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44–568 PDF 2008

S. HRG. 110–740

THE EFFECTS OF THE UNDERGROUND ECONOMY

ON SMALL BUSINESSES AND WORKERS

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 28, 2008

Printed for the use of the Committee on Small Business and Entrepreneurship

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Available via the World Wide Web: http://www.access.gpo/gov/congress/senate

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine,

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Republican Staff Director

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CONTENTS

Page

OPENING STATEMENTS

Kerry, The Honorable John F., Chairman, Committee on Small Business

and Entrepreneurship, and a United States Senator from Massachusetts .... 1

Tierney, The Honorable John F., a United States Representative from Massachusetts ................................................................................................................. 4

WITNESS TESTIMONY

Morrisey, Scott, owner, Red Line Wall Systems, Inc ............................................ 5

Callahan, Francis X., Jr., president, Massachusetts Building Trades Council,

AFL–CIO ............................................................................................................... 13

Erlich, Mark, executive secretary-treasury, New England Regional Council

of Carpenters ........................................................................................................ 21

Noel, George, Director of Labor, Executive Office of Labor and the Workforce,

Massachusetts Department of Labor .................................................................. 26

Stark, Jennifer, chief, Policy and Government, Office of the Attorney General,

Commmonwealth of Massachusetts .................................................................... 35

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Callahan, Francis X., Jr.

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 17

Erlich, Mark

Testimony .......................................................................................................... 21

Prepared statement .......................................................................................... 24

Kerry, The Honorable John F.

Testimony .......................................................................................................... 1

Kennedy, The Honorable Edward M.

Prepared statement .......................................................................................... 52

Morrisey, Scott

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 9

Noel, George

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 29

Stafford, Sara A.

Prepared statement .......................................................................................... 57

Stark, Jennifer

Testimony .......................................................................................................... 35

Prepared statement .......................................................................................... 38

Tierney, The Honorable John F.

Testimony .......................................................................................................... 4

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THE EFFECTS OF THE UNDERGROUND ECONOMY ON SMALL BUSINESSES AND WORKERS

MONDAY, APRIL 28, 2008

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, Washington, DC.

The Committee met, pursuant to notice, at 10 a.m., at Bunker

Hill Community College, Chelsea, Massachusetts, the Honorable

John Kerry (Chairman of the Committee) presiding.

Present. Senator Kerry and Representative Tierney.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MASSACHUSETTS

Chairman KERRY. The hearing of the Small Business Committee

of the U.S. Senate will formally come into session. I am delighted

to be here at Bunker Community College, Chelsea, and particularly

happy to have my friend and colleague from the House of Representatives, Congressman Tierney, with us to explore what is a

very disturbing trend in our economy and an issue of great concern

to businesses and workers alike. Congressman Tierney has been

working on this issue already in the House and has a piece of legislation which he will talk about in-a few moments. But this is an

issue which over the course of a couple of decades now has seen

a fair amount of talk and, frankly, not a lot of action.

By some estimates, America’s underground economy is as big as

$1 trillion—$1 trillion—contributing to over $100 billion in lost revenue a year. Think about that, $100 billion in lost revenue, folks,

is an unbelievable amount of taxes that are lost, as well as income

lost to individuals. And so our whole economy is disrupted as a consequence of behavior that is fundamentally illegal.

At the heart of the issue is the fact that many companies are

taking short-cuts, sidestepping lawful hiring practices so that they

can gain a competitive edge. This is an issue that impacts both

large and small businesses. Employers across the United States

have found that tax laws and worker protections can be avoided if

they treat workers as independent contractors. Some companies go

to great lengths to avoid paying employment taxes and providing

benefits to workers. Let me give you an example.

Kellogg Brown & Root, Inc.—KBR, as it is referred to—has

avoided paying payroll taxes by hiring workers through shell companies in the Cayman Islands, and that has resulted in the losses

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of hundreds of millions of dollars in payroll taxes. Now, when I talk

about a shell company in the Cayman Islands, do you know what

I am talking about? I am talking about a building in which there

may be 15,000 or so, or 5,000 similar companies with little brass

plates, maybe a phone number, maybe a fax number, and that is

it. There are no employees. There is no company. There is nobody

working there. This is a pure and complete shell, a sham, a fraud.

And it is there solely for the purpose of avoiding the law, of avoiding the responsibility that other people in the country live up to.

Tactics like that are literally inexcusable. All these big CEOs and

folks who run around in fancy suits and expensive cars, live in nice

homes, beat themselves on the chest, often talk about patriotism

and love of country and live off the fat of the land; it is really inexcusable when you think about how unpatriotic, in fact, that is because it undermines the country. It destroys the tax base, not to

mention violates the law.

I recently introduced legislation with Congressman Rahm Emanuel and others in the House to specifically address the question of

Kellogg Brown & Root. Today we will hear from our witnesses

about these issues.

Tax shelters in the Cayman Islands are not needed to cheat

workers out of benefits, as we will hear today. Right here in Massachusetts, workers are being harmed by employers who want to take

the easy way out and not pay unemployment insurance, which is

there for a purpose; workers’ compensation, which is there for a

purpose; and Social Security taxes—all of which escape the cost of

withholding income taxes, which then gives them more cash than

the other people who are withholding them.

Too many workers are being misclassified as independent contractors, an arrangement in which the employer is not responsible

for withholding income or paying unemployment taxes. Employers

who erroneously misclassify their workers stand to save as much

30 percent of their payroll costs. This puts a law-abiding employer

at a disadvantage.

The misclassification of workers is not just a financial issue. It

is a values issue. Employers that wrongly treat their employees as

independent contractors don’t have to provide them with many of

the worker protections that are considered to be fundamental in

the country. And for more than a century, workers in this country

have fought hard for these protections. They are the law of the

land. And yet they are now taken for granted in many parts of the

country. Employers should not be permitted to individually and arbitrarily take away these protections by simply filing a different

tax form.

This morning we are going to hear from Scott Morrisey. Scott’s

company, Red Line Wall Systems, is constantly finding itself on the

wrong end of procurement decisions because his company, which

plays by the rules, can’t compete with the pricing bids submitted

by competitors who are getting away with these unscrupulous hiring practices.

We were also going to hear testimony from Sara Stafford, the

sole owner of Stafford Construction Services, a small business with

65 employees, but unfortunately, an urgent family matter has prevented Ms. Stafford from being here with us today. But she has

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submitted very important testimony about how difficult it is to

compete with companies that don’t play by the rules.

In her testimony, Ms. Stafford tells how Stafford Construction Services recently bid on and lost a $500,000 contract funded by

Federal, State, and local taxes. An investigation by the Attorney

General’s Office revealed that the winning company had employed

undocumented workers, as well as misclassified employees and had

failed to pay benefits to workers in cash as the company had reported in its paperwork. As a result, her competitor was able to bid

15 percent less on the contract.

We also have two incredible advocates for workers in the State

of Massachusetts here with us today to give us an idea of how

workers are impacted by this. I want to welcome my friends Frank

Callahan and Mark Erlich, who are two of the best friends Massachusetts’ workers have ever had. Thanks to both of you for making

time to be here.

And finally, we are going to hear about what actions Massachusetts is taking to end this abusive practice. Governor Patrick and

Attorney General Coakley have done a terrific job on this issue, establishing a task force to look more closely at what can be done

from a policy standpoint and also stepping up enforcement efforts

for the laws that are already on the books.

Let me just say, enforcement folks, we are struggling with the

problem of illegal immigration, and we are struggling with the

problem of people who work off the books. A lot of the folks I just

talked about also just get paid cash under the table. And that has

the same impact, undermining everything else we are trying to do.

Enforcement is the key. For all those people concerned about immigration and immigration reform, the biggest single missing link in

the whole effort is enforcement. It is illegal to hire people illegally.

And you can’t tell me—and all of you know this as a matter of common sense—that there aren’t an awful lot of employers all around

the country who know exactly who they are hiring and how they

are paying them.

We need stronger enforcement so that people believe that in this

country we respect workers, and we are going to pay people appropriately and have an economy that works above the table, that is

accountable and transparent. Everybody benefits when this happens. If we weren’t paying people illegally in America, fewer people

would decide to come where they can’t get a job. They come because they know they can get the job. And in half the hotels of

many communities—I am not going to name them all here today—

you can go in the back rooms and kitchens and in the various

workplaces of those hotels and find undocumented people. Everybody knows it—the hotel owners, the mayor, the law enforcement

officials, and others.

So it is time for all of us to get serious with how we create an

economy that works for everybody. As I said, I am delighted to be

joined by John Tierney, who understands these issues as well as

anybody. He has introduced legislation in the House, the Taxpayer

Responsibility, Accountability, and Consistency Act, and we are

very glad to have him here. I also look forward to hearing the testimony of each of our witnesses today who can share with us an important perspective on this problem.

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So, without further ado, again, I thank Bunker Hill Community

College for hosting us here today. This institution understands how

important it is to train people for these jobs, and it matters that

their students, when they graduate, go out and compete in a fair,

competitive marketplace.

Congressman Tierney.

OPENING STATEMENT OF THE HONORABLE JOHN F. TIERNEY,

A UNITED STATES REPRESENTATIVE FROM MASSACHUSETTS

Representative TIERNEY. Thank you very much, Senator. Thank

you for your work on the Small Business Committee especially, in

the Senate, but all the other work that you do there as well. And

thanks for having this hearing and allowing me to join you, however briefly I will be able to stay. I appreciate the opportunity in

no small part because we have been dealing with this issue in the

House as well, and hopefully we will be able to work together with

the Senate to bring some relief in fairly short order on this.

You have hit all the high points on this, and I think we will hear

it repeated on down the line from our witnesses here who have different iterations of the same story. The fact of the matter is that

when people misclassify, there are three groups of victims.

One, obviously, is the employer who does the right thing, as you

mentioned, Senator, the person that goes and hires people the right

way, makes all the payments, does the withholdings. And other

people have figured out that they can save up to 30 percent if they

don’t do the withholdings, if they hire somebody off the books, and

if they cheat. And, obviously, that becomes a competitive disadvantage. I know Mr. Morrisey is going to tell us about specific examples of that. And that has to stop. As a former small businessman

myself—a real small business person who represented a lot of

small business people—I know that aggravation, firsthand, that

they would repeatedly suffer.

But the second group obviously are the workers themselves. If

they get hurt on the job and they don’t have any withholdings on

that, no unemployment compensation and no workmen’s compensation, they are really in terrible shape, as we know. It may even affect their Social Security and their Medicare benefits on down the

line.

So there is a second group of victims, and then obviously the taxpayers. The taxpayers as a broad group are hurt seriously by this,

and studies show—the Government Accountability Office, Congress’

investigatory arm, did a study that showed that up to $4.7 billion

in Federal income taxes alone in 1 year can be lost on that. And

over a period of time—Pricewaterhouse did a study showing the tax

receipts for the period 1996 to 2004 could have been increased by

$34.7 billion.

So we talk about wanting to make sure people have the education and the job skills and training that they need to work in our

society to deal with the advances in technology, to deal with jobs

going overseas. We can find the money for these resources. People

want to know how you are going to fund programs and issues that

are there. We are going to find it by doing the right thing—by having people act in the appropriate way by paying their fair share,

getting on board with the rest of us who pay our fair share in taxes

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and withholdings and make sure that we put those resources to go

work to strengthen the core of our country. We have national security issues abroad. We have homeland security issues. But part of

our security is making sure that the very core of this country,

whether it is our infrastructure or our human capital, are all moving in the right direction, that they are trained, they are educated,

they are capable in this competitive international environment that

we have.

So we have in the House, Senator, as you mentioned, formulated

a bill called the Taxpayer Responsibility, Accountability, and Consistency Act. It is H.R. 5804. Frank Callahan, I noticed you mentioned it in your testimony, and I appreciate that. Richie Neal, my

colleague from Springfield, and Jim McDermott, another colleagues

from the State of Washington, spent a lot of time working on that

trying to bring the various groups of people who had an interest

in this together so that we could get a lot of the issues ironed out

ahead of time. It basically amends the Internal Revenue Code so

that there is a clearer vision of what would be a safe harbor that

would be fair for everybody and not let people escape and use that

as a way of avoiding their responsibilities. It moves forward in the

right direction. There is better enforcement, higher penalties, all

the things that I think we need to move on.

I want to just repeat what the Senator said about the good work

that Governor Patrick is doing here in the Commonwealth; and

George Noel, your group is doing well with the task force, and we

think that is going to have steady progress. We have to see this

happen in State after State. We are going to have to have a Federal commitment to changing that Internal Revenue Code to make

it work. We have to make it easier for people to proceed on that.

It will make a huge difference for all three of those groups that I

talked about earlier.

Senator thank you for your work on this and for the hearing, and

we look forward to working with you. Hopefully we can get a bill

through that has all the facets on this.

Chairman KERRY. Congressman, delighted, and again, thanks for

being here and taking the time to be with us.

We will go through each of our testimonies now. I will start down

here with Scott Morrisey, and we will run right across the line. Director Noel, thanks so much for being here. We really appreciate

it. And thank you, Ms. Stark, for representing the Attorney General’s Office. We are glad to have you also.

So would you lead off, Mr. Morrisey.

STATEMENT OF SCOTT MORRISEY, OWNER, RED LINE WALL

SYSTEMS, INC.

Mr. MORRISEY. Yes, thank you very much, Senator Kerry and

Congressman Tierney, for the opportunity——

Chairman KERRY. Pull the microphone real close so everybody

can hear you. There you go.

Mr. MORRISEY. On behalf of myself and my partner, Brian Cody,

and Charles Doyle and the other 60 employees or so that we have

at Red Line Wall Systems; companies like ours have been having

a difficult time, as you have all just read. And so what I have said

here is that construction has long been an industry filled with men

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considered rough around the edges, unable to sit behind a desk or

just good with their hands. And construction jobs gave these men

an occupation that suited their disposition and still enabled them

the opportunity to provide their families a solid, middle-class lifestyle.

Our company has prided itself on its ability to provide jobs with

good wages and a generous benefit package. We understand that

if a man does not have to worry about taking care of his family,

he will be more productive on the job site. Cash-paid and 1099

underinsured subcontractors have always been a negative factor in

our industry, but over the last 10 years, the ranks of these people

have been exacerbated by a wave of illegal underground labor

which is able to expand into and withdraw from any given region,

depending on the workload. This can severely disrupt, or in some

cases, destroy a small legitimate company that has long held ties

to the local communities.

Construction can be a very competitive, labor-intensive business.

Most jobs work on a 5-percent profit markup, leaving no room for

error. In our commercial drywall industry, labor will typically make

up 40 to 50 percent of the total job cost. In a highly competitive

industry like ours, labor tends to be the prime target when paring

down costs for those willing to break established rules or bend

vaguely written guidelines. Our company, which supplies health,

disability, dental insurance, alongside other benefits like holidays

and vacations, make these expenses a deal breaker when competing against the underground economy.

Using Red Line as an example and the aforementioned benefits,

you get a feel for what we are up against. We have Social Security

and Medicare at 8 percent that we have to add to our costs; unemployment, 5 percent; workers’ compensation, 11 percent; health insurance, 16 percent; holidays and vacations, 8 percent—for a 48-

percent markup to our base wages to be able to get our bids out

the door.

When we bid against companies who bend or break established

rules of engagement, who are willing to shortchange their workers

in any one or all of these overhead categories, it can put us at a

20- to 25-percent cost disadvantage. This disadvantage is impossible to make up in the total project cost line items.

I would like to now explore some of the other myths and facts

as we see them based upon our experience as a small company

with 50 to 60 employees in the construction business.

Myth number one: Construction is a low-skilled occupation.

Nothing can be further from the truth. It seems to be the perception today that the more a person sweats and gets dirty, the less

skilled his occupation. As business owners, we understand that it

takes about 5 years of training and field application to become a

qualified commercial carpenter. This is a significant investment of

time and treasure for any business.

Myth number two: Our company needs underground labor to get

the job done. Well, the fact really is that this is yet another fallacy,

many times driven by greed and companies overextending their

abilities and qualifications. Good management is a lot like being a

good farmer. Jobs and manpower have to be tended to and managed. Good management is hard work, but it is necessary for a

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company to succeed in a competitive marketplace. Good management and oversight is being supplemented by lower-skilled, highervolume labor, extending the survival of inefficient companies, while

simultaneously increasing the ranks of the lower-skilled, less productive workforce today.

Myth number three: Underground workers fill a void of a stagnant industry that has no need for innovation or continued skill development. Well, the fact is, again, underground workers stymie innovation and productivity gains. If you oversupply an industry with

cheap labor, there is no need to innovate, as long as a steady supply of cheap, inexpensive labor can be assessed whenever you need

it.

In our industry, alone over the last 20 years, new tools, products,

and equipment have increased labor productivity by up to 50 percent in certain applications. Going forward, I can envision an industry that uses more high-tech tools, machines, and materials

making a highly trained and motivated workforce more desirable

than a lower-skilled, more plentiful labor pool.

Myth number four, and this is my favorite: As long as underground workers pay at least some insurance, we are all protected,

we are covered. Well, the fact is that underground workers tend to

be underinsured and undertaxed, which increases the burden upon

legitimate, fully insured, tax-compliant companies. Any accident, or

incident caused by an underinsured company will eventually be

met with an across-the-board premium hike. Many of these workers are using personal vehicles with no commercial underwriting to

transport men and materials. Also, in many cases, under-the-table

workers are straining our social safety nets by double-dipping.

Some have no problem working a full week for cash while collecting

an unemployment check that has been funded by taxed labor.

Some of the worst offenders are criminals, deadbeat dads, and

illegals who only work for cash so as not to get caught up in a

paper trail. Some employers understand this and actually use it to

their advantage to drive down labor costs.

Even one additional point of reflection: We all feel that the underground economy may possibly be responsible for the mortgage

meltdown we are now experiencing. The ability for some builders

to exploit easily attainable underground workers fueled an already

heated housing market to the point of overcapacity. Some industry

experts estimate that our overbuilt inventory will last well into the

year 2010. Had hot housing markets used naturally occurring internal labor shifts, much like we had during the Texas oil boom

years, we quite possibly would not be in the unfortunate situation

we find ourselves currently mired in.

I put together an example of what we are up against in dollars

and cents, and what we have is our company and companies like

ours, if we pay a skilled carpenter, a drywall carpenter $25 an

hour, $200 a day, we pay their insurance and benefit package of

about 48 percent, as we mentioned earlier, $96, we have a direct

cost of $296. Gentlemen, I don’t care how good your men are, but

over the course of a year or over a project’s time, the average production for that man is about 20 sheets of drywall a day, is what

they are going to hang. This cost for us would be $14.80 per sheet.

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Other companies that use 1099 non-compliant individuals, they might pay their men the same. They might pay them $25 an hour,

give them $200 a day. But with no benefit package, their costs on

a daily output of 20 sheets would be $10 per sheet. So if I had a

project with 5,000 sheets of drywall, my cost would be $74,000 and

my competitor’s cost would be $50,000. That is certainly a wide

spread. I would ask all of you, if you were the general contractor

or the developer and owner, who would you hire? You are going to

save 25 percent. Well, to date, Red Line Wall Systems’ manner of

competing with such cost structures is three-fold:

We find good men with good attitudes who want to go to work

every day. We provide them with the training, tools, and equipment to safely maximize their own skill levels.

And we take care of our employees and their families the way

we would like it if we were in their shoes.

The result—while not always the rule—is an above average

range of performance. The same men that I told you would usually

hang 20 sheets a day now hang 26, for an average cost of $11.39

per sheet. So that job I mentioned earlier of 5,000 sheets, we can

now become more competitive at $56,900. While not the low bidder

still, we are close enough for some contractors and owners to consider the best project value, not the lowest number, which is what

we have been doing over the last decade. Unfortunately, we don’t

know if that can continue with the present rate of the economy.

[The prepared statement of Mr. Morrisey follows:]

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Chairman KERRY. Thank you, Mr. Morrisey. I appreciate it.

[Applause.]

Chairman KERRY. We will come back to questions in a moment.

If I can ask everybody—I forgot to mention this. Everybody’s testimony will be put in the record as if read in full. So if you want

to just summarize, take about 5 minutes, that helps us, and then

we can go from there.

Mr. Callahan.

STATEMENT OF FRANCIS X. CALLAHAN, JR., PRESIDENT,

MASSACHUSETTS BUILDING TRADES COUNCIL, AFL–CIO

Mr. CALLAHAN. Thank you, Senator. Thank you, Congressman

Tierney. For the record, my name is Frank Callahan. I am the

president of the Massachusetts Building Trades Council. The Massachusetts Building Trades Council is comprised of 74 local unions

and district councils which represent 75,000 construction workers

across the Commonwealth who work for approximately 3,000 subcontractors and general contractors. Our members work for these

contractors, and they earn good pay. They get good benefits, comprehensive health insurance, comprehensive retirement, defined

benefit pension benefits, and they pay their taxes, and they play

by the rules. That is why I would like to start by thanking you,

Senator, for hosting this hearing to address this very serious issue.

The Mass. Building Trades Council fully supports the Committee’s efforts to address this issue of the underground economy and

the vast array of problems associated with it. Four years ago, we

played an active role in securing changes in Massachusetts in the

State statutes back in 2004. Currently, the Massachusetts definition of what an employee is versus what an independent contractor

is,is widely regarded as the best in the Nation. It is the tightest

out there. And when you go to different labor conferences and conferences of labor lawyers, that is the model that everybody wants

to use.

Since that time, we have worked closely with Governor Deval

Patrick’s office, the Executive Office of Labor and Workforce Development. I see my good friend George Noel is here; Suzanne Bump’s

office has been great, and the Attorney General’s Office, Martha

Coakley’s office, the Fair Labor and Business Practices has just

been outstanding. They have been very aggressive. They have been

very serious about enforcing the law, and we have already started

to see some results.

These efforts were formalized even further back in March. We

were privileged at our convention to have Governor Patrick sign

the executive order which formalized the relationship that had already been ongoing between all the different agencies of State government—the Attorney General’s Office, Division of Industrial Accidents, Division of Unemployment Assistance, the Department of

Labor. So they are talking to each other and not just doing piecemeal efforts on their own behalf. But typically what we find is we

have a contractor who is not paying the proper wages; chances are

they are not paying workers’ comp or unemployment. If they are

not paying workers’ comp or unemployment, chances are they are

not paying their taxes. It is usually the bad actors out that we are

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really after, and we feel with this combined effort, we can make

some great strides.

One of the main reasons we have been involved in this is not just

the direct impacts that were addressed by Mr. Morrisey earlier,

and by other panelists that I know it will be in their testimony.

But this strikes at the very core—you alluded to it earlier, Senator—of the social contract between workers and their employers.

This has developed over the last hundred years, largely due to the

efforts of labor unions. Many of the people in this room are still involved in those struggles with workers’ compensation, with unemployment insurance, with the uncompensated care pool—basically

the social safety net. There is a social contract that if you go to

work every day, you put on your boots; you put in 8 hours of work;

you get 8 hours of pay; and you get treated decently.

As was mentioned by Mr. Morrisey—and I won’t repeat a lot of

the things he said—our industry is highly competitive in the construction industry. I have seen $40-million projects where the difference in the low bid and the second bid is $40,000. That is a pretty tight margin. A lot of the contractors are using the same software, but if you have those types of advantages that Mr. Morrisey

alluded to, the people that are willing to cheat are going to be the

ones who are going to be able to compete most effectively. And that

is not what we want in our industry.

So the impact that Mr. Morrisey outlined is true. That is a very

serious impact on our contractors. But the impact on our members

is enormous because when those contractors that don’t play by the

rules get those projects, our members lose paychecks. Our members

lose the ability to contribute to their pensions, to their health insurance. Some of them because of the way our Health and Welfare

programs are set up may lose eligibility for their health insurance.

Our apprentices lose the on-the-job hours that are required to complete their apprentice training programs. We have the best training

programs in the industry, but they take anywhere from 3 to 5

years to complete. It is in-the-classroom training and it is on-thejob training for hands-on experience. If they don’t get their manhours they need to do that training, they will not progress and

achieve journeyman status.

And as serious as the impact on our members is, the impact on

misclassified workers is even worse. As I mentioned, it strikes at

the very core of the social contract between employers and employees that has evolved over the last hundred years. Those workers

are denied decent wages. They are ineligible for unemployment insurance benefits. Oftentimes, they are denied workers’ compensation benefits. They don’t accrue Social Security credit. And they almost always lack health insurance.

They are also responsible for paying employer and employee side

FICA and FUTA taxes, roughly 15 percent of their gross wages,

while people are properly classified as employees pay only 7.65 percent.

And, most importantly, on the social contract issue that you addressed, Senator, they lost the protections of a host of labor laws,

including the minimum wage protections, overtime pay, workplace

safety, discrimination, sexual harassment, the Family and Medical

Leave Act, and even the right to join a union, because you have to

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be an employee first before you can petition the National Labor Relations Board for a union election.

Although the construction industry experiences a higher incidence of this abuse, this problem is not limited to construction. The

impact on misclassified workers is obvious, but employees, employers, and taxpayers who play by the rules also pay a very high price

all across our economy for those employees who seek to avoid their

legal responsibilities.

Just a few quick bullet points for the impact on Massachusetts.

Most of these come from a 2004 study performed by Harvard University and the University of Massachusetts, which was sponsored

by the Center to Protect Workers’ Rights.

The Massachusetts General Fund loses an estimated $152 million in unpaid income taxes. The Unemployment Insurance Trust

Fund loses $35 million in revenues. There is $91 million in unpaid

workers’ compensation premiums over a 2-year period, forcing the

rest of us to cover injured workers in the Workers’ Compensation

Trust Fund. That fund covers workers who might not normally be

covered. In fiscal year 2004, approximately $4,331,000 was paid to

uninsured claimants. That is an assessment that ends up getting

levied on the rest of us and the responsible employers.

Laid-off or injured workers lacking unemployment or workers’

compensation benefits are forced to turn to public services, including the uncompensated care pool, now renamed the Health Safety

Net Fund. And those workers show up at emergency rooms, further

draining the Health Safety Net Fund because they don’t have their

regular insurance to go see their primary care doc, and those costs,

as we all know, are much higher when you show up at the emergency room.

The impact on the national level includes three quick bullet

points:

The Federal Treasury loses an estimated $4.7 billion in unpaid

taxes annually. The General Accounting Office estimates that 10.3

million workers, or 7.4 percent of the total workforce, were

misclassified in the year 2005. And the IRS in its most recent analysis found that 15 percent of employers misclassified employees as

independent contractors.

While much progress has been made and we are expecting more

progress in Massachusetts, there is still much work to be done at

the Federal level. We urge the Committee and the Congress to

adopt changes that will end or at least curb these abuses of the underground economy. The Massachusetts Building Trades Council

supports the passage of House Resolution 5804, the Taxpayer Responsibility, Accountability, and Consistency Act, which Congressman Tierney addressed earlier and is one of the lead sponsors.

I won’t go through all the main points since they were already

addressed by the Congressman. But we need to tighten up that definition, and we need to get enforcement. That is what it is all

about. We can’t have these games. Currently, the Social Security

Administration has a 20-point test to determine who is an employee and who is an independent contractor. Many of those points

are legitimate, but a lot of them are, unfortunately, used as an effort, as I like to say, ‘‘feather bedding for the Bar Association’’ to

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get around the law as opposed to finding out how to comply with

the law.

We would like to see those definitions tightened up. Massachusetts has essentially compressed the 20-part test into a 3-part test,

which is very rigorous and we think does the job. And it has been

followed up with responsible enforcement by the Attorney General’s

Office and by the Department of Labor. They are not going after

all the groups that you will hear about. When this law was passed

in 2004, we heard about bike messengers, hairdressers, people delivering water, kids cutting grass. It is really just a sham that is

put out there by folks on the other side. Those aren’t the people

that we are going after. These are legitimate businesses—I am

sorry, illegitimate businesses that have a substantial number of

employees, and they are doing this for the reasons Mr. Morrisey

outlined: just to simply avoid their responsibilities.

Many in the business community will argue that this puts them

in a trap, that they are really just trying to play by the rules, and

the rules are too confusing, and if they break the law inadvertently, that they will be subject to serious penalties. This is simply

not true. This is a calculated effort to avoid taxes, to avoid unemployment, to avoid workers’ compensation, to avoid paying proper

wages, and to avoid all the responsibilities that go along with being

an employer, and those rights and responsibilities that transfer to

that individual employee. It is an illegal action. It is tax fraud. It

is workers’ comp fraud. It is employment fraud. And it is a fraud

on the American people and a fraud on the American workforce. It

fosters a race to the bottom, and the winners in that race, unfortunately, are those who are willing to most aggressively violate the

law. The losers are the rest of us—the taxpayers, the workers, and

the honest employers.

I applaud your efforts in this to bring some light onto this issue

at the Federal level. We are willing to work with the Committee

and with the Congress in whatever efforts are necessary to make

this happen, and I thank you for the opportunity to testify here

today.

[The prepared statement of Mr. Callahan follows:]

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Chairman KERRY. Well, we thank you for coming.

Mark Erlich of the Carpenters.

STATEMENT OF MARK ERLICH, EXECUTIVE SECRETARYTREASURER, NEW ENGLAND REGIONAL COUNCIL OF

CARPENTERS

Mr. ERLICH. Thank you. My name is Mark Erlich, and I am the

head of the 24,000-member New England Regional Council of Carpenters. We are partners with over 1,400 union contractors, most

of them small businesses.

Senator Kerry, Congressman Tierney, we thank you for being

willing to shine a light today on our Nation’s growing underground

economy and its consequences for workers and legitimate businesses.

During the recession of the early 1990s, some construction employers at that point began to label their employees as ‘‘independent contractors,’’ thereby avoiding legally obligated tax payments and costly workers’ compensation premiums in order to cut

costs and gain a competitive advantage. We have seen over time

that during recessions, as folks are looking for an advantage, they

will look for new and creative ways of doing business.

Construction is a straightforward business of labor and materials. Since materials are generally the same for all bidders, companies can only undercut one another with higher productivity or

lower labor costs. But if a company can cheat the State and the

Federal Government, as well as insurance companies—and get

away with it—they have successfully gamed the system.

By the late 1990s, the economic boom increased demand for

workers in the Massachusetts building industry, and our region

witnessed an influx of immigrant workers, many of whom were undocumented.

The employers who had been willing to cheat through

misclassification now realized that they could take advantage of

this new workforce. They simply began to forget the niceties of

misclassification and just pay in cash, off the books and under the

table. In many parts of our industry, particularly the private nonunion construction sector, this approach has become standard practice.

How bad is the problem? Well, it is impossible to measure precisely because so much of this economic activity is unreported. One

study claimed that the shadow or underground economy in the

United States grew by 28 percent between 1990 and 2003. And a

2005 Bear Stearns report that has been referred to suggested that

the overall underground economy was nearly $3 trillion a year,

nearly 9 percent of our GNP.

What is the impact? You have obviously heard testimony from

contractors who will explain that they cannot compete on such an

unlevel playing field. Last fall, a local drywall contractor in this

area informed his workers that he was putting them back on the

books after years of misclassifying them as independent contractors

as a result of enforcement activities by the Government and the Attorney General. As a result, he cut their wages by 30 percent—a

figure that I believe constitutes a ‘‘fraud index.’’

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The impact on State and Federal revenues is even more severe. The current estimate of the tax gap is $290 billion, and an IRS

spokesman says that 30 percent of this is attributable to

misclassification. As mentioned, the GAO suggests misclassification

reduces Federal income tax revenues by up to $4.7 billion.

But these staggering numbers only reflect payments by employers who are still filing some sort of paperwork. What we forget is

that losses from those who keep a workforce completely off the

books cannot even begin to be measured. So all of these numbers

are really low-ball estimates. At a time of Federal and State budgets deficits, we are cutting crucial public services while these dollars go uncollected.

But what I would like to speak about today is the human side

of this public policy crisis. Companies that cheat on taxes and

workers’ compensation premiums are more likely to cut corners

and expose their workers to unnecessary risks and dangers. A New

York study reported a 40-percent increase in construction fatalities

in 2006 compared to the previous 5 years, an incredible spike that

the authors attributed to practices in the underground economy.

Oscar Pintado is an example. Last year this 27-year-old died on

a 450-unit residential project in Woburn. The builder, Avalon Bay

Communities, a giant Virginia-based development firm, had been

cited by OSHA for failure to meet fall protection standards on other

projects. Pintado fell 45 feet down an elevator shaft as he stepped

on and broke a piece of substandard particle board.

Pintado worked for National Carpentry Contractors, a large

framing contractor working for Avalon Bay that claims it has no

employees—just 150 independent contractors. National Carpentry

told OSHA inspectors that Pintado worked for an entity that actually did not exist and whose alleged owner conveniently disappeared and has not been located since the fatality. Pintado was,

of course, paid in cash and, therefore his family was not eligible for

any benefits or compensation.

Until this situation is corrected, taxpayers and legitimate companies will continue to pay an enormous price for wanton law-breaking. But there are also the thousands and perhaps even millions of

Oscar Pintados working on construction sites in this country. Most

are citizens, some are here illegally, but all of them are invisible

victims of this Nation’s shadow economy.

Those of us who live and work in Massachusetts are fortunate

that we have a Governor and an Attorney General who understand

this issue and have made heightened enforcement of the Commonwealth’s laws a priority. Their sense of urgency has to be translated to the Federal Government and its enforcement agencies.

Therefore, we recommend, as Frank said, a clearer and stronger

definition in Federal law of what constitutes a legitimate independent contractor and what is an employee—as defined by what

is known as the ‘‘ABC’’ test that Frank referred to. In this situation, both employers and employees are entitled to concise rules of

the road.

We also support the repeal of Section 530 of the Tax Code, the

‘‘safe harbor’’ rule as outlined in the House Taxpayer Responsibility, Accountability, and Consistency Act of 2008 that Congressman Tierney has sponsored, which we appreciate, and support SenVerDate 11-MAY-2000 17:36 Feb 26, 2009 Jkt 044568 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 C:\DOCS\44568.TXT DianeA PsN: DianeA
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ate 2044, the Independent Contractor Proper Classification Act of

2007.

And, finally, we believe that there should be a creation of a Federal task force of all the impacted agencies—similar to what is happening in Massachusetts, New York, New Jersey, and other States

around the country—to root out the underground economy. It

should not be a question of lack of resources. New dollars spent on

enforcement will produce exponentially more money in recaptured

revenues.

Our industry and our Nation need urgent action. We thank you

again for taking this action today.

[The prepared statement of Erlich follows:]

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Chairman KERRY. Thank you so much, Mr. Erlich. Appreciate it.

[Applause.]

Chairman KERRY. Director George Noel, we are delighted to have

you here representing the Department of Labor for the State, and

we recognize your good work in this field. Thank you.

STATEMENT OF GEORGE NOEL, DIRECTOR OF LABOR, EXECUTIVE OFFICE OF LABOR AND THE WORKFORCE, MASSACHUSETTS DEPARTMENT OF LABOR

Mr. NOEL. Thank you, Senator and Congressman. Good morning.

My name is George Noel. I am the Director of the Massachusetts

Department of Labor. I wish to begin my remarks by expressing

my appreciation for the Senator’s and the Congressman’s quest for

fairness. I have not forgotten your leadership in my former life supporting the defense authorization Build American amendments.

But today I am here to talk about the underground economy, its

effect on small business and workers.

I want to first talk about defining the underground economy,

then discuss who I believe is harmed by it, and some of our efforts

that the Governor has asked us to undertake.

The underground economy is a plague that has infected not only

the financial system of the Commonwealth of Massachusetts, but

that of the United States as a whole. It consists of individuals and

businesses that willfully avoid labor, licensing, and tax laws. These

individuals and businesses misclassify employees as independent

contractors or deal in cash or other ‘‘off the books’’ schemes to conceal their activities and their true tax liability from licensing, regulatory, and tax agencies.

While the precise scale of these extra-legal and illegal activities

is by definition difficult to calculate, we can reasonably and conservatively estimate the impact on the Massachusetts economy

running into many millions of dollars. We heard Mr. Callahan talk

about the Harvard study, and I am not going to rehash some of

those statistics. But the broader economic toll, which takes into account lower wages and the knock-on effects of unfair competition

on employers, may well be impossible to calculate.

The Fiscal Policy Institute, in a study on New York’s construction industry, estimated last year that nearly one-third of New

York City’s residential construction workforce is ‘‘off the books’’ and

working in the underground economy. With New York City’s 8 million residents to the Commonwealth’s 6.5 million, we think these

numbers are a reasonable reflection of the scale of the problem

here.

In essence, the underground economy is an illegal gray market

which lowers living standards, undercuts wages and workplace protections, undermines fair competition for businesses, pitting residents against one another in a race to the bottom.

Who is affected by the underground economy?

Operating in the underground economy is not a victimless crime,

as some would lead us to believe. Workers, legitimate business

owners, consumers, government, and society in general shoulder

the burden shirked by employers who operate in the shadows of the

underground economy.

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Workers, usually the most vulnerable, are exploited by irresponsible employers who engage in employment fraud. These workers

are usually on the lower wage scale and are often undocumented

workers.

Another set of workers who are adversely affected by the underground economy are workers who work for employers who play by

the rules. These workers suffer from depressed wages and benefits

or end up in the unemployment line, all because their employers

commit the cardinal sin of playing by the rules. Some workers have

no other choice but to slip into the underground economy themselves. The same Bear Stearns report that Mr. Erlich just referenced also says that ‘‘four to six million jobs have shifted to the

underground economy, as small businesses take advantage of undocumented workers.’’ It is safe to assume that tens of thousands

of Massachusetts jobs have suffered the same fate by that migration. One only has to look at some of the Home Depot parking lots

or Foss Park in Somerville to find evidence of these ‘‘street corner

hiring halls’’ that have spouted around the Commonwealth and the

United States.

The Commonwealth of Massachusetts and the United States lose

tax revenue due to unreported wages. The Internal Revenue has

developed the idea of the tax gap as a way of measuring taxpayer

compliance with Federal tax laws. The General Accounting Office

found that the Federal tax gap in the tax year of 2001 ranged anywhere from $312 billion to $353 billion.

Consumers are also affected. They are exposed to unregulated

and potentially unsafe goods and services through the underground

economy. Legitimate employers like Mr. Morrisey face an unfair

advantage from employers operating in the underground economy

themselves over legitimate employers and their workers. These employers pay their workers’ compensation premiums. They pay their

unemployment taxes. They pay into Social Security. They pay their

payroll taxes.

What is the task force that you have heard a little bit about

today?

In his efforts for broad economic growth, Governor Patrick is

committed to creating good jobs at good wages, proper protections

for employees and employers, and assurances of fairness. That is

why he signed the executive order that Mr. Callahan referred to on

March 12th.

The Governor asked me to chair this task force, which unites

various State agencies with the goal of surfacing the underground

economy.

The task force is a large-scale, collaborative effort between State

and constitutional offices. The Joint Task Force brings together the

Attorney General’s Office of Fair Labor and Business with a variety of State agencies. We also worked closely with other partners

such as the Office of Refugees and Immigration and the Insurance

Fraud Task Force to achieve our goals.

It is important to note, just like Mr. Callahan noted earlier, that

we have been working together in an informal fashion. What this

does is codify it. And our partners over at the Attorney General’s

Office have been very helpful to us.

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The task force’s stated goal is to surface the underground economy in Massachusetts by pooling resources and sharing information, enforcing licensing, labor, and tax laws. We have found that

working together is the most effective way to surface the underground economy. We have looked for best practices in California

and New York to help us lay the foundation for our own task force.

Our task force has six goals: eliminate unfair business competition; protect workers by ensuring that they receive all the benefits

and protections they are due under the law; protect consumers by

ensuring that businesses are properly licensed and adhere to consumer protection regulations; reduce the burden on law-abiding

citizens and businesses by ensuring compliance with the Commonwealth’s licensing, regulatory, and tax laws; reclaim rightful revenue for the Commonwealth through increased compliance with

State tax laws; and continuously evaluate and improve our own effectiveness by developing new procedures, promulgating new regulations, and proposing new legislation.

The task force is managed by a director who coordinates the activities of the task force from the Department of Industrial Accidents. He is here with us today—Mr. Michael Bradley.

His job is to coordinate the efforts, primarily by educating business owners, employees, and the public about relevant requirements and conducting targeted investigations and enforcement actions against violators.

The underground economy is most prevalent and target task

force resources accordingly, assess investigative and enforcement

methods, and develop and recommend strategies to improve these

methods.

We are organized into six sub teams. I am not going to go

through all of them. They each have their job. But one thing I do

want to talk about is some of the communications that we have

done.

We have developed a tip line that has been developed with a general message that can be heard in English and Spanish. That

phone number is 1–877–96-Labor-2267. Additionally, we have developed a Web site that has a lot of information on how to report

these irresponsible, illegal employers.

Governor Patrick has charged Secretary of Labor and Workforce

Development Suzanne Bump with creating an advisory panel to engage employer, labor, and community groups to solicit feedback and

input as part of the information-sharing process.

Once again, I wish to close by expressing my gratitude to the

Committee for taking the time to explore this important issue. And

I believe that we all must work together if we are to be successful

in achieving what I believe is our shared aspiration of driving this

scourge from the Commonwealth of Massachusetts and our great

country.

Thank you.

[The prepared statement of Mr. Noel follows:]

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Chairman KERRY. Mr. Noel, thank you. Very helpful and very

important.

[Applause.]

Chairman KERRY. Thank you.

Finally, Jennifer Stark, Assistant Attorney General, we appreciate your being here, and you are testifying on behalf of Ms. Goldstein.

Ms. STARK. I am. Thank you.

Chairman KERRY. Thank you.

STATEMENT OF JENNIFER STARK, ASSISTANT ATTORNEY

GENERAL, POLICY AND GOVERNMENT RELATIONS DIVISION

CHIEF

Ms. STARK. Good morning, Senator Kerry and Congressman

Tierney. For the record, my name is Jennifer Stark. I am the chief

of the Policy and Government Division of the Attorney General’s

Office, and I am delivering this testimony on behalf of the Policy

and Government Division. And I am delivering the testimony on

behalf of Joanne Goldstein, who is the chief of our Fair Labor Division. And on behalf of her and Attorney General Martha Coakley,

I would like to thank you for allowing us to have the opportunity

to comment on this very important issue.

The Fair Labor Division of the Office of the Attorney General is

statutorily mandated to enforce the wage and hour laws of the

Commonwealth. This includes minimum wage, overtime, prevailing

wage, vacation, commission, and child labor laws, just to name several of them. We handle over 3,000 complaints annually, and a vast

majority of these can be considered within the underground economy designation.

The underground economy encompasses a wide variety of offenses that we enforce, which includes an employer who pays employees in cash, often below minimum wage; employees who work

hours significantly above 40, but don’t get paid the statutorily required time and a half for all of the hours worked. Often, employees get a cash payment that covers only some of the time worked

or may get only straight time for overtime hours worked. It is not

uncommon for unscrupulous employers to pay overtime from a separate account to shield the overtime payments from scrutiny and

taxes.

There are employers who give employees—often minimum wage

workers—checks that bounce, week after week, or intermittently. A

lot of these employees are reluctant to seek other employment

without getting their back wages; but when they stay in these jobs,

it also leaves them vulnerable to additional weeks without a paycheck.

Even in the public construction arena, the underground economy

issues flourish. Employers fail to pay prevailing wage, take credit

for deductions for health or pension plans, but never remit the premiums to the plans, or pay less than the full rate or fail to register

apprentices.

Some employers hire undocumented workers despite our Federal

requirements that they confirm immigration status and then exploit the status of the workers by not paying them, or paying them

less than the law requires, or requiring illegal offsets for transporVerDate 11-MAY-2000 17:36 Feb 26, 2009 Jkt 044568 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 C:\DOCS\44568.TXT DianeA PsN: DianeA
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tation, tools, and other costs, knowing that these employees are unlikely to report due to their status.

In one particularly egregious case, an employer never paid any

employee at all. Instead, he hired a crew of undocumented workers,

worked them for several weeks, let them go and kept cycling

through new crews of undocumented workers every few weeks,

never paying any of them at all.

One of the most pervasive practices within the underground

economy is the misclassification of employees, as you have heard

from the other witnesses on this panel. And although this is commonly referred to as classifying individuals as independent contractors, not as employees, as they should be classified, this is somewhat of a misnomer because often these people are not just

misclassified, they are not classified at all. They are not true independent contractors, running their own businesses, having independence and autonomy, being paid by check and then reporting

income with the proper documentation. Instead, they receive a set

sum of money, usually in cash, often below the proper rates of pay

with no pay stub or other record.

And this issue has an impact on employees and small businesses,

as you have heard from Mr. Morrisey today. The impact on employees is unmistakable. Employees deprived of their just wages, or any

wages, simply cannot live. They cannot pay rent, utilities, buy food

for their families, provide health care, transportation, or any of the

other basic necessities for their lives and their families. Often, they

are unskilled, perhaps undocumented, frequently uncomfortable reporting violations. We should not tolerate, in Massachusetts or anywhere in the United States, the exploitation of workers. Not only

are workers harmed economically, they are demoralized by being

treated so poorly. It is hard enough, especially in this economy, to

live paycheck to paycheck, but when the checks don’t come in, oftentimes lives for these people become impossible.

The Attorney General recognizes that small businesses face challenges different than, and probably greater than, larger businesses.

They find it hard to sustain viability. Clearly, expenses and taxes

and the challenges of running a small business make success more

elusive. Some find it tempting to skimp on employee obligations.

Interestingly, we hear from many legitimate small businesses that

they are thrilled that the Attorney General is vigorously enforcing

the wage and hour laws. They concur with the Attorney General’s

assumptions that enforcement of the law will level the playing field

within the small business community and allow them to become

more successful, as they will no longer be undercut by businesses

that are not playing by the rules. And you have heard some of

those examples today.

We have been advised that for the first time in many years,

small businesses are filing complaints against their own competitors who are not playing by the rules because they know that the

Attorney General’s Office is vigorously enforcing these cases.

In a number of industries, such as car washes, flooring and

drywall, all of which are rife with underground economy problems,

the Attorney General’s actions have led to a change in the culture

of the industries, and businesses are being more receptive to playing by the rules. One noteworthy example of our success is a small

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company that employs between 10 and 50 and complies with wage

and hour laws. The company has historically bid 30 to 40 percent

higher than many of its competitors who don’t play by the rules.

And now that we have demonstrated our commitment to enforcing

actions in the construction industry, the company in question reports that his competitors are bidding in the same range as he is,

and they are in greater compliance with the law, so that he is right

in the mix of the bid range with his competitors at this point. This

is certainly a success story in this area.

So looking at the effect of the underground economy on small

business, it is clear to the Attorney General that continued, meaningful enforcement of wage and hour laws will have a positive and

sustained impact on legitimate small businesses.

The Attorney General has also made enforcement of wage and

hour laws, as I have said, a priority in her office, and she has devoted resources and personnel to the issue in about the year and

a half that she has been in office. Some of the highlights of her

first year in office include: Consistent, visible, and vigorous enforcement of the wage statutes, with a focus on those businesses and

employees who are part of the underground economy; we have

processed complaints more quickly and efficiently; we have issued

citations with orders of restitution to the workers and fines that

are commensurate with the violations.

We have also obtained criminal complaints against those businesses whose wage and hour violations meet the criteria for criminal enforcement. We advise businesses that failure to comply with

our procedures no longer results in a minor fine, but that these

businesses are now subject to significant, legitimate fines and orders of restitution.

There is also an open-door policy in our office for businesses,

unions, workers, and advocacy groups who want to discuss issues

with us and resolve complaints. And we have also done outreach

to all stakeholders, and we have revised all of our written materials for distribution.

We have increased our language capacity so that we can reach

more employees, especially those that are in the underground economy for whom English is their second language. We have also

made presentations and had information sessions to industry

groups, unions, law firms, legal and other professional associations.

We are in the process of revising our Independent Contractor/

Misclassification Advisory that is going to be issued very soon, and

it hopefully is going to give stakeholders a better understanding of

the enforcement guidelines. We are participating in the Governor’s

Underground Economy Task Force, and we have also assigned two

new victim/witness advocates to the Fair Labor Division. That division has never had victim/witness advocates before, and they will

be able to assist employees who are victims of wage violations. And

we are hoping that this will also foster trust so that the word will

get out and these workers will report more often.

Thank you for your efforts to address this problem, and we look

forward to working with you toward this effort.

[The prepared statement of Ms. Stark follows:]

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Chairman KERRY. Well, thank you all very, very much.

[Applause.]

Chairman KERRY. The testimony is very, very helpful.

Congressman Tierney has to catch a plane to Washington to

make the city safe for my arrival.

[Laughter.]

Representative TIERNEY. Thank you very much, Senator. I want

to thank all the witnesses again for this, and I will look forward

to reading the question-and-answer sessions as well. Thank you.

Chairman KERRY. Thanks for being with us very, very much.

[Applause.]

Chairman KERRY. So now let’s flesh the record out a little bit

more, and I appreciate the Congressman being here and his leadership in the House. Obviously, this is an enormous issue. I want to

try to get at it a little bit in real terms here. Each of your testimonies have been very candid and very helpful, and I think it

paints a broad picture to hear from representatives of working

folks who have a set of rules by which they operate and who have

helped to improve the workplace in America; an entrepreneur who

is trying to make it work; and one in absentia, and I put some of

her testimony in here. But she has a very similar story to tell, as

Mr. Morrisey’s, about how the construction industry is impacted by

this.

I think it is important to emphasize that it is not just the construction industry, and we; will talk about that a little bit more in

a minute.

Ms. Stark, thank you very much. You know, none of this has a

chance of being fixed unless the enforcement is rigorous, and we

obviously appreciate what the Attorney General is doing to help

make that happen. But let’s try to simplify some of this and see

if we can consolidate it.

First of all, the breadth of this, we have talked specifically about

construction, but give us a better sense, if you will, or sort out the

different examples that you are aware of in the different places

where this is having an impact in the State of Massachusetts or

in the country. Do you want to share—Director Noel, do you want

to lead off on that?

Mr. NOEL. Sure. In fact, you and Mr. Callahan mentioned one

case in your editorial today, in the Boston Herald, that talked

about a young woman who is a janitor, worked at a nursing home,

and was treated as a franchisee. And, you know, the company that

she worked for, I think, made claims of $90 million of sales each

year, claims only to have 300 or so employees, and they operate

worldwide, but yet they have 8,500 franchisees. You know, they are

really employees. Let’s not kid ourselves. But they seem to exploit

the most vulnerable workers.

Chairman KERRY. Well, how do they classify somebody as a

franchisee?

Mr. NOEL. What they did was they actually told them that they

were a business unto themselves. They gave them direction, gave

them uniforms, procedures how to clear, but yet they basically sold

this woman the business for $10,500 and made her buy all the supplies from them, was under their direction, and only paid her a cerVerDate 11-MAY-2000 17:36 Feb 26, 2009 Jkt 044568 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 C:\DOCS\44568.TXT DianeA PsN: DianeA
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tain amount of money and had her work an enormous amount of

hours that she had to actually——

Chairman KERRY. And did the company set the hours of work?

Mr. NOEL. They told her originally that she only was going to be

working 20 to 25 hours. However, you know, the work that she did

far exceeded—the work they assigned her far exceeded that, so

much so that she had to hire somebody else and pay them, you

know, as if she was her own business. In the end, it was a losing

proposition. She ended up—she couldn’t make any money out of it.

Chairman KERRY. Did she believe she was her own business?

Mr. NOEL. I think at first she did, you know, but it really didn’t

turn out—and, in fact, that is what brought the case forward, that

when she finally couldn’t go on any further, she filed for unemployment, and that is what generated the case that you have talked

about.

Chairman KERRY. Can any of you tell us from your experience

how many people know that they are actually misclassified? Or

how many people know how they have been classified, that they

have been classified as an independent contractor and then find out

later when there is a problem that that, in fact, is their status? Are

you aware?

Mr. CALLAHAN. I could give you a personal example. My motherin-law is working as a home health care aide. She was working

roughly 20 to 25 hours a week. She went through an agency, and

she was told she was an independent contractor. None of the

withholdings were done for her, for her taxes. There was no workers’ comp paid, no unemployment paid. And she knew she didn’t

really have a choice. She went to work. She got her pay. She was

told when to be there, what she had to do. She was under their direction and control. And then when tax time came, she was responsible for all those—the employer’s side of those taxes. She had to

pay the FUTA, the FICA, all the other employment taxes. I know

this because I had to write the check to cover her taxes come tax

time because the IRS was coming after her.

Chairman KERRY. Did she think originally she was a full-fledged

employee?

Mr. CALLAHAN. For the purposes of the law, I think she thought

she was an employee, but she knew she didn’t have a choice. That

is part of the problem here. People work there; they are working

under the table for cash. They know what the deal is.

Chairman KERRY. But they can’t get the job otherwise.

Mr. CALLAHAN. They can’t get that job otherwise, and that is

really what it comes down to.

Chairman KERRY. What about in terms of enforcement, Ms.

Stark. What is the biggest restraint on our ability to be able to enforce adequately?

Ms. STARK. Well, I don’t know if there are restraints at this

point. I mean, we have been spending the past year analyzing all

of these complaints that have come into the office and actually

doing the enforcement. The wage and hour laws we are happy

with, and we are using them wisely and properly. It is just a matter of having that commitment to actually do the enforcement.

Chairman KERRY. Well, there has to be some restraint, because

if you have all of these companies that are doing this, either there

44

aren’t enough people, or there isn’t enough insight, or there isn’t

enough effort, or something is happening. Companies ought to be

living in total awareness that if they do it, they are probably going

to get caught, and it is going to be costly.

Ms. STARK. Yes. I think maybe one of the restraints is there are

folks out there that aren’t reporting it to the Attorney General’s Office, so we can’t enforce something that we don’t know——

Chairman KERRY. The reason they don’t report it, Ms. Stark, in

my judgment, is that they don’t fear it is a deterrent. It is the absence of deterrence.

Ms. STARK. Right.

Chairman KERRY. They don’t worry about it because the chances

of getting caught aren’t great. Am I wrong? If you have $312- to

$353-billion worth of taxes that are not being collected, what would

happen if we took $3 million—$10 million of that per State—I

mean, what is that? That is $150 million, maybe, out of $312 billion, and said go do this, enforce this, wouldn’t that make a difference? Suppose you had a larger division in your office.

Ms. STARK. Yes, it would make a difference. But I think, you

know, we are seeing changes already over just 1 year of having this

focus. Of course, it would make a difference.

Chairman KERRY. Mr. Morrisey.

Mr. MORRISEY. Senator, I can speak very frankly about that. We

have seen almost immediate changes over the last 6 months where

individuals that were coming down seeing the grass being greener

in Massachusetts, specifically even some New Hampshire contractors. Now they are not so quick to come over the State line because

the grass isn’t so greener, because they have all been called in to

the Attorney General’s Office. From what I understand, the conversations are all very nice, but they have been given notice that

the procedures cannot continue and must be changed. These individuals are not quick now to bring their workforce down here,

which by and large, are those underground workforces.

So now they are staying back there, and it is opening up a new

field for others now that I was having trouble trying to compete

against. Now the competition is becoming more fair.

Chairman KERRY. How prevalent is the disadvantage to you in

terms of the competition? Give me a percentage.

Mr. MORRISEY. Well, I will tell you that it used to be years ago

I could get 50 percent of the jobs I quote. Now I am probably 25

percent, and it has been that way, you know, for the last 7 or 8

years. So it is tough.

Chairman KERRY. And do you see who the people are who get the

jobs you quoted?

Mr. MORRISEY. Yes, and you have one of those things in your

mind. If, you know, Company ABC is good competition, hey, they

got us on one, they beat us fair and square. But when you hear

about these others, you know, it really—it gets you pretty upset.

Chairman KERRY. But you know how they are competing.

Mr. MORRISEY. Yes, we do.

Chairman KERRY. In other words, you are very aware—you can

see who won, and depending on who won, you know whether they

competed on a fair basis or on an unfair basis.

45

Mr. MORRISEY. Right. And what you had for a long time is you

had that gray area. Even legitimate companies would overextend

themselves. Maybe the project was mismanaged by an owner or a

developer, and so now they had too many going at once. Their 50

or 25 or 30 payroll employees couldn’t keep up, so now they could

go to this other resource and maybe even hire a legitimate guy, but

knowing in the back of their minds—the old ‘‘Don’t ask, don’t

tell’’—knowing that they were bringing in these other workers. To

be able to get this job done and meet the schedules, they just said,

well, I will deal with the consequences if I have to when they continue on.

Chairman KERRY. And what is the greatest deterrent in your

mind to their doing that or being willing to do that?

Mr. MORRISEY. The greatest deterrent is knowing now that there

is an accountability. With all due respect to everyone here, there

really didn’t seem to be an accountability. We always heard about,

quote-unquote, people being fined or having difficulties. You saw

that in the insurance industry. If you didn’t have workers’ compensation, there was a fine or a penalty. But now, when we hear

that the offices of the Attorney General are taking things much

more seriously and they are looking into all of this, people now are

waking up to the fact that, you know, there is going to be a reaction for their actions.

Chairman KERRY. Now, give me a good, hard list of the readily

identifiable, tangible consequences, and then maybe some of the

unintended consequences—or collateral consequences. Shall we call

it that? Direct consequences.

Mr. NOEL. Well, I can speak to one just while we are on the subject of workers’ comp. One of the departments I oversee is Industrial Accidents. One of the offices of investigation ensures that employers have workers’ comp premiums. Just this past month alone,

they issued 177 stop-work orders, which was unheard of. And it is

due to a commitment that we have instilled in that office. And it

is about commitment to enforcing the laws. Like our partners over

at the Attorney General’s Office, we have agencies—the Division of

Occupational Safety oversees asbestos and lead abatement, and

they have the power to issue stop-work orders.

One of the things that we are looking for now through the legislature is civil fines that we find would probably be a greater deterrent, because our only other resource would be to make it a criminal matter and overburden our already overburdened Attorney

General’s Office. But it is about commitment. It is about enforcement.

Chairman KERRY. But what I am trying to get at is in terms of

unemployment compensation—or workers’ compensation—you have

the potential of employee injury and they are not covered.

Mr. NOEL. It is also—they may be covered, but there is a workers’ comp—the trust fund would then pick up the payments.

Chairman KERRY. So citizens wind up paying more for other

things than they should.

Mr. NOEL. The legitimate businesses pay into that, and they

would be——

Chairman KERRY. That is number two. What else? Health care.

People don’t have a health care benefit.

46

Mr. NOEL. Right.

Chairman KERRY. People get injured, no compensation.

Mr. NOEL. You have unemployment.

Chairman KERRY. Shoddy work. Work may be less safe.

Mr. MORRISEY. Doesn’t get done on time. You have to have someone come out then to finish it up because they tried to go with the

low-ball guy. He can’t keep up. It doesn’t——

Chairman KERRY. It may wind up costing more.

Mr. MORRISEY. I can give you a case-by-case scenario where we

profit because the guy that they chose didn’t fulfill his obligation.

Chairman KERRY. And you wind up doing it.

Mr. MORRISEY. So we come in at the end and finishing, anyway.

Chairman Kerry. What else?

Mr. MORRISEY. Increased fatalities.

Chairman KERRY. Increased fatalities.

Mr. CALLAHAN. A chilling effect on bidding. Mr. Morrisey mentioned the drop in the number of projects that he has been successful in winning. What he didn’t mention was the number of contractors that tell us that they simply didn’t bid the job.

Chairman KERRY. They won’t even bid.

Mr. CALLAHAN. They walked in and they saw XYZ Construction.

Chairman Kerry. I have heard that.

Mr. CALLAHAN. And they said, ‘‘I can’t even compete; I am not

going to spend $30,000 in 2 weeks to put together an estimate for

a project I know I simply cannot win.’’

Chairman KERRY. Any other consequences?

Mr. MORRISEY. If you look at the long-term effects, Senator, you

have these aging individuals that are 1099s. In my industry, you

had it for years. Guys would go out. They would get the nice house,

the nice truck. They would raise their children. But now all of a

sudden they are at the age of 45 or so——

Chairman KERRY. And their income is going down.

Mr. MORRISEY. They have nothing. They are beyond their piecework prime years. They can’t produce what they used to. And so

now they are coming to folks like us to try to get them jobs. In

some cases, we are able to put them on. But now you have that

they have not saved for that rainy day. They don’t have anything

to back them up toward their retirement. So you are having this

back-end issue. We put them on, and now they have got bad knees

or the bad shoulder. Now you have a medical issue that has to be

addressed because they couldn’t do it when they were younger.

Chairman KERRY. How effectively is the Governor’s task force

working right now with the AG’s Office in that collaboration? Is

that working well?

Mr. NOEL. Actually, we have been working together since both

administrations came into office. This more or less codifies it. We

have, I believe, about 16 or 17 joint investigations, not just with

the Attorney General’s Office, but between the other government

agencies. We have yet to perform a full sweep. You know, we are

just starting to get underway, and there is a lot of stuff that we

have to do before we get to the full sweeps. But there is a good

partnership there.

47

Chairman KERRY. What do you think is the most important step

that can or should be taken at the Federal level to augment what

is happening in a few of the States?

Mr. NOEL. I think Mr. Callahan touched upon it as far as tighten

up the definition of an employee.

Chairman KERRY. The classification.

Mr. NOEL. Classification. One of the——

Chairman KERRY. Of independent contractor.

Mr. NOEL. One of the obstacles that we face working together

is—it is actually twofold: One is information that we can legally

share with one another, and that is something that we are going

to have to tighten up either through legislation or regulation. The

other thing is different agencies have different definitions of what

an employee is. You know, you have the Department of Revenue,

which relies upon the 20-point test that the IRS has. And then, you

know, some of us rely upon the 3-point test as defined under Massachusetts law.

Mr. ERLICH. Senator, if I may, one thing about this problem is

it actually is a problem that can be fixed, as opposed to so many

problems that folks in Congress are constantly banging their heads

against the wall. The actions of the Attorney General and the announcement of the Governor’s task force, as Mr. Morrisey has said,

has already—the word is on the street, and, I mean, it is early and

it is premature, but just the fact that there seems to be a heightened focus has meant that companies are starting to say, ‘‘Should

I continue; am I now taking a risk by continuing to do business

this way?’’ And some are beginning to change the way they do business. It is really—and that is at a very early stage.

Chairman KERRY. That is the whole purpose of law enforcement

deterrence?

Mr. ERLICH. Exactly.

Chairman KERRY. You get the word out there that you are serious about something, people take note of it.

Mr. ERLICH. It is a business calculation.

Chairman KERRY. Absolutely.

Ms. STARK. And just to mention, there are two cases that we

brought. One is still ongoing so I can’t talk about it in too much

detail, but one is—there is an action against FedEx, which you

know, when you have a higher profile case going on, the word does

get out a lot quicker; it is an independent contractor

misclassification case. And we also have the issue with Wendy’s

where a Wendy’s franchise had closed, and a ton of workers were

just not paid. The Wendy’s closed in western Massachusetts, and

our office worked with the owner of Wendy’s Corporate, and all of

those workers were paid. And I think when people see those higher

profile cases—the FedEx case—it also helps with deterrence.

Chairman KERRY. What about the argument that is made—and,

Frank, you know this, Mr. Callahan, and Mr. Erlich, about the

pushback we get on the prevailing wage argument, that people say

we can’t compete; we are not able to make this work because of the

overall cost of the project is going to be too great, so we are not

going to be able to do that, or we are not going to be able to make

that improvement to the building. There is always that pushback.

What is your comment about that?

48

Mr. ERLICH. Just quickly, that is a discussion that actually is

going on with folks in the housing community, especially in the affordable housing community, because they are strapped for money,

and they see every rise in the cost of labor being one less affordable

unit that is being built. And when we point out to them that—this

isn’t even about prevailing wage. This is simply about playing by

the rules.

From my perspective, one of the reasons why we are seeing a lot

of groups come together around this, including groups that have

historically been opposed around labor issues, is that I think it is

almost impossible—this is like apple pie and motherhood. This is

just playing by the rules. This is not a question of prevailing wage.

It is really not a question of other—it is simply cheating or not

cheating. And I think it is very difficult for anybody to make a logical and concise argument that there is any reason not to make everybody play by the same set of rules, which is why I think that

there is a reasonable chance of success here.

Chairman KERRY. Yes, Mr. Morrisey.

Mr. MORRISEY. To the point of prevailing wage, Senator, depending on which set you are working with, whether it be HUD or

whatnot, it is not that big a step anymore. If you are paying all

of your things that you need to pay, the step is not as great as

some people will make you think it is. It is really not.

Chairman KERRY. And it is made up in the productivity, as Mr.

Morrisey alluded to earlier. You are not getting some kid who is

home from college for the summer, wearing a pair of sneakers and

a baseball hat, pretending to be a carpenter so he or she can go

back to school in September. You have people that have completed

an apprentice program that takes anywhere from 3 to 5 years,

where their skills and their productivity and quality of their work

more than makes up for any differential in the wage scale.

Chairman KERRY. Has this had an impact on the numbers of

workers you hire?

Mr. MORRISEY. Well, interestingly enough, we talked about that

on the way in today, my partner and I. We could hire numbers of

more individuals. We have applications coming in, you know, probably 12 or 16 every week. But you know, unless we get the jobs,

you can’t put them on.

In the short term, the past couple of years, we have been maxed

out. We couldn’t put anyone else on because we couldn’t get enough

work to sustain them all. We kind of had capped out a little bit.

Although we have grown every year, we kind of capped out a little

bit. So we would like to, but we are hoping this will make the other

opportunity change.

Chairman KERRY. Is there any aspect, in terms of enforcement,

that we have not been able to discuss thus far? Is there anything

that is not on the table as to how we approach this problem? I just

want to make sure there is nothing left unsaid. My sense is we

have got a pretty good understanding of it.

The classification issue, is there some simplified way you would

make that classification in your judgment so that we just don’t

have these crazy arguments?

Mr. ERLICH. There is what is called the ABC test. That is what

Frank referred to.

49

Chairman KERRY. You think that is the simplest way to approach it?

Mr. ERLICH. It is simple, it is clear, the least confused, yes.

Chairman KERRY. Right, OK. Do you think that—and what about

the illegal immigration component of it, is that somehow

compounding the issue? Would the issue exist even if we didn’t

have that? It would?

Mr. ERLICH. It would exist, but I think not to the same degree.

Chairman KERRY. Not to the same degree.

Mr. ERLICH. And, you know, I think the State agencies that we

are dealing with are taking the right approach, which is that is a

Federal issue, it seems to be not being forthrightly addressed these

days, but whoever is working out——

Chairman KERRY. If it were more directly addressed these

days——

Mr. ERLICH. Clearly the problem would disappear. If everybody

had to be treated legally as a—you know, then everything——

Chairman KERRY. You think that would signal the——

Mr. ERLICH. Absolutely. But the State has taken the position

that everybody needs to function under the State laws, in any case,

and that is good enough for us.

Chairman KERRY. All right. Well, this is very helpful, and I am

going to make sure that this record gets appropriately distributed

to our colleagues on the Committee, and we are going to try and

press forward and see what we can do, both on the definition as

well as the enforcement side. I am convinced, and I have been convinced for some time—this is sort of a part of our discussion now

about tax reform. We need to do the tax reform and the tax piece

would help it, but it is not going to cure it. The enforcement is perhaps the most critical thing of all, and we need to empower you.

I am going to talk to the Attorney General about how we might

augment those efforts, because I think that would be as significant

as anything in making a profound impact.

You have already commented on the impact that is being had by

virtue of what is going on. So I think if it gets more visibility, if

more people are aware of it, and if the hammer comes down more

rapidly on more people, boom, you are going to start to solve this

problem significantly.

I tell you, every citizen in this room and everyone who is not

here—every citizen—is negatively impacted by this. And every citizen would be better off if we were able to be out there collecting

the taxes that are uncollected, the billions upon billions of dollars

of taxes. I was driving today on some roads. I don’t know how

many of you—I mean, our roads in this State are in shocking disrepair. And that is true nationally, not to mention bridges and tunnels and buildings and all kinds of things that need repair. We

could be putting people to work.

But part of it is everybody is saying, ‘‘Well, how are we going to

pay for it?’’ Well, one of the reasons we are struggling with that

is that people are avoiding their fair share of paying that burden.

So we need to do it.

I appreciate everybody’s——

Mr. NOEL. Excuse me, Senator, if I could just add one comment.

You talked about the Attorney General’s Office. Also some of the

50

Governor’s agencies, also there is enforcement involved there.

There are enforcement components. Some of those are federally

funded. One I can think of is the Division of Occupational Safety.

So if there is any help there that you could provide, it would be

in that regard.

Chairman KERRY. I see a number of folks in this audience who

I know are union either leaders or members, and I greatly appreciate their being here today to help focus on this issue. I greatly

appreciate their leadership and efforts in this regard.

I want to just mention Steve Tewksbury, who is in the back

here—he was, anyway. Where is he? There he is. He just came

back in here. I just want to call attention, he is a union carpenter,

the only guy I know who has had a town named after him here in

the city.

[Laughter.]

Chairman KERRY. But he is deployed to Iraq, I guess four times

already.

How many times have you been to Iraq? You have been how

many?

He has been twice, but he is going in June again, folks, and I

just want everybody here to acknowledge him and say thank you

for his service.

[Applause.]

Chairman KERRY. Thank you.

So I thank you. I think that is a great note, people are willing

to serve their country and willing to go abroad to do it. We have

got to serve our country right here at home and do a better job of

making things happen.

So thank you all for contributing to this record, and I can promise you we will try to take some actions on this down in Washington.

We stand adjourned. I appreciate it.

[Applause.]

[Whereupon, at 11:28 a.m., the Committee was adjourned.]

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