Senate Health, Education, Labor and Pensions Subcommittee on Employment and Workplace Safety Hearing
Federal Information & News Dispatch, Inc. |
Senator Casey and members of the Subcommittee: thank you for this opportunity to testify today on the important subject of payroll fraud and its impacts on workers and their families, law abiding employers, and the broader economy.
My name is
At NELP, we see low-wage workers in our economy's growth sectors being forced to sign contracts saying they are "independent contractors" as a condition of getting a job; we see employers changing employees into independent contractors, franchisees, or other non-employee labels to cut costs, and we see workers being paid off the books completely, with no reporting or withholding of the basic payroll taxes or insurance. Janitors, home care workers, construction laborers and drywallers, cable installers, delivery persons, and even restaurant servers - these are the workers we see who are called non-employees by their employers. They are not running their own businesses by any definition. They want to work and they too often accept whatever arrangement gets them a job. These same occupations with high rates of independent contractor misclassification are among the jobs with the highest numbers of workplace violations. n2
This hurts the workers, who lose out on labor and employment protections including workers compensation, unemployment insurance, fair pay, and health and safety safeguards. They also bear a tax burden that their employers are supposed to incur. It hurts law-abiding employers who treat their workers as employees but who cannot compete with those who perpetrate fraud. This has resulted in a race to the bottom and rewards cheaters. This affects the quality of what should be middle class jobs that could stimulate our economy.
My testimony will update what I presented in 2010, describing independent contractor misclassification and its impacts on workers, on state and federal government coffers, and on law-abiding employers. I will describe the recent downturn in state legislative activity on this important issue, and conclude with comments on federal efforts to address the problem, including the Payroll Fraud Protection Act.
I. What is Independent Contractor Misclassification, or Payroll Fraud?
Companies looking to cut payroll costs to compete for work have become increasingly emboldened in the ways they seek to skirt basic labor standards, insurance and tax laws that apply to employers. They call employees "independent contractors," even when the worker is not running his own business; they require employees to form a limited liability corporation or franchise company-of-one as a condition of getting a job, and they pay workers off the books, without any payroll treatment at all. These workers are sometimes required to sign boilerplate contracts attesting to independent contractor status even where the functional relationships do not reflect true independence.
These practices are increasingly being called "payroll fraud" because they are intentional and aimed at evading the law. Legitimate business-to-business transactions are not payroll fraud, because true independent contractors have a specialized skill and have invested in a business that enables them to earn a profit. n3
Companies do this to avoid having to report and pay FICA and FUTA taxes, evade labor organizing, skirt baseline labor standards like minimum wage and overtime, discrimination protections, health and safety and workers compensation, and unemployment insurance. n4 And they construct these arrangements because they can under-bid competitors in labor-intensive sectors by saving as much as 30% of payroll and related costs.
A. Misclassification persists in labor-intensive and lower-wage jobs.
The most recent
Many states have studied the problem and find high rates of misclassification, especially in construction, where as many as 47% of employers were found to have misclassified their employees. n8
Most of these studies do not capture the so-called "underground economy," where workers are paid off-the-books, sometimes in cash. n9 These workers are de facto misclassified independent contractors, because the employers do not withhold and report taxes or comply with other basic workplace rules. Many of these jobs are filled by immigrant and lower-wage workers. n10
Payroll fraud is persistently common in jobs where the workers are not truly running their own independent businesses: construction, n11 day labor, n12 janitorial and building services, n13 home health care, n14 agriculture n15, poultry and meat processing, n16 high-tech, n17 delivery, n18 trucking, n19 home-based work n20, and the public n21 sectors.
Press accounts and queries coming into the NELP offices indicate that employer payroll fraud and related practices rise during periods of high unemployment, where workers will take a job under nearly any circumstance. When job opportunities are scarce, workers face increased pressure to acquiesce to independent contractor arrangements. An
Permitting employers in these jobs to get away with skirting basic labor and tax requirements will have a significant and long-term effect on the nature of jobs and our economy.
II. Federal and State Governments Lose Billions
Federal and state governments suffer hefty loss of revenues due to independent contractor misclassification, in the form of unpaid and uncollectible income taxes, payroll taxes, and unemployment insurance and workers' compensation premiums.
A. Losses to Federal Revenues.
As detailed in my 2010 testimony, several government studies document the extent to which misclassification drains federal revenues:
* A 1994 study by Coopers and Lybrand estimated the federal government would lose
* A 2000 study commissioned by the
* A 2009 report by the
* A 2010 study by the
B.Losses to State Revenues.
The 2010 testimony I provided enumerated the various state task force studies showing staggering losses in the billions of dollars to state workers' compensation, unemployment insurance, and income tax revenues. n27 Updates to the state and federal costs reports show continued and damaging drains on public funds. Recent results from state task force reports include:
* A 2013 bill in the
*
* In 2012,
III. State and Federal Policy Reforms
A. State reforms
State legislation seeking to combat independent contractor abuses has dwindled since the initial spate of laws were passed in the mid-to late 2000's, with much of the more recent activity pertaining to small provisions allowing discretionary penalties or weakening previously-enacted laws. n31
The state reforms fall into a few general categories, and with one possible exception, are not comprehensive laws applying to all sectors. Some themes that emerge from an analysis of state laws are:
* Laws that create a presumption of "employee" or "employer" status for those performing or receiving labor or services for a fee. State UI and other laws that use the so-called "
* Construction industry-specific laws that apply the standard across multiple state workplace laws to determine the status of construction workers. n33
* Laws creating a study commission or task force to coordinate audits and enforcement. n34
The state reforms, including the state task forces and executive branch activity, are an important first step and have brought real results to the state treasuries. There is however a continued need for federal leadership and oversight, as nearly half of the states have no payroll fraud provisions in place, and because the practices continue largely unabated in many sectors.
B. Federal Reforms
To date, no federal legislation has been enacted to address this growing problem. The
The
The Payroll Fraud Prevention Act n38 was introduced in
This law, if enacted, would provide important transparency for workers and their employers, and enable workers to question their designated employment status if the notification appeared incorrect or was confusing.
Closing the IRS Safe Harbor -Fair Playing Field Act
Under current law, an employer who is found by the
This loophole prevents the
In addition, the
n1 See, Testimony of
n2 See,
n3 See, Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification, GAO-06-656 (
n4 See, Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification, GAO-06-656 (
n5 See, Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification, GAO-06-656 (
n6
n7 Proposed Information Collection Request (ICR) for the
n8
n9
n10
n11
n12
n13
n14
n15 Sec'y of Labor v.
n16 Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification, GAO-06-656 (
n17 Vizcaino v.
n18 Ansoumana et al v. Gristedes et al, 255 F.Supp.2d 184 (S.D.N.Y. 2003).
n19
n20 Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification, GAO-06-656 (
n21
n22 http://www.bloomberg.com/news/2013-10-18/states-clamping-down-on-workers- mislabeled-as-contractors.html
n23
n24
n25 U.S. General Accounting Office, Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention (
n26 A 2010 study by the
n27 See, Testimony of
n28
n29 Annual Report of the
n30
n31 For state legislative round-ups of leading independent contractor legislation, see
n32 24 states have this definition in their unemployment insurance law
n33 E.g., DE, IL, MD, MN, NB, NM, NY, PA,WI.
n34 For a recent summary of state task forces and their results, see
n35 The DOL has signed Memoranda of Understanding with thirteen states and is undertaking targeted enforcement in collaboration with other agencies to combat the worst abuses; see http://www.dol.gov/whd/workers/misclassification/.
n36 See http://www.dol.gov/_sec/media/congress/20100310_appropriations.htm
n37 See http://www.irs.gov/newsroom/article/0,,id=246203,00.html .
n38 https://www.govtrack.us/congress/bills/112/s770.
Read this original document at: http://www.help.senate.gov/imo/media/doc/Ruckelshaus1.pdf
Copyright: | (c) 2010 Federal Information & News Dispatch, Inc. |
Wordcount: | 3849 |
Senate Health, Education, Labor and Pensions Subcommittee on Employment and Workplace Safety Hearing
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