreting
what the law was?
Mr. Williams. No, I think the whole intent of the operating
agreement was to classify us as independent contractors and to
keep us as independent contractors, thereby shifting all the
costs to us and making us pay, you know, having to pay for the
entire situation.
In Massachusetts, there are three simple situations: the
123 test they call it in Massachusetts, which is if you control
the employee, or if the employee is not allowed to work for
others, or if the employee is in a different business or if the
employee is in the same business, then you can't classify him
as an independent contractor.
All three of those tests, very clearly in the FedEx model,
have proven to be employees.
Chairman Andrews. And, Commissioner Socolow, if you had to
just take an educated guess at the percentage of enforcement
actions your department has engaged in that are intentional
misclassifications versus confused or inadvertent ones, what is
your estimate of that breakdown?
Mr. Socolow. Congressman, it is hard to put an exact number
on that. But I will say that when you see the industries in
which 60, 70 percent of the employers are routinely and
continually engaging in this practice, when you see,
furthermore, unfortunately that when we do follow-up audits of
those who we have found violating it and go back and look at
them 2 and 3 years later, that 60 and 70 percent continue to
misclassify their workers, I would say that a very substantial
share of employers are doing this intentionally.
Chairman Andrews. Do you have any reason--I see my time is
up. Thank you very much.
Ms. Woolsey. Mr. Kline?
Mr. Kline. Thank you, Madam Chair.
I want to thank the panel for being here with us today, for
their testimony and for answering the questions. I have a
couple of different directions I want to go, because I am
finding this to be still fairly complex.
Just for the record, Mr. Williams, I want to make sure that
I understand the status of your cases. You have a hearing
scheduled before the National Labor Relations Board later this
fall, is that correct?
Mr. Williams. That is correct, sir.
Mr. Kline. And you have some action in state court with a
lawsuit, is that correct?
Mr. Williams. That is also correct.
Mr. Kline. And neither of those have been resolved yet, is
that correct?
Mr. Williams. No, sir.
Mr. Kline. So those are pending. All right. Thank you.
Ms. Walters, I want to go back to this issue of definition.
We have, in the previous hearing and in this hearing today in
the discussion with the administrator on the first panel,
recognized that there is a lot of confusion over this
definition. And it does seem that it would be helpful if we
didn't have so many definitions, if we could make it simpler.
And yet, as you said in your testimony and your discussion
with Mr. Andrews, that you don't think that we should try to
change the statutes, and, as I understand your answer, that is
because, as Mr. Andrews said, there are various statutes. There
are many statutes, and just the process--knowing how we work or
don't work here in Congress--that could be pretty problematic
as we went in and tried to fix these definitions for all the
statutes.
But you discuss something in your testimony called joint
guidance. Can you tell us how that might help this problem?
Ms. Walters. Sure, I would be happy to.
Just giving consideration to, again, multiple agencies that
have purview in administering and enforcing some of the laws
where this issue comes up--again, Title VII, ADA, Family
Medical Leave--so perhaps the Department of Labor, the EEOC,
the IRS coming together, as they did in the example we gave
with regard to HIPAA compliance, coming together to try and
develop guidance for employers in how to, you know, clarify
applying the different tests, is there guidance that would be
and it is the society's position that could be extremely
helpful to employers to move toward some consistency in the
application of the different interpretations.
Mr. Kline. So this guidance, then, would not require a
statute change? But it would do a couple things. It would make
it easier for employers, presumably, to understand. But it also
would make it easier for employees and others to understand if
there was a willful misclassification. Is that correct?
Ms. Walters. That is correct. That is what we believe.
Mr. Kline. And so it would achieve, presumably, both goals:
make it less likely that there would inadvertent
misclassification, and certainly make it easier for other
members of the panel and employees across the country to
understand if they are being taken advantage of.
Ms. Walters. I believe so, yes.
Mr. Kline. Okay. Thank you.
I yield back.
Ms. Woolsey. Mr. Kildee?
Mr. Kildee. Thank you, Madam Chair.
Mr. Williams, when you were injured in 2002, you did not
file for workman's compensation benefits. Why not? And who paid
for your medical bills at that time?
Mr. Williams. Eventually, the medical bills were paid by
the person that caused the accident, by that particular
company's--that person is insured, as he was found to be at
fault and be at fault in a major situation.
The only income I had at the time was for the worker's
accident policy, which was provided in the contract in FedEx,
which I paid for every week. But that is the only thing I had
to live on at that time. I had no other income coming in.
I was ineligible for workman's compensation. FedEx would
not--did not--contribute to workman's compensation. Therefore,
I was ineligible. The only thing I had was this worker's
accident policy, for which I paid.
Mr. Kildee. And that was a private worker's accident
policy?
Mr. Williams. Yes, provided through FedEx through an
insurance company.
Mr. Kildee. But you did not qualify for the regular
workman's compensation benefits?
Mr. Williams. No. I was told I could not qualify.
Mr. Kildee. So eventually, because the other party was at
fault, you eventually collected from----
Mr. Williams. Recouped for the hospital expenses, et
cetera, yes.
Mr. Kildee. Were you told you that you could not file for
workman's compensation?
Mr. Williams. Yes. It is very specific in the FedEx
operating agreement and also in the policy that the protective
insurance company provides for you. It says, ``You are not,
under any circumstances, covered by workman's compensation.''
Mr. Kildee. Thank you very much.
Thank you, Madam Chair.
Ms. Woolsey. Thank you.
Mr. Hare?
Mr. Hare. Thank you, Madam Chair.
Mr. Williams, just a few other questions about it. I am
assuming your van was damaged in the accident?
Mr. Williams. Yes, sir.
Mr. Hare. And who paid for that?
Mr. Williams. Well, it was my van. It was totaled in the
accident. And it was paid for by the other party's insurance
company. My insurance company paid for it first.
Mr. Hare. And then at some point you went back to work and
you were required to replace your P400 vehicle----
Mr. Williams. Yes.
Mr. Hare [continuing]. With another one selected. And what
happened to that vehicle?
Mr. Williams. Well, when I was terminated in December of
2005, I was on the hook for that vehicle, if you will. I was
liable for the payments. It was a leased vehicle that was set
up through FedEx. And when they terminated me, I had to get rid
of the vehicle.
I was one of the few fortunate ones to be able to get rid
of the vehicle through the leasing company. I called them the
day after I was terminated, told them what had happened. They
told me to take it to a certain location. I took it to that
location and turned it in. And then approximately 6 months
later, my vehicle was sold.
In the meantime, I had to make all those monthly payments.
I did not make them because I told them I didn't have the
income to make them. But they did eventually sell the vehicle.
Mr. Hare. Ms. Stafford, just a couple of questions for you.
You said that in residential construction it is impossible for
companies like yours to compete. Is misclassification rampant
in that industry? And, if so, why do you suppose that is the
case?
Ms. Stafford. It certainly--it is rampant.
And the difficulty we have is the market supporting our
prices to do the work because we are paying--when you talk
about the difference in percentage from one company to another,
my federal, state, Medicare and all the employee contributions
run about 16.2 percent to my company.
But if you are misclassifying an employee, and you are also
skirting a workman's compensation payment that should be made,
that is another 10 to 15 percent, depending on what the
classification that you are using, if you have an insurance
policy.
If you don't have either of those two things, you are
talking about somewhere in the neighborhood of a 30 percent
price advantage.
Mr. Hare. Well, in your experience, what happens to the
workers when they are misclassified as independent contractors?
In other words, you know, how do they cope when they are
injured, and how do they handle the cost of being an
independent contractor?
Ms. Stafford. There have been a lot of documented cases of
what happens in the housing industry. And basically, there have
been cases when there has been a major accident and the person
goes on the payroll that day. And all of a sudden shows up
under the employer's workers' compensation policy. However,
prior to that, he was never on the employer's records and was
being paid cash under the table.
Mr. Hare. Chairman Andrews, I would like to yield to you.
You had a question that you didn't get to finish.
Chairman Andrews. Thank you.
I did want to ask Mr. Socolow if the experience he has had
in New Jersey, if he has seen any evidence that it is atypical
of states across the country; in other words, this prevalence
of intentional misclassification.
Mr. Socolow. Yes, Chairman Andrews. The colleagues in the
other U.I. tax agencies in the other wage and hour divisions of
state governments collaborate. There are conferences. And this
topic is topic number one at both of those conferences. All the
states are seeing the same patterns.
Chairman Andrews. I thank my friend for yielding.
And I thank the commissioner.
Ms. Woolsey. Mr. Bishop?
Mr. Bishop. Thank you, Madam Chair.
Ms. Walters, you have indicated that you don't believe that
this is an issue that suggests new law ought to be passed on
the part of the federal government, but that you do believe
that the way to approach this problem is through improved
enforcement and clarification of existing law and information-
sharing.
That is essentially the position of your organization?
Ms. Walters. It is. Just the one point of clarification is
adding a new federal law to those that already exist I think
would not be the best approach to enhancing clarification.
Mr. Bishop. But would enforcement and clarification be
enhanced if there were this automatic referral notion that has
been recommended by the GAO? How would you feel about that?
Ms. Walters. My first impression in response to that is I
think that would not help with clarification because it is
still going to come after the fact.
Mr. Bishop. Would it not help with enforcement?
Ms. Walters. It could help with enforcement. But I am not
sure how it would help with the initial appropriate----
Mr. Bishop. Would not enforcement ultimately yield
clarification? I mean, wouldn't people, in effect, get the
message?
Ms. Walters. They would. But, again, I would think
everyone's goal here is to what can we do to prevent this from
happening in the first place, proactively to get clarification,
education so that there is--rather than needing the increased
need for enforcement because there is more misclassifications
than there used to be--what can we do proactively to prevent
the misclassifications in the first place?
That is the society's goal is to try and, you know, get
this, nip it in the bud, if you will and----
Mr. Bishop. And in an ideal world, I would agree with you.
I think you would also agree that none of us live in that ideal
world. I mean, if I were to follow that logic, the IRS's
function would be to simply provide information to help people
fill out the forms. [Laughter.]
Ms. Walters. You know, I would go back to, with regard to
the multi-agency guidance that was given out before, I don't
know if there is statistics to measure the number of alleged
violations before and after that, but, you know, it is an
effort that I think is well worth consideration.
Mr. Bishop. I guess the point I am trying to make is--what
I am struggling to understand is, in the absence of a unitary
definition, which I think I would support a unitary definition,
but it seems as if you do not--but in the absence of a unitary
definition, and in the absence of mandated or automatic
referral, I don't see how we can be effective in terms of
targeted enforcement. I just fail to understand how we would
have sufficient tools to target enforcement if we didn't have
those two tools.
Ms. Walters. SHRM supports the idea of enforcement.
Absolutely. Absolutely.
And I think the other question on the table is--and, again,
I think a point of clarification is I don't know the answer to
the question, but what comes to my mind, what the society is
considering is if there is consideration of one definition, how
is that applied when a claim comes up under ERISA, when a claim
comes up--I don't know the----
Mr. Bishop. I am not suggesting for a moment that to divine
a definition would be easy. It wouldn't be. But we step up to
the plate on lots of complex issues. And I think simply because
this is complex, we ought not to allow that to deter us.
Mr. Socolow, if I may? In New Jersey, it is considered a
violation of the law to misclassify an employee, correct?
Mr. Socolow. Yes, Congressman.
Mr. Bishop. And have you found that to be a deterrent?
Mr. Socolow. Yes, we have. We have been doing a lot of
education and information and clarification. And we have found
over time that having a strong enforcement process, in fact,
does complement those compliance assistance efforts, as well.
Mr. Bishop. Thank you very much.
Thank you, Madam Chair.
Ms. Woolsey. Mr. Payne?
Mr. Payne. Thank you very much.
Mr. Socolow, you mentioned that in your testimony you
highlighted New Jersey's new law, known as the ABC test.
Although the law has not been in effect for long, do you
believe it has been effective in determining whether an
individual is an employee or an independent contractor? And do
you know if other states use the same test? And if so, what
states? And do you believe that it is effective, as well, with
them?
Mr. Socolow. Congressman Payne, thank you.
The chief thing that happened a year ago last summer was
that our taxation division adopted--or the statute was changed
so that the taxation division has the same ABC test that we
have had for many, many years in unemployment insurance.
And what that has been effective over the last 12 months--
or 7 months, because it took effect in January of this year--it
has given us the opportunity now that, when one agency does an
audit or an investigation, those findings can be used by the
other agency to double up on the enforcement without having to
double up on the work.
So that is the chief--from an enforcement perspective, it
just streamlines and breaks down those silos between agencies
of state government.
As to the ABC test, it is widely used by unemployment
insurance programs--you know, prong C, the third prong of the
test, which goes to whether or not the worker would be able to
survive the loss of that client as an independent contractor or
whether they would be unemployed, obviously comes from the
question of whether somebody should get unemployment benefits.
And, yes, I would advocate that every state use it for
their income tax, as well.
Mr. Payne. Let me ask another question in regard--and you
may not have the answer at hand. But, as you know, FedEx and
UPS are the big competitors in the whole delivery system.
Actually, you know, FedEx used to keep up with UPS's benefits
to, I guess, show that unionization is not necessarily
necessary to get benefits and so forth and so on.
However, there is a new guy on the block--not so new--but
they are DHL. And I don't know if you have taken a look at that
operation. One, as you know, it is part of the Federal Republic
of Germany's subsidized mail system. Therefore, indirectly,
they have unfair advantage. But secondly, they make it, I
believe, mandatory that every driver is an independent
contractor.
And I wondered, do you know of that situation?
Mr. Socolow. Congressman Payne, I guess I would have to get
back to you specifically about that situation.
I do know that we found in that industry certain instances
where drivers were misclassified as independent contractors. We
have one of them here today on the panel. And we have found
that, as well, in New Jersey. And we are enforcing to make sure
that that is corrected.
Mr. Payne. It is probably even a little more difficult one
at this time.
Our federal post office--I should have asked our federal
witness--had begun in the last year or so to hire independent
contractors, can you believe it? They are hiring people to--if
you have got a pickup truck, you can just go and we will
contract with you to pick up mail and, you know, deliver it to
a sub-post office.
And it seems to me like the federal government is violating
the law. It would appear to me that they are overreaching. It
appears to me that they are trying to break the union--postal
workers union--by this contracting out. As a matter of fact,
even in the post office delivery system, there is the same kind
of situation happening.
And so I would really like to get together with your
department and see whether we need to sue the federal
government about the state of New Jersey. [Laughter.]
But I am serious about these practices, once again, of the
federal government coming in, as they did in our----
Mr. Socolow. Rodino Building.
Mr. Payne. Right. And now it is in the new federal building
where I moved next door when the new building was built.
But I would certainly like to talk about and see whether
there is some serious violations by the federal government.
Mr. Socolow. I look forward to following up with you on
that, Congressman. Thank you.
Mr. Payne. Thank you very much.
Ms. Woolsey. Mr. Holt?
Mr. Holt. Just as the bells ring.
Thank you, Madam Chair.
And I welcome the witnesses, particularly Commissioner
Socolow, whose career has shown that intelligence, competence
and skill can be rewarded.
I think New Jerseyans can take pride on this subject, as
Mr. Andrews and Mr. Payne have pointed out. I think this is one
area where we have shown ourselves, our state, to be
progressive.
Let me follow up on two subjects. One is the declaration
that this is unlawful behavior: misclassification. What do you
say in response or do in response to those employers who say,
``Well, this is really by mutual agreement,'' or, ``This is
what the employee wanted?''
Mr. Socolow. Like with any labor standard, you often have
that thrown back at you. People say, you know, the worker
agreed and didn't want to be paid overtime for working more
than 40 hours in a work week. People say that the worker didn't
want to be paid the minimum wage.
Well, that is really not relevant. I mean, you cannot
contract, you cannot voluntarily, even in a mutual agreement,
give up the rights that are there for workers. And that is
because it is arguable that such an agreement really would be
voluntary. It would almost certainly have elements of coercion.
And so, that is really not a matter. The law is very clear
as to whose call that is. That is the call of the enforcement
agency and, if we are challenged, up ultimately to the courts.
But it isn't between the employer and the employee to go ahead
and break the law.
Mr. Holt. And that is not difficult to uphold in the
courts.
Mr. Socolow. No, not at all. Again, there is lot of case
law on that test.
Mr. Holt. Now, to the definition, Ms. Walters and others
have suggested that it might be very hard to come up with a
definition. As I understand it, you are proposing, or you would
propose, a definition that is similar to the ABC test that is
applied in New Jersey.
Mr. Socolow. Yes.
Mr. Holt. That test, you say, has been used in various
agencies, is now used uniformly across agencies. When you
adopted it for these new applications, was there wrangling over
the wording?
Mr. Socolow. No, Congressman, not at all.
And I just want to point one thing out. Just because you
use this test to define an independent contractor doesn't mean
that other tests can't be elsewhere in those laws.
It was mentioned on page three of the U.S. Department of
Labor's testimony that in certain of their statutes individuals
performing work are covered even if they are classified as an
independent contractor.
So you can do that. You can have all different definitions
of who is covered, but still say, nonetheless, covered or not,
this is what an independent contractor is. And, again, what
that does is it provides ease of training of the auditors and
investigators because they all know they are using the same
test.
Mr. Holt. Do you happen to know how close your language is
to the language of other states? You mentioned that a number of
states--I don't think you gave the number, and maybe you don't
know the number--use a uniform test.
Mr. Socolow. Well, Congressman, I don't know how many use
the ABC test. I do know that many of the state unemployment
insurance programs--I believe it is the vast majority of them--
use the ABC test, with all three prongs being required, to
distinguish whether someone is or is not an independent
contractor.
Again, whether that has been adopted beyond unemployment
insurance by those states, I don't know. I know that we have
now done it beyond that.
Mr. Holt. And the commonality of the language that you are
familiar with, how close is that?
Mr. Socolow. It is identical. That ABC test, you know, has
essentially been codified almost identically in many, many
state unemployment compensation programs.
Mr. Holt. Well, I think you have made our decision here on
a couple of these issues easier. Thank you.
Chairman Andrews [presiding]. Does the gentleman yield back
his time?
Mr. Holt. Yes.
Chairman Andrews. I want to thank all the witnesses today.
Mr. DeCamp, thank you for your contribution and for staying
for the second panel. So we appreciate very much the fact that
you stayed and listened. And we look forward to working with
you further.
Mr. Williams, your story was compelling and well-told. And
I think we have a shared consensus to prevent this from
happening to other people in the future.
Ms. Stafford, it was refreshing to hear from someone who is
actually running a business every day and dealing with these
issues. And your contribution was quite notable.
Ms. Walters, your association has been a valued advisor to
this committee for a long time. And we hope that continues to
be the case.
And, Commissioner Socolow, we very much appreciate the fact
that you brought some specific ideas as to how to fix this
problem, as well as simply a description of it.
So we are very grateful to everyone who participated today.
As previously ordered, members will have 14 days to submit
additional materials for the hearing record, without objection.
And any member who wishes to submit follow-up questions in
writing to the witnesses should coordinate with the majority
staff within 14 days.
Without objection, the hearing is adjourned.
[The prepared statement of LIUNA, submitted by Mr. Andrews,
follows:]
Prepared Statement of the Laborers' International Union of North
America (LIUNA)
The Laborers' International Union of North America (LIUNA) is
submitting this statement on behalf of the 520,000 workers it
represents who are employed in many of the industries which are
particularly impacted by the misclassification of workers as
independent contractors, including the construction industry.
LIUNA commends the Subcommittee for seeking solutions to the severe
and ``growing problem for the public and private sector'' of worker
misclassification which has now been conclusively established to have
``direct and significant impacts on workers, employers, insurers, and
tax revenue basis'' \1\.
The Growing Problem of Worker Misclassification
Worker misclassification is an important public policy issue with
broad implications. Employers who play by the rules are put at a
competitive disadvantage with companies that misclassify their
employees. In cases of misclassification, employees are unable to
access basic worker protections, such as unemployment insurance, social
security benefits, overtime payments, and workplace injury benefits.
Insurance companies are deprived of workers compensation premiums
requiring legitimate employers to bear those costs. Law-abiding
citizens bear the taxes of others as they are forced to make up for
unscrupulous companies that evade their legal responsibilities.
The practice of worker misclassification occurs when employers
label workers on their payrolls as independent contractors in order to
illegally lower labor costs. An employer who misclassifies a worker as
an independent contractor evades his obligation to withhold any pay to
the federal government for income tax Social Security, Medicare and
unemployment (FUTA) tax on behalf of that worker. In addition, the
employer is evading similar requirements under state law, including the
failure to pay workers compensation premiums on behalf of that worker
and fringe benefits to which the worker might be entitled if he or she
were properly classified. Moreover, misclassification deprives workers
of a wide variety of labor and employment protections, most
particularly the right to receive minimum wages and overtime payments.
The practice not only seriously harms workers, many of whom are low-
wage and minority workers, but it constitutes tax and insurance fraud.
These and previous hearings have established the scope of severity
of the problem.\2\ The testimony presented thus far confirms the
conclusions of a growing number of studies which establish the impact
of independent contractor/worker misclassification abuse.\3\
Misclassification negatively impacts both the federal and state
governments and all of our citizens in the following ways:
Impact upon workers
Workers who are incorrectly classified as independent contractors
lose the protection of a wide variety of labor and employment laws,
including the overtime provisions of the Fair Labor Standards Act,
Social Security, Unemployment Insurance and Workers Compensation.\4\
If misclassified workers need to apply for workers compensation or
unemployment insurance benefits, they are denied those benefits.
Workers who are misclassified rarely receive pensions. It is also well
established that workers who are misclassified do not receive health
insurance benefits at the same rate as properly classified workers. GAO
Report at p. 14. The Illinois Study found that the ``lack of health
insurance coverage exacts a large toll on the uninsured--avoidable
deaths, poorly managed chronic conditions, and underutilizes life-
savings medical procedures.'' Illinois Study at p. 11.
In addition, when workers are deprived of employer--provided health
insurance or workers' compensation coverage, taxpayers bear the
economic costs of the uninsured and under-insured. Federal, state, and
local governments support care of the uninsured through public clinics,
and payments to health care facilities that care for the uninsured.
Impact upon fair, law-abiding employers
The conditions for a fair and competitive marketplace are
undermined because firms that misclassify workers illegally lower their
labor costs as much as 30%. This places employers who play by the rules
and properly classify their employees at a competitive disadvantage by
shifting costs to them from the violating employers. Recent studies
have documented the harm done to responsible honest employers by worker
misclassification:
``[T]he conditions for a fair and competitive are sabotaged [by
misclassification]. Firms that misclassify can bid for work without
having to account for many normal payroll-related costs. This illegal
practice can decrease payroll costs by as much as 15 to 30%. This
places employers who correctly classify their employees at a distinct
competitive disadvantage * * * [T]he violating employer will have been
able to gain business illegally by exploiting their competitive
advantage during the bidding process and they will have profited by
avoiding other payroll related expenses * * * Employers can avoid the
high cost of paying workers' compensation premiums by mandating that
persons who work for them have an exemption. This allows employers who
misclassify to underbid the legitimate employers who provide coverage
for their employees. In the construction sector, the workers'
compensation effect from misclassification further destroys the
fairness and legitimacy of the bidding process.'' The Economic Cost of
Employee Misclassification in the State of Illinois, supra at note 1 at
pp. 2-3.
Impact upon Federal and State Revenue
Studies at the federal income level have established that
``misclassification can reduce tax payments, Medicare payments, and
Social Security payments. At the state level, misclassification can
affect payments into state tax, workers' compensation and unemployment
insurance programs.'' GAO Report at p. 8.
According to published data, income is reported on Form 1099's at a
31% lower rate than that of income reported on Form W-2's; as a result,
both the federal and state governments suffer a loss of income tax
revenue when employers misclassify workers, thereby pushing them out of
wage-earner tax status. Illinois Study at p. 6. The studies have
estimated that millions in federal and state income taxes are lost
annually due to misclassification. For example, in Massachusetts, lost
state tax revenues due to misclassification for all industries in 2001-
2003 was $91 to $125 million.
Impact upon State Unemployment and Workers
Compensation Systems
State workers' compensation and unemployment insurance systems are
adversely affected as well. Businesses that misclassify employees as
independent contractors pay no unemployment insurance nor do they
obtain workers' compensation coverage on those workers. Employers who
correctly classify workers pay both federal tax under FUTA and state UI
tax. In 2000, a federal DOL study found that nearly $200 million in
Unemployment Insurance tax revenue was lost per year through the 1990's
due to misclassification of workers as independent contractors. In
Illinois, for example, it is estimated ``that the unemployment
insurance system has lost an average of $39.2 million annually from
2001-2005 in unemployment insurance taxes that are not levied on the
payroll of misclassified workers as they should be. For 2005, [it is]
estimate[d] that the unemployment insurance system in Illinois lost
$53.7 million in unemployment insurance taxes.'' Illinois Study at p.
6.
Misclassification is Endemic in the Construction Industry
Recent studies have confirmed that ``the moderate rate of
misclassification [of workers in all industries] was from 13-23%.'' In
certain industries such as the construction industry, the rate of
misclassification of workers is at the high end of the spectrum and it
is safe to say that misclassification has become all but endemic in the
construction industry: ``In two states, Massachusetts and Maine, the
incidence of misclassification in the construction industry is higher
than all other industries in their states. For Massachusetts, the
moderate statewide rate is 19%, while the rate of misclassification in
the construction sector is 24%; * * * In a report by the General
Accounting Office (1996), it was reported that the percentage of
misclassified workers * * * in the construction sector was 20%.
Illinois Report at p. 3.
Because the misclassification problem is especially severe in the
construction industry, a growing number of states are using targeted
industry enforcement as a way to most effectively utilize scarce
governmental resources to focus on sectors where the practice is
widespread.
For example, Illinois has recently enacted the Illinois Employee
Classification Act of 2007 (HB 1735) which provides new remedies and
penalties to address construction contractors who misclassify their
workers. It gives new enforcement authority to the state Department of
Labor and creates an Employee Classification Fund from penalties
collected under the new law to provide for additional investigators.
Important anti-retaliation procedures are included to protect workers
who utilize the law's new remedies to file a complaint. The law
specifically directs cooperative information sharing among Illinois'
Labor, Employment Security, Workers Compensation and Revenue Agencies.
Most important, the new law ``presumes'' employee status for an
individual performing service for a construction contractor.
In his recent testimony before this Subcommittee, New Jersey's
Labor Commissioner described targeted audits and investigations in 2006
in the construction industry which revealed that there were instances
of misclassification in 41% of construction audits and investigations
revealing $78.2 million in under-reported wages in one year alone.
Statement of New Jersey Commissioner of Labor David J. Socolow at p. 3.
Other states have focused their resources in the construction
industry as well. For example, California's Labor Code 2819 creates a
presumption of employee status in several industries including
construction. New Mexico creates a presumption of employee status for
workers in the construction industry as well. New Mexico Stat. 60-13-
3.1.
The public construction contracting system is particularly
undermined by independent contractor abuse because misclassification
allows unfair contractors to sabotage the competitive bidding process
by underbidding contractors who comply with the law. As a result,
several states have specifically included misclassification violations
as a basis for debarment from state construction contracts, including
Massachusetts (Massachusetts Gen. Laws Ch. 149, section 14B (d);
Illinois (Illinois Employee Classification Act of 2007, HB 1735) and
New Jersey (PL 2007, chapter 114).
New Policies and Practices to Address the Growing Problem of Worker
Misclassification
New Policies and practices to address the growing problem of
misclassification of workers as independent contractors should be
considered in the following areas:
Close the Section 530 ``Safe Harbor'' Loophole
Closing the so-called ``safe harbor'' loophole will allow the IRS
to collect employment taxes from violating employers and to require the
proper reclassification of workers in the future. Without closing this
loophole, the impact of misclassification cannot be effectively
addressed at the federal level and there is simply no credible
justification for retaining this tax loophole.
Reevaluate Federal Law Regarding Presumptive
Employee Status
Impediments to joint agency enforcement which has worked
successfully in many states will be removed if employee status is
presumptively established under the IRC. This will allow scarce
investigatory resources to be leveraged when relevant investigatory
agencies begin at the same starting point of presumptive employee
status. See GAO Report at pp. 25 & 33. For example, the New Jersey
Commissioner of Labor identified the importance to his state's new
enforcement measures of having ``an individual paid for services [to
be] presumed to be an employee.'' Statement of New Jersey Labor
Commissioner at p. 5.
Strengthen Current Federal Enforcement Mechanisms
and Penalties for Violators
Additional penalties and remedies to deter employers who engage in
misclassification should be considered. In this connection, innovative
approaches in several states can provide guidance. For example,
Illinois amended its code to make the classification of workers as
independent contractors a separate statutory violation. Other states
have separate reporting, licensing and registration requirements for
independent contractors, including:
California http://www.edd.ca.gov/taxrep/txicr.htm;
Kansas http://kdor.org/misclass/mcfaq.htm;
And Montana http://erd.dli.mt.gov/wcregs/iccu.asp.
The Subcommittee should consider whether the Department of Labor
requires increased authority to investigate and remedy
misclassification in addition to addressing its need for increased
resources to initiate routine and targeted audits; an increased number
of investigators to conduct field and job-site inspections and audits
designed to uncover the misclassification of workers.
Promote Information Sharing Among Federal and
State Agencies
Procedures can be established to coordinate and promote federal
agency sharing of information regarding the misclassification as well
as procedures to strengthen and coordinate federal and state agency
enforcement efforts. These efforts should include establishing
interagency collaboration on worker misclassification enforcement among
the Department of Labor, IRS and state workers compensation,
unemployment security, labor and revenue agencies. See GAO Report at p.
33-34.
New Procedures for Targeted Investigations in
Construction
New procedures for targeted investigations, increased audit
capacity and field inspections in industries such as construction
should be established. This approach conserves resources and focuses
limited staff on investigations which will expose endemic problems.
Conclusion
Worker misclassification reform will not only benefit workers, but
also fair employers, insurers, taxpayers, and federal and state tax
authorities. It will ensure fair and competitive markets and it will
protect the integrity of the public works bidding process. LIUNA urges
the Subcommittee to strongly consider new practices and policies as set
forth above and presented by many witnesses which not only protect
workers, but also promote the ``administration of many federal and
state programs, such as payment of federal taxes and pension benefits''
harmed misclassification.\5\
endnotes
\1\ The Economic Costs of Employee Misclassification in the State
of Illinois, Michael P. Kelsay, PhD; James I. Sturgeon, Ph.D.; Kelly D.
Pinkham, M.S.; Department of Economics, University of Missouri--Kansas
City (December 6, 2006) (Illinois Study at p. 9 & 1"; see also The Cost
of Worker Misclassification in New York State, Linda H. Donahue, James
R. Lamare and Fred B. Kotler, Cornell University ILR School (February
2007); The Social and Economic Costs of Employee Misclassification in
Construction, Elaine Bernard, PhD Robert Herrick, ScD, Francoise Carre,
Ph.D.; Randall Wilson, University of Massachusetts, Boston;
Construction Policy Research Center Labor & Work Life Program, Harvard
Law School and Harvard School of Public Health, (December 17, 2004);
The Social and Economic Costs of Employee Misclassification in the
Maine Construction Industry, Elaine Bernard Ph.D., Robert Herrick, ScD,
Francoise Carre, Ph.D. and Randall Wilson, University of Massachusetts,
Boston Construction Policy Research Center Labor & Work Life Program,
Harvard Law School and Harvard School of Public Health (April 25,
2005).
\2\ Statement of Kelly D. Pinkham, University of Missouri-Kansas
City, Assistant Director, Center for Full Employment, House
Subcommittee on Income Security and Family Support, Hearing on the
Effects of Misclassifying Workers as Independent Contractors, (May 8,
2007); see also House Workforce Protections Subcommittee Hearing on
Providing Fairness to Workers Who Have Been Misclassified as
Independent Contractors, (March 27, 2007).
\3\ Supra at note 1.
\4\ Employment Arrangements: Improved Outreach Could Help Ensure
Proper Worker Classification, US Government Accountability Office No.
06656 (July 11, 2006) (``GAO Report at pp. 21-22 '').
\5\ GAO Report at p. 7.
______
[Additional statements submitted by Mr. Kline follow:]
[Statement of the Associated Builders and Contractors,
Inc., follows:]
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[Statement of Travis Boardman follows:]
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[Statement of Randy Eystad follows:]
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[Statement of Michael P. Mannion follows:]
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[Statement of the National Association of Home Builders
follows:]
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[Statement of William Vazquez follows:]
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[Whereupon, at 12:56 p.m., the subcommittees were
adjourned.]