```

[Senate Hearing 111-1146]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 111-1146

LEVELING THE PLAYING FIELD: PROTECTING WORKERS AND BUSINESSES AFFECTED 
                          BY MISCLASSIFICATION

=======================================================================

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

        EXAMINING PROTECTING WORKERS AND BUSINESSES AFFECTED BY 
MISCLASSIFICATION, INCLUDING S. 3254, TO AMEND THE FAIR LABOR STANDARDS 
  ACT OF 1938 TO REQUIRE PERSONS TO KEEP RECORDS OF NON-EMPLOYEES WHO 
  PERFORM LABOR OR SERVICES FOR REMUNERATION AND TO PROVIDE A SPECIAL 
     PENALTY FOR PERSONS WHO MISCLASSIFY EMPLOYEES AS NON-EMPLOYEES

                               __________

                             JUNE 17, 2010

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      Available via the World Wide Web: http://www.gpo.gov/fdsys/

                  U.S. GOVERNMENT PRINTING OFFICE

76-452 PDF                WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001

          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

CHRISTOPHER J. DODD, Connecticut     MICHAEL B. ENZI, Wyoming
BARBARA A. MIKULSKI, Maryland        JUDD GREGG, New Hampshire
JEFF BINGAMAN, New Mexico            LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington             RICHARD BURR, North Carolina
JACK REED, Rhode Island              JOHNNY ISAKSON, Georgia
BERNARD SANDERS (I), Vermont         JOHN McCAIN, Arizona
SHERROD BROWN, Ohio                  ORRIN G. HATCH, Utah
ROBERT P. CASEY, JR., Pennsylvania   LISA MURKOWSKI, Alaska
KAY R. HAGAN, North Carolina         TOM COBURN, M.D., Oklahoma
JEFF MERKLEY, Oregon                 PAT ROBERTS, Kansas
AL FRANKEN, Minnesota                
MICHAEL F. BENNET, Colorado          

                      Daniel Smith, Staff Director
                  Pamela Smith, Deputy Staff Director
     Frank Macchiarola, Republican Staff Director and Chief Counsel

                                  (ii)

                            C O N T E N T S

                               __________

                               STATEMENTS

                        THURSDAY, JUNE 17, 2010

                                                                   Page
Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................     2
    Prepared statement...........................................     4
Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio.......     5
Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia...     7
Harris, Seth D., Deputy Secretary of Labor, Washington, DC.......     8
    Prepared statement...........................................    10
Franken, Hon. Al, a U.S. Senator from the State of Minnesota, 
  statement......................................................    24
Murkowski, Hon. Lisa, a U.S. Senator from the State of Alaska, 
  statement......................................................    26
Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon, 
  statement......................................................    27
Gardner, Colleen C., Commissioner, New York State Department of 
  Labor, Albany, NY..............................................    30
    Prepared statement...........................................    32
Battaglino, Frank, Owner, Metro Test and Balance, Capitol 
  Heights, MD....................................................    37
    Prepared statement...........................................    39
Ruckelshaus, Catherine K., Legal Co-Director, National Employment 
  Law Project, New York, NY......................................    42
    Prepared statement...........................................    43
Uber, Gary, Co-Founder, Family Private Care, Hobe Sound, FL......    51
    Prepared statement...........................................    53

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Dale E. Brown, CAE, President & CEO of the Financial Services 
      Institute, Inc.............................................    68
    Charles F. Chiusano, Vice President and CFO, Avant Business 
      Services; on behalf of the Messenger Courier Association of 
      America (MCAA).............................................    70
    Coalition to Preserve Independent Contractor Status..........    78
    James P. Hoffa, General President, International Brotherhood 
      of Teamsters...............................................    84
    National Federation of Independent Business (NFIB)...........    85
    National Association for the Self-Employed (NASE), letter....    88

                                 (iii)

 
LEVELING THE PLAYING FIELD: PROTECTING WORKERS AND BUSINESSES AFFECTED 
                          BY MISCLASSIFICATION

                              ----------                              

                        THURSDAY, JUNE 17, 2010

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:06 a.m. in 
room SD-430, Dirksen Senate Office Building, Hon. Tom Harkin, 
chairman of the committee, presiding.
    Present: Senators Harkin, Brown, Merkley, Franken, Enzi, 
Isakson, and Murkowski.

                  Opening Statement of Senator Harkin

    The Chairman. The Senate Committee on Health, Education, 
Labor, and Pensions will please come to order.
    I want to welcome everyone to today's hearing. We are here 
today to talk about worker misclassification, an issue of 
critical importance to millions of working men and women across 
our country.
    We all know that these are very difficult times for our 
economy, especially for working families. Millions of Americans 
are now living paycheck to paycheck. Employees across the 
Nation are working hard but still struggling to make ends meet. 
And need I say that filings for unemployment benefits were up 
sharply again last week? So we still have many millions of 
Americans unemployed or underemployed.
    Over the past few years, it has become clear that a few 
unscrupulous employers are making these challenges even more 
difficult for their workers by intentionally misclassifying 
them as ``independent contractors'' to gain an advantage over 
their law-abiding competitors. When these companies play games 
with workers' rights, everyone loses: the workers, the 
taxpayers, and responsible businesses that play by the rules.
    Misclassified workers simply do not receive the same 
protections under our laws. Basic standards such as the minimum 
wage, the right to overtime pay, unemployment compensation, 
workers' compensation, safety and health laws, and 
antidiscrimination protections do not apply to independent 
contractors. That means the construction worker who falls and 
breaks his leg is denied workers' compensation if he is an 
independent contractor. The truck driver who works 60 hours a 
week does not receive the overtime pay his family deserves if 
he is an independent contractor.
    Misclassification is also costing the Federal and State 
governments billions of dollars in unpaid revenues, including 
the payments that support our unemployment insurance and 
workers' compensation systems.
    Businesses are hurt by misclassification, too. An employer 
that misclassifies its workers may be able to outbid employers 
complying with the law, I am told, sometimes by as much as 30 
percent. The problem is especially bad in cash industries where 
workers are often paid off the books making it virtually 
impossible to prove that employers are intentionally 
misclassifying workers and violating their rights.
    The sad truth is that law-abiding employers lose business 
every day to scofflaw employers that intentionally misclassify 
their workers.
    It should never pay to break the law, so we here in 
Congress have a duty to fix the problem and make sure everyone 
is competing on a level playing field.
    The scope of the misclassification problem is staggering. 
There are more than 10.3 million workers in the United States 
who are treated as independent contractors. That is about 7.3 
percent of the workforce. A Department of Labor study found 
that as many as 30 percent of businesses misclassifies 
employees as independent contractors.
    So it is going to take a concerted effort by Federal and 
State agencies to solve this misclassification problem. 
Fortunately, we are off to a good start. In January, the 
Department of Labor hired more investigators to pursue 
misclassification. The Internal Revenue Service is working on a 
comprehensive nationwide employment tax audit program. Many 
States have also stepped up to the plate, and they are cracking 
down on misclassification.
    But Federal and State agencies cannot do it alone. We also 
need some Federal legislation to hold employers accountable for 
breaking wage and hour laws by misclassifying their workers. 
The bill that Sherrod Brown has introduced--which I 
cosponsored--called the Employee Misclassification Prevention 
Act will do just that.
    This important legislation would go a long way toward 
protecting workers and their families from unfair 
misclassification.
    So I hope that today's hearing will be the first step in a 
bipartisan process to pass legislation to end misclassification 
once and for all. I look forward to working with other Members 
of the Congress on this issue.
    With that, I will turn to Senator Enzi.

                       Statement of Senator Enzi

    Senator Enzi. Mr. Chairman, I am disappointed that we are 
holding a hearing on S. 3254, the Employee Misclassification 
Prevention Act, because I think this is a symbol of what is 
wrong with Washington today. I think this could be called ``the 
accountant and auditor employment program.''
    I agree that there are a few unscrupulous employers out 
there that are taking advantage of the system and they should 
be caught. This is going to penalize the 97 percent that are 
doing the right thing, give them huge additional costs, a lot 
of extra paperwork, and the result is going to be fines for 
miswriting the paperwork.
    I got to participate a lot with the INS forms, and those 
were to catch illegal immigrants that were wrongfully employed. 
Every business had to collect a lot of documents from every 
worker and fill out a form on each worker, and then the 
businesses were audited. And what they were audited for were 
paperwork mistakes. They were not audited for whether they were 
catching illegal immigrants or not, whether they were hiring 
illegal immigrants, and they got huge fines because they did 
not cross a ``T'' or dot an ``I''. And I think that is exactly 
where this legislation is headed.
    I think there are some ways that this can be done so it is 
a good auditing practice rather than a paperwork practice. As a 
former small business owner, I do not understand why instead of 
helping small business and entrepreneurs, we are saddling them 
with more paperwork, more recordkeeping, more fines, more 
penalties. You would think with the economy in its precarious 
State, that we would be doing everything in our power to help 
small business to do business. Everyone knows that small 
business entrepreneurs have been the drivers of our economic 
recoveries in the past recessions, and their role in our 
economy is just as important today.
    With respect to S. 3254, one of the first mandates of the 
bill would be to require every single business to send every 
single employee and independent contractor a disclosure notice 
letting them know of their employment or independent contractor 
status. But what does that mean in the real world? According to 
the Small Business Administration, there are 120 million 
employees in our Nation. Half, or 60 million, of these 
employees are hired by small businesses. Because the bill 
requires that each disclosure notice be customized for the 
exact dollars earned and hours worked--let us say that each 
disclosure notice takes about 30 minutes to compile, complete, 
and share with the employee and then retained for records. That 
comes to about 30 million hours devoted by small businesses for 
these disclosures, and that relies on the employee auditing 
them. There is going to be a huge auditing factor that has to 
be built into this, and that is going to cause a lot more 
employees just to keep track of the paperwork.
    One of the sticking points in our food safety bill is going 
from 900 Federal inspectors to 22,500 Federal inspectors that 
would greatly increase the cost. We are trying to overcome that 
additional cost for the bill. I can only imagine what the cost 
is going to be on this worker classification bill.
    This bill comes to 30 million hours devoted by small 
businesses for these disclosures. It does not add anything on 
the bottom line. It does not produce any product. It does not 
create any sale.
    According to the National Federation of Independent 
Businesses, the lowest dollar amount per hour for small 
business regulatory compliance is $37 for the smallest of 
businesses and up to $68 for the next size up small business. 
If we took the time to calculate out what it will actually cost 
small business, the figure would end up being in the billions. 
This is a complete waste of money and time for small business.
    As I said, there is a way to do it, but this is not it.
    Ironically, President Obama has met with small business 
owners twice in the Rose Garden in the past few weeks praising 
small business owners and talking about how we need to help 
them. However, only in Washington would legislation be drafted 
to require companies to tell their employees that they are 
employees and to spend billions of dollars to do so. Small 
businesses have much better use for that money, money spent to 
help the economy.
    We have to look no further than the title to find out the 
true intent of the hearing, ``Leveling the Playing Field.'' 
This hearing is less about making sure that independent 
contractors are properly classified than it is about union 
firms that want to level the playing field against nonunion 
firms, and they are willing to place billions of dollars of 
paperwork burdens and fines and penalties on our teetering 
economy just so they can level the playing field.
    If there are legitimate problems with the independent 
contractors being improperly classified--and I think there 
are--then I would welcome action by the Department of Labor to 
establish a Web site to help clear up the confusion and to help 
independent contractors comply with the law. In addition, we 
could do the same outreach to companies contracting with 
independent contractors. But as this bill stands before us 
today, it is a Washington special interest bill and it 
symbolizes what is wrong with Washington today. It will 
penalize the businesses that are doing the right thing and the 
ones that are doing the wrong thing will continue to do it but 
eventually they will be caught.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Enzi follows:]

                   Prepared Statement of Senator Enzi

    Mr. Chairman, I am very disappointed that we are holding a 
hearing on S. 3254, the Employee Misclassification Prevention 
Act as this bill is a symbol of what is wrong with Washington 
today.
    As a former small business owner, I am saddened that 
instead of helping our small businesses and entrepreneurs we 
are saddling them with more paperwork, more recordkeeping and 
more fines and penalties. You would think that with the economy 
in its precarious state we would be doing everything in our 
power to help small businesses to do business. Everyone knows 
that small business entrepreneurs have been the drivers of our 
economic recoveries in past recessions and their role in our 
economy is just as important today.
    With respect to S. 3254, one of the first mandates of the 
bill would be to require every single business to send every 
single employee and independent contractor a disclosure notice 
letting them know of their employment or independent contractor 
status. But what does this mean in the real world?
    According to the Small Business Administration, there are 
120 million employees in our Nation. Half, or 60 million, of 
these employees are hired by small businesses. Because the bill 
requires that each disclosure notice be customized for the 
exact dollars earned and hours worked, let's say that each 
disclosure notice takes 30 minutes to compile, complete, share 
with the employee, and then retain for records. That comes out 
to 30 million hours devoted by small businesses for these 
disclosures. According to the National Federation of 
Independent Businesses, the lowest dollar amount per hour for 
small business regulatory compliance is $37.18 for the smallest 
of businesses. The figure going progressively higher depending 
upon how many employees the business hires.
    Multiplying the 30 million hours by $37.18 per hour, the 
total cost to small business for just this one component of the 
bill is $1.1 trillion. That is $1.1 trillion just to tell 
employees that they are employees. If we include disclosure 
notices to all employees then the cost would be above $2 
trillion dollars for the first 6 months of this bill if it 
becomes law. This is a complete waste of money and time for 
small businesses.
    Ironically, President Obama has met with small business 
owners twice in the Rose Garden in the past few weeks praising 
small business owners and talked about how we need to help 
them. However, only in Washington would legislation be drafted 
to require companies to tell their employees that they are 
employees and to spend over a trillion dollars to do so. Small 
businesses have much better use for that money.
    Clearly, this bill was drafted by Washington special 
interests. We have to look no further than the title to find 
out the intent of this hearing--``Leveling the Playing Field''. 
This hearing is less about the making sure that independent 
contractors are properly classified than it is about union 
firms wanted to ``level the playing field'' against non-union 
firms. These Washington special interests are willing to place 
a $2 trillion drag on our teetering economy just so they can 
``level the playing field.''
    If there are legitimate problems with independent 
contractors being improperly classified then I would welcome 
the Department of Labor to establish a Web site to help clear 
up the confusion and to help independent contractors comply 
with the law. But as this bill stands it is nothing but a 
Washington special interest bill and symbolizes what is wrong 
with Washington today.

    The Chairman. Thank you, Senator Enzi.
    I would like to recognize Senator Brown, the sponsor of the 
misclassification legislation, for an opening statement.

                       Statement of Senator Brown

    Senator Brown. Thank you, Mr. Chairman.
    I appreciate the comments of Senator Enzi, which I would 
like to address.
    I appreciate Mr. Harris joining us and thank you for your 
public service and all those on the second panel too.
    I obviously concur with the remarks of the chairman on this 
problem and what it means to workers, what it means to those 
overwhelmingly honest businesses that compete with those firms 
that do not play by the rules and what this means for local and 
State revenues and Federal revenues too, for that matter.
    The attorney general of Ohio, the 7th largest State in the 
Nation, published a study a year ago, finding that at least 
459,000 Ohio employees might be misclassified--459,000 
employees. One of these--and these are statistics and numbers, 
and we can talk about that from up here as long as we want. But 
one of these workers--let me put a human face on it--is a 
gentleman named Kevin Ennis who was a carpenter from Parma, a 
suburb south of Cleveland, south and west of Cleveland. Mr. 
Ennis worked for companies that expected him to be on site 
every day, more than 40 hours a week--a highly skilled 
carpenter. These companies expected him to work like any other 
employee on these job sites, inside and outside.
    Then he cut his thumb. He needed stitches. His employer 
made clear he was not really an employee and did not have 
health coverage, did not have workers' compensation. They had 
not paid into those. These companies classified him as an 
independent contractor even though the company was as dependent 
on Kevin Ennis as Kevin was on the company and as they were on 
employees that they did not misclassify this way.
    This is an issue that affects workers like Kevin.
    It is an issue that affects local tax revenues. Attorney 
General Cordray estimates the State of Ohio loses up to $800 
million in State revenue and local tax revenue because of 
misclassification.
    I appreciate Senator Enzi's concern for small business, and 
I share that and I would love to work with him on finding ways 
to make sure this is not an onerous burden on small business.
    But I emphasize that those small businesses that play by 
the rules are at a competitive disadvantage. When we announced 
this bill with Congresswoman Woolsey, House Member from 
California who is the House sponsor, we had employers there, 
including some people in trade associations that are doing 
contracting. And they said that they lose contracts, they lose 
bids. They cannot meet the same price as those employers 
because they play by the rules. It is those employers who do 
not play by the rules.
    Again, I know, whether they are NFIB members or not, those 
employers are small in number, relatively, that do not play by 
the rules, but those employers have a distinct advantage 
because they do not play by the rules. That is why the rules 
need to be tougher and need to be enforced.
    I hear people talk about that when we are in a fragile 
economic time, it is not the time to focus on labor law 
reforms. That is really exactly 180 degrees wrong. Now is the 
time with a still fragile recovery with significant job loss, 
when workers are more taken advantage of because people are so 
desperate to get a job and do whatever it takes to feed their 
family, even if they are not being treated fairly, even if 
their employer is breaking the rules.
    So that is why the time for this legislation is today.
    And the last thing, Mr. Chair, I wanted to bring out--I 
would think that the whole philosophy of voluntary compliance 
would have been discredited in the last 2 years. We can trust 
the employers to do the right thing and we can have voluntary 
compliance. I mean, voluntary compliance. Wall Street? You 
know, the whole view of the--I do not want to go back, but I 
think you want to go back so you do not go forward and do 
stupid things.
    The whole view of the Bush years on voluntary compliance is 
Wall Street will police itself. That did not seem to work out 
so well. The mining companies will police themselves for mine 
safety. That did not seem to work so well in West Virginia. The 
oil companies, in terms of worker safety--do not forget. We 
talk about this awful oil gusher ad nauseam, as we should, but 
do not forget 11 people were killed on that rig, on that 
platform. So whether it is voluntary compliance on worker 
safety, on environment, on financial reform, on financial 
services, financial regulation, it is not working, Mr. 
Chairman, and it is time that we had rules that were enforced 
that are fair to everybody.
    It is not a union/nonunion issue. It is enforcing a level 
playing field so that one company can compete on equal terms, 
fair terms with another, employees are treated better, and our 
economy will be better off as a result.
    So I ask for support on the legislation that Chairman 
Harkin mentioned, the Employee Misclassification Prevention Act 
of 2010. It is designed to dramatically reduce the number of 
worker misclassification violations. Small business wins by 
that. Workers win by that and taxpayers win by that.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Brown.
    Senator Isakson.

                      Statement of Senator Isakson

    Senator Isakson. Thank you, Mr. Chairman.
    Unlike most hearings we attend where we really are learning 
and have not had any experience, I ran a company for 22 years 
and had 800 independent contractors like Lenox Scott in Seattle 
and Howard Hannah in Pittsburgh in Pennsylvania, and Real 
Estate One in Cleveland, and Ralph Burnett in Minneapolis, and 
Paul Knapp in Iowa.
    We need to be very careful not to demonize people who were 
doing it right, and because the company operates under the 
independent contractor laws that exist in the United States 
today, including the IRS 10-point test, which is the critical 
test to determine whether somebody is misclassified or not--
there are a lot of good American business people who hire 
independent contractors because you cannot do what they do in 
an employee/employer relationship in service industries, in 
sales industries.
    While I have the deepest of respect for Senator Brown, but 
to categorically chastise the 7 percent who work as independent 
contractors when those people who have them working under them 
have to meet the IRS 10-way test and all the other provisions 
of the law that exist today to prohibit misclassification, I 
would take issue with the fact that it is a rampant problem. It 
is a problem. Mr. Ennis in Ohio very well may have been the 
victim of somebody that was breaking the law anyway. So out of 
respect for my friends that ran businesses like I ran at one 
time and run them today in the cities of each of the members 
here, we need to be very careful not to demonize what is a very 
important segment that moves America from the standpoint of 
sales and services in a way that you could not otherwise 
capitalize the businesses if they had to be employer/employee. 
So I wanted to get that on the record.
    And I hope you all will talk with those business people in 
your States because they can tell you the same story I can 
tell.
    The Chairman. Well, I would say, Senator Isakson, I 
appreciate that. I think that there are legitimate independent 
contractors, obviously. But from my observation over the last 
few years, there has been almost a quantum rush by other 
businesses to misclassify workers as independent contractors. I 
think we are going to hear that from Mr. Harris and we have 
some studies from the DOL that show that.
    I think what we need to do is to be able to have a system 
set up whereby legitimate independent contractors are 
permitted, but the system prevents misclassification of workers 
that, by all of the tests and measures, should be employees and 
not independent contractors. As I said, misclassification seems 
to be increasing, at least as I have seen, just in the last few 
years.
    Mr. Seth Harris was sworn in as Deputy Secretary of Labor 
on May 26, 2009. Prior to joining DOL, he served as a professor 
of law at New York Law School and director of its labor and 
employment law programs. He also served for 7 years at DOL 
during the Clinton administration as counselor to the Secretary 
of Labor and as Acting Assistant Secretary of Labor for Policy.
    Mr. Harris, welcome to the committee. Your statement will 
be made a part of the record in its entirety, and if you could 
sum up in 5 or so minutes, we would appreciate it.

         STATEMENT OF SETH D. HARRIS, DEPUTY SECRETARY 
                    OF LABOR, WASHINGTON, DC

    Mr. Harris. Thank you very much, Mr. Chairman. Thank you, 
Senator Enzi, members of the committee. Thank you so much for 
the opportunity to speak today about worker misclassification.
    Worker misclassification seems to suggest a paperwork 
error, but it is no mere technical violation. It is a serious 
threat to workers and the fair application of the laws Congress 
has enacted to assure workers have good, safe jobs.
    In simple terms, worker misclassification is the practice 
of treating a worker who is an employee under the law as 
something other than an employee, and this misclassification 
deprives the worker of rights and benefits that Congress 
intended her to have.
    Whether a worker is an employee depends on which law is 
applicable. For example, there is the economic realities test 
employers must apply to determine the nature of their workers 
under the Fair Labor Standards Act. But regardless of what law 
applies, employers should assure that workers get the wages, 
the benefits, and the protections that are guaranteed by the 
law.
    In this difficult economic climate, millions of Americans 
are struggling to stay in the middle class. Worker 
misclassification exacerbates that challenge. Mis-classified 
workers may not be paid the wages to which they are entitled. 
Law-abiding, responsible employers may be denied a level 
playing field in a hyper-competitive business environment, and 
the revenues flowing into Federal and State treasuries may be 
diminished by employers that avoid paying payroll taxes, 
unemployment taxes, and workers' compensation premiums.
    Unfortunately, it is all too easy for employers to 
misclassify employees and get away with it. Misclassification 
alone does not violate the statutes administered by the Labor 
Department. For this reason and others, it can be difficult for 
DOL to protect workers and for workers to protect themselves 
under our existing laws.
    Honest employers are also harmed by intentional misclassi-
fication. At least one study estimates that employers can 
reduce their labor costs by 20 to 40 percent by misclassifying 
their employees as independent contractors. Government must 
level the playing field for high-road employers by ensuring 
that low-road employers cannot cheat and secure an unfair 
competitive advantage.
    Mr. Chairman, the Obama administration agrees with you that 
our current system cannot continue. The President's fiscal year 
2011 budget proposes $25 million for a DOL initiative that will 
include close cooperation with our partners at the IRS to 
address worker misclassification.
    In addition, we look forward to working with this 
committee, through your leadership and Senator Brown's 
leadership, to enact legislation that will address worker 
misclassification under the FLSA. We strongly support many 
provisions of the Employee Misclassification Prevention Act and 
view it as a critically important legislative vehicle for 
addressing worker misclassification.
    One measure of the scope of the misclassification problem 
is its affect on tax revenues. A 1984 IRS survey estimated that 
nearly 15 percent of employers Mis-classified employees as 
independent contractors under the tax laws, with an estimated 
revenue loss of $1.6 billion in 1984 dollars.
    A 1994 Coopers and Lybrand study estimated that misclassi-
fication would cost the Federal Government almost $35 billion 
between 1996 and 2004.
    These assessments suggest that misclassification is 
widespread and occurs across the country.
    Addressing worker misclassification is a necessary part of 
the Labor Department's ``good jobs for everyone'' mission. We 
are exploring regulatory innovations, opportunities to provide 
better guidance to both workers and employers and improved 
targeted enforcement.
    In April, we announced our intention to move toward a broad 
regulatory strategy built on the view that employers bear the 
responsibility to obey the law before they are visited by a DOL 
investigator. We call this strategy ``Plan/Prevent/Protect.'' 
One way in which Plan/Prevent/Protect will be implemented is by 
requiring employers to inform workers about their employment 
status. DOL's Wage and Hour Division is working on a proposed 
rule that would, if it becomes a final regulation, require 
employers to perform an analysis of a worker's employment 
status, disclose that analysis to the worker and keep a copy of 
the analysis in the employer's files. The regulation would not 
change the test employers use for this analysis, but we believe 
it will play an important role in preventing misclassification.
    Second, the Wage and Hour Division is emphasizing 
misclassi-fication in its ongoing enforcement strategy. As I 
noted earlier, the President's fiscal year 2011 budget request 
included $12 million for increased wage and hour enforcement in 
cases where employees are likely to have been misclassified. 
The President also requested almost $11 million to provide 
grants to States to build capacity for identifying and 
addressing worker misclassification in the Unemployment 
Insurance Program through targeted employer audits and enhanced 
information-sharing.
    And third, the Labor Department is cooperating closely on 
worker misclassification with our colleagues in State 
government. Last month, we hosted a State forum on 
misclassification. We invited representatives from a long list 
of States, including Iowa, Ohio, Washington, Connecticut, and 
New York, among others. During the forum, we learned about a 
wide range of tools and practices the States are using to stop 
and prevent misclassification.
    Finally, we believe legislation like EMPA is a critically 
important contribution to this effort. EMPA would make 
misclassification a violation of the law, thereby creating an 
important incentive for employers to make the correct decision 
when determining whether a worker is an employee. Only Congress 
can strengthen the law in this way.
    In addition and consistent with DOL's upcoming proposed 
rulemaking, EMPA would codify an employer's obligation to 
provide its workers with notice of how the worker is 
classified. If an employer fails to give that notice, EMPA 
establishes a legal presumption that the worker is an employee.
    And finally, the EMPA provision that authorizes the Wage 
and Hour Division to seek civil monetary penalties for 
recordkeeping violations provides an important enforcement tool 
not only against misclassification but against all FLSA 
violations.
    So in sum, Mr. Chairman, the Administration proudly 
supports your efforts and Senator Brown's efforts to address 
worker misclassification. We stand ready to work with this 
committee and its members to advance those efforts.
    I look forward to your questions.
    [The prepared statement of Mr. Harris follows:]
                  Prepared Statement of Seth D. Harris
    Chairman Harkin, Senator Enzi, and members of the committee. Thank 
you for the opportunity to speak today about ``worker 
misclassification.''
    ``Misclassification'' seems to suggest a technical violation or a 
paperwork error. But ``worker misclassification'' actually describes 
workers being illegally deprived of labor and employment law 
protections, as well as public benefits programs like unemployment 
insurance and workers' compensation because such programs generally 
apply only to ``employees'' rather than workers in general. Worker 
misclassification occurs when a worker who is legally an employee is 
treated as a self-employed worker, often referred to as an 
``independent contractor.'' Some misclassification is the result of 
uncertainty or misapplication of often complicated laws or situations. 
However, much worker misclassification is intentional. 
Misclassification as independent contractors also increases the 
opportunities for tax evasion, and some take advantage of those 
opportunities, with a resulting loss of Federal and State revenue. Too 
many workers are being deprived of overtime premiums and minimum wages 
forced to pay taxes their employers are legally obligated to pay and 
are left with no recourse if they are injured or discriminated against 
in the workplace. Misclassification is no mere technical violation. It 
is a serious threat to workers and the fair application of the laws 
Congress has enacted to assure workers have good, safe jobs.
    In this difficult economic climate, millions of Americans are 
struggling to stay in the middle class. We can see the impact of these 
struggles in many different areas of the economy: workers trying to 
keep good jobs with good wages and benefits; small businesses 
struggling to compete in a difficult market; and State governments and 
the U.S. Government working to fund budgets that can provide the 
essential services Americans need. Worker misclassification exacerbates 
all of these challenges. It shortchanges workers, employers, States, 
and the Federal Government. Workers are not paid the wages to which 
they are entitled. Law-abiding, responsible employers are denied a 
level playing field in a hyper-competitive business environment. And 
the revenues flowing into Federal and State treasuries are diminished 
when employers that should be treating workers as employees avoid 
paying, unemployment taxes, workers' compensation premiums, and (unless 
the workers pay them) payroll taxes. When the misclassified workers 
themselves do not pay some or all of the employment taxes for self-
employed workers, the Social Security trust funds suffer a permanent 
loss.
    Most workers in this country simply assume they are protected by 
our Nation's basic employment laws--minimum wage, overtime, health and 
safety, workers' compensation, anti-discrimination, and unemployment 
insurance, among others. What they may not realize is that these 
protections are directly linked to their status as ``employees.'' For 
example, independent contractors, a label given to individuals who are 
genuinely self-employed, are not ``employees'' and, therefore, are not 
protected by these laws.
    Unfortunately, it is all too easy for employers to misclassify 
employees and get away with it. Misclassification alone does not 
violate the Fair Labor Standards Act (FLSA), the Occupational Safety 
and Health Act (OSH Act), the Mine Safety and Health Act (Mine Act), or 
most other statutes administered by the Labor Department. No penalty 
attaches under these laws when employers misclassify workers, even when 
the employer knows and ignores a worker's true legal status. 
Furthermore, employers are not obligated to perform a written 
classification analysis before unilaterally deciding to treat workers 
as though unprotected by employment laws. For these reasons and others, 
it can be difficult for the Labor Department's worker protection 
agencies to protect workers and for workers to protect themselves under 
our existing laws. There are, however, severe Federal tax penalties for 
employers who are discovered to have misclassified workers, and such 
employers may also be required to pay their unpaid unemployment 
insurance premiums.
    The Labor Department's experience has shown that misclassification 
can be a tool for employers to evade their legal obligations to workers 
and thereby gain a competitive advantage over employers that obey the 
law. While some employers misclassify their workers in error, the 
Government Accountability Office (GAO) concluded that some employers 
choose to misclassify their employees in order to avoid laws that 
restrict their labor practices or require them to provide rights and 
benefits to employees.\1\ These are the cases we are targeting.
---------------------------------------------------------------------------
    \1\ Employee Misclassification: Improved Coordination, Outreach, 
and Targeting Could Better Ensure Detection and Prevention, GAO-09-
09717 (2009).
---------------------------------------------------------------------------
    Workers are not the only ones harmed by misclassification--honest 
employers are as well. At a recent hearing of the House Education and 
Labor Committee's Subcommittee on Workplace Safety, a representative of 
the Mason Contractors Association of America estimated that companies 
that misclassify their workers expect to reduce labor costs by as much 
as 30 percent, in part by not paying workers' compensation premiums. 
Law-abiding business owners who play by the rules are being forced out 
of competition by companies that skirt the law and play games with the 
definition of ``employee.''
    In a 2000 study of nine States commissioned by the Department of 
Labor's (DOL) Employment and Training Administration (ETA), the most 
significant reason for misclassifying employees as independent 
contractors was to avoid paying workers' compensation premiums and not 
being subject to workplace injury and disability-related disputes.\2\ 
At least one study estimates that employers can reduce their labor 
costs by 20-40 percent by misclassifying their employees as independent 
contractors.\3\ This underscores the need to level the playing field 
for high road employers--we should ensure that they are not facing 
these unfair downward pressures in order to stay competitive.
---------------------------------------------------------------------------
    \2\ Independent Contractors: Prevalence and Implications for 
Unemployment Insurance Programs, Lalith de Silva et al., Planmatics, 
Inc. (2000).
    \3\ The Social and Economic Costs of Employee Misclassification in 
the Michigan Construction Industry, Dale L. Belman and Richard Block, 
School of Labor and Industrial Relations, Michigan State University 
(2008).
---------------------------------------------------------------------------
    Mr. Chairman, the Obama administration agrees with you that our 
current system cannot continue. The rules governing employers' 
decisions about whether to respect employees' rights under our Nation's 
employment laws must change, and they must change now. We must restore 
a level playing field for responsible employers and employees and 
ensure that workers benefit from the protections Congress intended them 
to have.
    The Obama administration--from the Office of the Vice President and 
the Middle Class Task Force to the Treasury Department and DOL--is 
organizing itself to address this issue. Most prominently, the 
President's Fiscal Year 2011 budget proposes $25 million for a DOL 
initiative that will include close cooperation with our partners in the 
Treasury Department's Internal Revenue Service (IRS) to address worker 
misclassification. In addition, we look forward to working with this 
committee, through the leadership of Chairman Harkin and Senator 
Sherrod Brown, along with Representatives Lynn Woolsey, George Miller 
and Rob Andrews, to enact legislation that will address worker 
misclassification under the Fair Labor Standards Act. We strongly 
support many provisions of the Employee Misclassification Prevention 
Act (EMPA) and view it as a critically important legislative vehicle 
for addressing worker misclassification. The President's 2011 Budget 
also includes a proposal to help employers and the IRS clarify the 
status of workers for employment tax purposes, so that the incidence of 
(and, in some instances, the excuses for) misclassification will be 
reduced.
    In the remainder of my testimony, I will seek to define the scope 
of the misclassification problem, outline the Labor Department's 
current plans to address it, and offer the Administration's views on 
the proposals that are before this committee that would make important 
contributions to finding a comprehensive and effective long-term 
solution.
               the scope of the misclassification problem
    In order to understand the scope of the problem, it is necessary to 
define what we mean by ``worker misclassification.'' In simple terms, 
worker misclassification is the practice of treating a worker who is an 
employee under the law as something other than an employee, thus 
depriving the employee of rights and benefits to which they are 
entitled. Whether a worker is an employee depends on which law is 
applicable. For example, there is the ``economic realities' test 
employers must apply to determine the nature of their relationship with 
their workers under the FLSA. Under that test, which is broader than, 
for example, the common law test used by the IRS, employers must 
consider the following factors when determining whether a worker meets 
the statute's definition of ``employee'':

     The extent to which the services rendered are an integral 
part of the employer's business;
     The permanency of the relationship;
     The amount of the worker's investment in facilities and 
equipment;
     The nature and degree of control by the employer;
     The worker's opportunities for profit and loss;
     The amount of initiative, judgment, or foresight in open-
market competition with others required for the worker's success; and
     The degree of the worker's independent business 
organization and operation.

    We recognize that it is conceivable for a worker to be correctly 
classified differently under the different standards that apply for 
different statutory purposes. However, that is not typical, and in most 
cases, applying the various laws does result in the same worker 
classification.
    Of course, there are legitimate independent contractors who enter 
into arms-length contractual arrangements with other business owners 
for their mutual benefit. I want to be clear that the DOL does not 
define misclassification as an ``independent contractor'' problem. 
Legitimate independent contractors can play an important role in our 
economy and many companies make good and legally appropriate use of 
their services. But some employers intentionally misclassify workers as 
independent contractors who, under the law, are employees. Sometimes 
the misclass-
ification may be forced on workers. Other times, the workers are 
complicit in the misclassification in an effort to increase their 
incomes by evading income and payroll taxes. Such workers may or may 
not realize the risks they are taking in losing all of the protections 
of the social safety net that are provided to employees but not to 
independent contractors.
    It is important to remember, however, that the workforce is not 
just divided into employees and independent contractors. Industries 
have developed a number of business models that are based on using the 
lowest cost labor possible, including independent contractors, leased 
employees, and outsourcing. Although the use of these models can be 
legitimate, they are frequently used without an analysis of the actual 
legal relationship between the company and the worker, which leads to 
the possibility that an employee will be misclassified and denied the 
rights and protections to which he or she is entitled.
    Many workers do not know they have been misclassified by an 
employer until they need the law's protection. As a result, they are 
often not prepared for the consequences. For example, I recently 
learned about a case settled a while back by the Wisconsin Department 
of Workforce Development. Alvaro was a dishwasher at a family-style 
restaurant in Madison, WI. He was being paid less than minimum wage and 
did not receive overtime. When Alvaro met with the employer to discuss 
the issue, the employer initially said he would pay all of the overtime 
wages Alvaro earned. A few days later, Alvaro was visited by the 
employer's attorney who said that the employer would only pay a 
fraction of what Alvaro was owed and if he made trouble they would make 
trouble for him. When Alvaro filed a wage complaint with his State's 
Department of Workforce Development, the employer's attorney claimed 
that the company did not owe him the minimum wage or overtime pay 
because Alvaro was an independent contractor. Remember, Alvaro's job 
was washing dishes for the restaurant in the restaurant's kitchen.
    If we take this example in the hypothetical, outside of the wage 
and hour context, Alvaro could have also found that his employer had 
treated him as an independent contractor under the workers' 
compensation laws. If so, Alvaro would have received no compensation if 
he were severely burned by scalding dish water in the workplace. He may 
have also found that his employer had failed to pay its share of 
payroll taxes for unemployment insurance (UI), Social Security, and 
Medicare. If so, Alvaro would have had to pay all of those taxes 
himself, and he would not have been entitled to UI benefits if he lost 
his job. There is every reason to believe that Alvaro's employer did 
not perform an appropriate analysis of his status under any law. It is 
difficult to imagine a dishwasher for a restaurant could ever be a 
legitimate independent contractor. Typically, these workers do not 
bring their own equipment, do not decide their own hours or method of 
work, and do not have a profit or loss motive. In this example, the 
employer's motive to evade the law seems clear and has devastating 
consequences: Alvaro did not receive wages he rightfully earned until 
he filed a complaint with the appropriate State agency and they settled 
the case.
    One measure of the scope of the misclassification problem is its 
effect on tax revenues. A 1984 IRS survey estimated that nearly 15 
percent of employers misclass-
ified some employees as independent contractors under the tax laws, 
with an estimated revenue loss of $1.6 billion in 1984 dollars.\4\ A 
1994 Coopers & Lybrand study estimated that misclassification would 
cost the Federal Government $34.7 billion between 1996 and 2004.\5\ The 
Planmatics 2000 study concluded that between 10 percent and 30 percent 
of the employers audited had misclassified some employees as 
independent contractors.\6\ The economy has changed significantly since 
those studies were performed, and even the number of workers that self-
identify as independent contractors has grown.\7\ Still, these numbers 
suggest that misclassification occurs in significant numbers and, 
across the country, workers are finding themselves without the basic 
protections that Congress has enacted to ensure they receive fair pay, 
safe workplaces, and necessary supports when they are hurt or lose 
their jobs.
---------------------------------------------------------------------------
    \4\ Strategic Initiative on Withholding Noncompliance (SVC-1), 
Employer Survey, Report of Findings, Ken Beier, Unpublished: Department 
of the Treasury, Internal Revenue Service, June 1989.
    \5\ Projection of the Loss in Federal Tax Revenues Due to 
Misclassification of Workers, Coopers & Lybrand (June 1994).
    \6\ Independent Contractors, supra note 2.
    \7\ In its 2005 Survey on Contingent and Alternative Employment 
Arrangements, the Bureau of Labor Statistics found that the number of 
workers who identified as independent contractors increased by 15 
percent, from 6.4 percent to 7.4 percent, since 2001. http://
www.bls.gov/news.release/pdf/conemp.pdf.
---------------------------------------------------------------------------
    Several recent studies suggest that misclassification results in 
significant losses to State UI and workers' compensation funds in 
addition to tax revenue. When employees are misclassified, their 
employers typically do not pay unemployment taxes or carry workers' 
compensation insurance for those employees. As a result, UI and 
workers' compensation funds are underfunded. Moreover, employers that 
obey the law end up carrying the weight for scofflaws in the form of 
higher workers' compensation premiums.
    A recent Tennessee study, for example, conservatively estimated 
that, due to misclassification in the construction industry alone, 
Tennessee lost between $4.9 million and $11.4 million in employers' 
unemployment insurance payments and between $30 million and $70 million 
in workers' compensation premiums in 2006.\8\ A Michigan study 
estimated that the State forgoes almost $17 million annually in 
unemployment insurance payments because of misclassification.\9\ An 
Ohio attorney general's report concluded that, according to 
conservative estimates, misclassification cost his State $20 million in 
payments for unemployment compensation, $103 million in workers' 
compensation premiums, and over $36 million in forgone State income tax 
revenues in 2005.\10\
---------------------------------------------------------------------------
    \8\ Misclassified Construction Employees in Tennessee, Dr. William 
Canak and Dr. Randall Adams, Study presented to the Tennessee House 
Committee on Consumer and Employee Affairs on February 17, 2010. Copy 
available for download at http://carpenters.org/misclassification/
ALL%20DOCUMENTS/TN%20fraud%20study %201-15-10.pdf.
    \9\ Informing the Debate: the Social and Economic Costs of Employee 
Misclassification in Michigan, Dale L. Belman and Richard Block, 
Michigan State University Institute for Public Policy and Social 
Research (2009).
    \10\ Report of the Ohio Attorney General on the Economic Impact of 
Misclassified Workers for State and Local governments in Ohio, 2009.
---------------------------------------------------------------------------
    Misclassification also affects an unknown number of employees in 
the ``underground'' or ``shadow'' economy. These workers are typically 
paid in cash with no regard for wage standards, no tax forms are 
provided, and the wages are neither recorded nor reported. Many of 
these workers are otherwise vulnerable for a variety of reasons, 
including limited English language skills. While some may prefer an 
``under the table'' arrangement, others may not know their rights or 
they may be afraid to assert them. The lack of recordkeeping and 
documentation makes it difficult to quantify just how prevalent 
misclassification is in this area.
            dol's ongoing efforts against misclassification
    Addressing worker misclassification is a necessary part of the 
Labor Department's ``Good Jobs for Everyone'' mission. We are exploring 
all possible options for addressing the worker misclassification 
problem, including regulatory innovations by several DOL agencies, 
opportunities to provide better guidance to both workers and employers, 
and improved enforcement through information-sharing among DOL agencies 
and between the Labor Department, the Treasury Department, and State 
labor and tax agencies.
                           regulatory agenda
    The Labor Department's Spring 2010 Regulatory Agenda announced our 
intention to use new tools to detect and prevent worker 
misclassification. Generally, DOL announced its intent to move towards 
a broad strategy that requires employers to understand that the burden 
is on them to obey the law before they are visited by a DOL 
investigator. We call this compliance strategy ``Plan/Prevent/
Protect.'' This new strategy will require employers and other regulated 
entities to: (1) create a ``plan'' for identifying and remediating 
risks of employment law violations and make the plans available to 
workers so they can participate in their creation, fully understand 
them, and help to monitor their implementation; (2) thoroughly and 
completely implement the plan in a manner that ``prevents'' legal 
violations; and (3) ensure that the plan's objectives are met on a 
regular basis so that it actually ``protects'' workers from violations 
of their workplace rights.
    One way in which ``Plan/Prevent/Protect'' will be implemented is by 
increasing transparency in employers' recordkeeping requirements under 
the FLSA. DOL's Wage and Hour Division (WHD) is considering a rule that 
would propose that employers, before declaring that a worker is not an 
``employee'' under the FLSA, not only perform a written analysis of the 
worker's status applying the ``economic realities'' test described 
above, but also be required to disclose the analysis to the affected 
worker, and keep a record of the analysis in their files for review 
should a Wage & Hour investigator seek this information. The proposed 
rule WHD is considering, if it becomes a final regulation, would not 
change the criteria that employers use to make this determination.
    This proposed rule would increase the likelihood that an employer 
makes the correct classification decision in the first place. The goal 
is to create transparency in employment relationships for both parties. 
Workers should have up-front knowledge of their employment status and 
what the implications may be for their wages and hours. Employers 
should be clear about their responsibilities under the law, and take 
affirmative steps to ensure that they are meeting those 
responsibilities. Employers who want to play by the rules should find 
compliance with those rules to be simpler and their obligations and 
responsibilities more transparent. By better ensuring that the 
employer-employee relationship is defined at the outset, all parties 
involved will have the opportunity to resolve any conflicts or 
misunderstandings before DOL has to get involved.
    Since ``Plan/Prevent/Protect'' is a department-wide initiative, 
both the Occupational Safety and Health Administration (OSHA) and the 
Office of Federal Contract Compliance Programs (OFCCP) will consider 
similar rules in the coming years. To properly protect workers under 
all of our DOL statutes, employers across the United States should plan 
ahead, perform the requisite analyses to prevent misclass-
ification, communicate with their workers before proceeding, and 
actually protect workers from employment law violations.
                              enforcement
    WHD is emphasizing misclassification in its ongoing enforcement 
strategy. All new investigators are being trained how to determine 
workers' employment status and to ensure they have been classified 
properly. In 2008, WHD began tracking whether misclassification was the 
primary reason for a violation of the laws it enforces--and these data 
suggest the practice is growing. In fiscal year 2009, the Department's 
Wage and Hour Division (WHD) found $2,650,510.28 in back wages owed to 
2,190 employees in cases where misclassification was the primary reason 
why the employer failed to pay the minimum wage or proper overtime. 
This is an increase of almost 50 percent from fiscal year 2008, when 
WHD found $1,320,343.46 owed to 1,278 employees for the same reason. 
WHD is currently exploring ways to improve its tracking system so that 
investigators can always record when they discover that an employee has 
been misclassified, even if this was not the primary reason for a 
violation or did not result in any violations. This will give WHD a 
more accurate picture of the scope of the problem and allow it to 
better target its resources.
    Additionally, as noted earlier, DOL is working with the Vice 
President's Middle Class Task Force and the Department of Treasury on a 
multi-agency initiative to develop strategies to address worker 
misclassification. The President's budget request for fiscal year 2011 
included $12 million for WHD's increased enforcement of wage and 
overtime laws in cases where employees have been misclassified together 
with additional funding for our Office of the Solicitor and OSHA for 
their work in this area. It also included $10.95 million to provide 
grants to States to build capacity to identify and address worker 
misclassification in the Unemployment Insurance program through 
targeted employer audits and enhanced information sharing to enable 
detection. States that are the most successful will receive high 
performance bonuses that can also be used to further reduce worker 
misclassification. WHD is currently considering how best to use its 
proposed funding for a targeted enforcement strategy informed by the 
agency's experience that misclassification is particularly prevalent in 
industries with large numbers of low-wage, vulnerable workers.
                         education and outreach
    This past April, WHD launched a campaign called ``We Can Help.'' 
This effort is tailored to inform low wage, vulnerable workers of their 
rights and benefits, how to get help if they believe those rights are 
violated, and to assure them that their complaint is confidential. The 
campaign will place a special focus on reaching employees in industries 
where misclassification is most prevalent, such as construction, 
janitorial work, hotel/motel services, food services and home health 
care. Through this campaign, we hope to ensure workers know more about 
their employment rights.
                          information sharing
    One important step we are taking as part of the Administration's 
employee misclassification initiative is to explore ways to increase 
information sharing among DOL agencies, DOL and other Federal agencies, 
and DOL and State agencies. In its 2009 Report, the GAO concluded that 
increased information sharing between DOL and Treasury, and among DOL 
agencies, would help to increase detection and prevention of 
misclassification--and we agree.\11\ Information sharing would allow 
government agencies at all levels to better leverage their resources 
against practices that violate the laws they enforce.
---------------------------------------------------------------------------
    \11\ GAO-09-717, supra note 1.
---------------------------------------------------------------------------
    DOL's ETA is already a part of a joint initiative with the IRS and 
the States that is designed to improve information sharing and lead to 
better detection of tax and revenue losses due to worker 
misclassification. Through this initiative, often referred to as the 
``Questionable Employment Tax Practices'' program (QETP), 39 States 
have signed memorandums of understanding with the IRS that enable the 
State and the IRS to participate in a two-way exchange of information. 
Participating States are now able to receive tax information and audit 
leads from the IRS, which allows them to target their State UI employer 
audits effectively. It is our hope that we can build on these existing 
relationships and develop agreements that also include Federal and 
State worker protection agencies to share information in a way that is 
meaningful despite our different jurisdictions and enforcement 
emphases.
                       partnering with the states
    The importance of working with the States on employee 
misclassification cannot be overemphasized. Last month, DOL hosted a 
State Forum on Misclassification. We invited representatives from a 
number of State agencies and misclassification task forces to meet with 
DOL staff and tell us about what their States have been doing on this 
issue. Attendees included representatives from the States of 
Connecticut, Iowa, Louisiana, Maryland, Massachusetts, Ohio, New York, 
and Washington.
    During the Forum, we learned about a wide range of tools and 
practices the States are using to stop and prevent misclassification, 
including sophisticated data analysis, various enforcement strategies, 
and laws passed by State legislatures to create a presumption of 
``employee status'' or authorizing State agencies to issue stop work 
orders. We also heard from the States that they are looking to the 
Administration to provide some leadership on this issue. We look 
forward to working closely with our State partners in a variety of 
effective ways to counter misclassification.
                   the need for congressional action
    The passage of legislation like S. 3254, the ``Employee 
Misclassification Prevention Act'' (EMPA) is critically important. Even 
considering the President's fiscal year 2011 budget initiative and the 
Labor Department's concerted efforts to expand regulatory protections, 
enforcement efforts, and partnerships with other government entities, 
legislation is needed to provide DOL with additional tools that the 
Department cannot use without action by the Congress.
    First, EMPA would make misclassification a violation of the FLSA. 
For the first time, misclassification would be against the labor law. 
We believe this would provide employers with an important additional 
incentive to make the correct call when determining whether a worker is 
an ``employee.'' Only Congress can strengthen the law in this way.
    Second, consistent with DOL's upcoming proposed rulemaking, EMPA 
would codify in the FLSA an employer's obligation to provide their 
workers with notice of how the worker is classified. If an employer 
fails to give this notice, EMPA establishes a legal presumption that 
the worker is an ``employee.'' This presumption will put the burden of 
proof on the employer to demonstrate that the worker should be excluded 
from coverage under the FLSA. We have discussed whether DOL has the 
regulatory authority to create such a presumption and concluded that 
action by Congress will significantly reduce the litigation risks.
    Finally, the EMPA provision that authorizes WHD to seek Civil 
Monetary Penalties for recordkeeping violations provides an important 
enforcement tool not only against misclassification, but against all 
FLSA recordkeeping violations. Time and time again, WHD investigators 
and employees find minimum wage and overtime violations, but the 
employer's failure to keep adequate records makes it difficult or even 
impossible to guarantee that the employee is made whole. Employers who 
violate the law should not be able to avoid paying fair compensation to 
their workers by failing to keep records as the FLSA requires.
    We strongly endorse these provisions of EMPA and look forward to 
working with Congress to pass effective legislation to address the 
misclassification problem.
    I also want to briefly highlight the Unemployment Compensation 
Integrity Act. This is draft legislation the Department recently shared 
with Congress and we believe it is another necessary element of a 
comprehensive strategy to end misclassification. The Unemployment 
Compensation Integrity Act contains provisions that would enable States 
to retain a percentage of delinquent employer UI taxes, including those 
resulting from misclassification, to use for increased efforts to 
identify worker misclassification. This incentive for expanded State 
tax efforts targeted at misclassification would be another way for us 
to help the States in their UI tax enforcement efforts.
                               conclusion
    Thank you again for the opportunity to testify before you today, 
and for your thoughtful leadership in drafting the EMPA. We believe 
that addressing this issue is essential to ensuring a level playing 
field in the marketplace, and protecting workers as Congress intended 
when it enacted a long list of employment laws. During this fragile 
economic recovery, workers are too often exploited and caused to lose 
out on the benefits they rightfully earned, while employers who do 
right by their employees are placed at a competitive disadvantage that 
they cannot afford.
    DOL, along with the White House, the Treasury Department, and 
States across the country are taking meaningful steps to prevent worker 
misclassification and address it whenever and wherever it occurs, but 
we need your help to make misclassification illegal and to assemble a 
truly comprehensive solution to this problem. We applaud your work on 
EMPA. We look forward to working with you in this endeavor. Thank you 
for your time. I am available to answer your questions.

    The Chairman. Thank you very much, Mr. Harris.
    We will start rounds of 5-minute questions.
    Again, as you pointed out, DOL, the IRS, and other agencies 
are trying to tackle this problem. So tell me again how the 
Brown bill would help in that effort.
    Mr. Harris. There are three provisions that we think are 
most important. I want to focus on those, if you do not mind.
    First is for the first time in Federal employment law, it 
would be a violation of the Fair Labor Standards Act to 
misclassify a worker as something other than an employee and 
thereby exclude them from coverage under the Fair Labor 
Standards Act. A number of States have this provision in their 
law. We think it should be in the Fair Labor Standards Act as 
well.
    Second, your bill would add civil money penalties to 
recordkeeping violations. Again, enforcing recordkeeping is a 
very difficult task when there is no consequence for failing to 
keep records. You can imagine how difficult it is for our 
investigators to assess how much overtime a worker has not 
gotten or how much a worker has actually been paid and should 
be given because they have not gotten the minimum wage when 
there is no record kept by the employer of those kinds of 
provisions.
    And third, it creates a legal presumption, that if an 
employer has not kept a record, that the worker is an employee. 
What we do not want is employers evading the law by keeping 
everything secret and not doing the analysis that they are 
supposed to do. So absent any kind of analysis, the worker 
would be an employee.
    We think those three provisions are very, very important to 
moving this effort forward.
    The Chairman. Well, I think that again clarifies why the 
legislation is needed to buttress efforts that are now being 
undertaken by DOL and by IRS.
    I understand that construction workers, truckers, home 
health care workers, and other types of home aides are among 
the occupations that are most likely to be misclassified. Yet, 
according to the Bureau of Labor Statistics, these are the jobs 
that are predicted to be among the fastest-growing occupations 
in the next decade. So tell us again what does it do to the 
economy and to the middle class when we have this rapid growth 
in these sectors and they do not have these kinds of 
protections.
    Mr. Harris. Well, we view the Fair Labor Standards Act and 
the other array of employment laws that are implicated by this 
issue as essential to a strong and expanding middle class. 
Workers' wage protections, workers' overtime protections, the 
availability of unemployment insurance benefits, the 
availability of workers' compensation benefits if a worker gets 
injured on the job are essential to getting workers into the 
middle class, keeping them in the middle class. Although we see 
worker misclassification across a wide range of industries, we 
are most troubled by it and see it most prevalently in the low-
wage industries that you identified, in construction, in health 
care, in janitorial services, for example. These are workers 
that are trying to build their way into the middle class, 
trying to earn a middle class wage, but if they cannot be 
assured of getting the minimum wage, if they cannot be assured 
of getting overtime when they work more than 40 hours in a 
week, it is very difficult for them to find and secure a place 
in the middle class.
    The Chairman. I read your testimony last night. You used an 
example of a dishwasher in Wisconsin who had been 
misclassified. He is a dishwasher. He did not set his own 
hours. He had no profit or losses. He did not bring his own 
equipment. And yet, he was told that he was not eligible for 
workers' compensation or for unemployment benefits because he 
had not paid into the system because he was an independent 
contractor. He had no idea that he was an independent 
contractor. He assumed he just worked for this restaurant.
    Mr. Harris. I think that the conclusion that he was an 
independent contractor would have been a surprise to any 
employment lawyer in the country. This is somebody who was a 
dishwasher in a restaurant using the employer's equipment, 
showing up on the employer's schedule, doing the work the 
employer directs the worker to do. He was not paid the minimum 
wage. He was not paid overtime, and the employer said to him, 
``well, I am sorry you are not an employee, so I do not have to 
do those things for you.'' It is a nice illustration of the 
problem that we are facing here, low-wage workers being 
deprived of fair pay and fair benefits.
    The Chairman. Thank you very much, Mr. Harris.
    Mr. Harris. Thank you.
    The Chairman. Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    I do not think there is anybody that does not want to catch 
the bad actors and that believes that there are not any bad 
actors.
    What I am concerned about is the burden that we are putting 
on those that have been good actors and would be good actors 
and intend to be good actors, although sometimes they make a 
mistake.
    In your testimony, you even mentioned the underground or 
the shadow economy and described those workers that are paid 
under the table and no records are being kept and the greater 
transparency that needs to be done. Those are not legitimate 
businesses. For legitimate businesses, the contract with 
independent contractors--there is a paperwork trail. I do not 
understand how the person that has this underground or shadow 
thing--why he would even file these papers, why he would even 
go to the extra work. But I understand why the person that is 
legitimate would go to the extra work.
    So should these legitimate businesses be subjected to more 
paperwork burdens and fines if it is the underground and shadow 
businesses that are causing the problem? Do you really think 
this is going to catch the shadow and underground ones?
    Mr. Harris. My hope is that the answer to that is yes, that 
we are going to be able to catch both----
    Senator Enzi. I am hoping for more than hope on this.
    Mr. Harris. The enterprises that we are interested in 
targeting at the Labor Department are the businesses that are 
evading the coverage of employment laws by misclassifying their 
workers for the purpose of gaining an advantage against their 
competitors. Those are the folks that we want to target.
    I associate myself completely with Senator Isakson's 
remarks that there are legitimate independent contractors doing 
business in a legitimate way with legitimate businesses, as you 
characterized them, Senator. You are exactly right about that. 
We have no complaint with that industry. Those folks are doing 
open and legitimate business, appropriate business. They should 
continue doing it. Nothing in the regulation that we plan to 
propose or in EMPA, in my view, would in any way interfere with 
that relationship between the businesses and those legitimate 
independent contractors.
    But there are businesses that are not operating in the 
shadow economy also that are misclassifying workers in a lot of 
industries. So I would say I would not limit the concern only 
to those in the shadow economy where it is just cash being paid 
under the table. There are folks who are keeping records and 
still misclassifying workers. We are interested in those folks 
as well, if they are intentionally misclassifying for the 
purpose of gaining an unfair competitive advantage.
    Senator Enzi. Well, in your full testimony, you talk about 
the Plan/Prevent/Protect new strategy. Think about this from a 
small employer's standpoint.
    Incidentally, have you been an employer?
    Mr. Harris. No, sir.
    Senator Enzi. Think about this from a small employer 
standpoint. No. 1, create a plan for identifying and 
remediating risks of employment law violations and make plans 
available to workers so they can participate in their creation, 
fully understand, and help monitor their implementation.
    This is a huge mental task for somebody to undertake. Why 
would the Department not provide this stuff? How can you expect 
a small businessman to create a plan? Are we not the ones that 
are supposed to be setting up the rules for this thing? But we 
are saying, ``no, you are going to create a plan for 
identifying, remediating risks, and make it available to the 
workers so they can participate.'' That is just one of the 
three.
    Then they thoroughly complete and implement the plan in a 
manner that prevents legal violations. Good. I do not see how 
that winds up there.
    And then ensure that the plan's objectives are met on a 
regular basis so it actually protects the workers from 
violations of their workplace rights.
    Again, we are talking about a lot of paperwork, most of 
which will never be looked at because there are not going to be 
enough auditors to look at them all, but we are going to be 
hiring accountants to put all of this stuff together. And the 
business is going to have to pay the accountant because they 
are not going to do it for free. Again, it is going to turn 
into somebody coming in and evaluating to see if they really 
filled out the forms right, and that is what the penalties are 
going to be about, not the misclassifications.
    How do we shift this over so it is actually the 
misclassifications rather than the paperwork violation?
    Mr. Harris. Well, let me describe how we see Plan/Prevent/
Protect operating in this arena with respect to 
misclassification. We are still in the process of developing 
our regulations, so it is not final.
    But our intention is to provide employers with a form that 
they can fill out that will allow them to understand how to 
apply the test and they will fill out the form. And we think it 
will just take a few minutes. It will not take as long as half 
an hour as you suggested. They will fill out the form for each 
category of employees, those that all have the same facts 
around their jobs. They will fill it out. That will be the way 
they will analyze whether or not someone is an employee or an 
independent contractor or something else.
    Once they have done that, they are done except that they 
have to provide it to the employee and put it in their files. 
The employee will look at it and say that description is a 
pretty good description of how my job works, or they will go to 
their employer and say, you know what? This is not right. This 
is not how I do my job. And the employer will fix it, I hope, 
or the employee will have the opportunity to complain either to 
the Wage and Hour Division, or under the Fair Labor Standards 
Act, they could sue on their own. But the employee will look at 
it. The employer will have it in their files. It will not be a 
lot of additional paperwork.
    And all we are asking of the employer is avoid violations, 
avoid the large class action suits that we are seeing with 
respect to overtime, the multimillion dollar class action suits 
that some of these businesses are experiencing because they are 
misclassifying workers and excluding them from overtime 
protection.
    So we do not think it is going to be significantly 
burdensome. In fact, we do not think it is going to be 
burdensome at all. Employers are supposed to be doing this 
analysis now. The test is a well-
established test. They are supposed to, before they say someone 
is an independent contractor, know whether someone is an 
independent contractor under the law before they say, ``no, you 
do not get the minimum wage. You do not get overtime 
protections.'' What our regulation and EMPA would do is simply 
say write it down on this form we have given you.
    Senator Enzi. Do you know how many forms the employer fills 
out on each employee and how many forms the employee signs? If 
I am the unscrupulous worker, I just keep shoveling those over 
and saying sign this and do you understand it? Sign this. Do 
you understand that? The employee wanting the job just keeps 
signing.
    So I like the problem that we are trying to get to. I am 
just not convinced that we are getting there, particularly not 
without costing a lot of time.
    Incidentally, the IRS says the form takes 16 minutes to 
fill out. So besides getting the form, explaining the form, 
filling out the form, and then filing the form, there are going 
to be a few more minutes that are going to be taken on the 
thing. And you are still not going to have the trail unless you 
go to the business to look at it.
    Mr. Harris. Our form will be shorter, Senator.
    Senator Enzi. OK. My time is up anyway. I am sorry.
    The Chairman. I was just looking, Senator Enzi, at the 
contents of the notice that is in the bill. No. 1, inform the 
individual of the classification. No. 2, include a statement 
directing the individual to a Department of Labor Web site. No. 
3, include the address and telephone for the applicable local 
office of the U.S. DOL. No. 4, if they are classified as a 
nonemployee, include the following statement. ``Your rights to 
wage, hour, and other labor protections depend upon your proper 
classification as an employee or nonemployee. If you have any 
questions or concerns about how you have been classified or 
suspect that you may have been misclassified, contact the U.S. 
Department of Labor.'' And the fifth one is include such 
additional information as the Secretary shall prescribe by 
regulation.
    Senator Enzi. Mr. Chairman, I do not have any difficulty 
with that part, but what about the remuneration and hours 
relating to the performance of labor or services by each 
individual described in subparagraph (b)? That is where the 
accountant comes in.
    The Chairman. I am looking at the contents of the notice 
that they have to give.
    Senator Enzi. Yes. That is just another notice that they 
sign, but this is where the real recordkeeping comes in.
    The Chairman. I will take a look at it.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    The Federal Labor Standards Act was passed in 1938, and 
with some exceptions, there has been a consensus in this 
country around labor law. There are sort of far-left, far-right 
disagreements, but there has generally been consensus that it 
has worked well in this country. That was sort of the beginning 
of an increasingly prosperous America, the beginning of a huge 
growth in the middle class. It is what makes our country 
different in many ways from almost any other rich or not-so-
rich country in the world--that we have brought that prosperity 
and labor law is part of the reason for that.
    I understand the concerns of Senator Enzi that he has 
expressed and Senator Isakson and I assume Senator Murkowski. I 
will not speak for any of them, of course. But I understand the 
concerns about two major things: paperwork and litigation. I am 
certainly willing to work on some of the things that Senator 
Enzi pointed out.
    I want to see the independent contractors, legitimate 
ones--and there are many that are legitimate. In no way, 
Senator Isakson, did I imply that most people in these 
businesses are not acting properly. I do assert, though, that 
those that act properly are at a competitive disadvantage to 
those who do not, and that is why we want to concentrate 
obviously on those who do not and minimize the paperwork burden 
on those who do act properly.
    So my question, Mr. Harris, is--I know this bill faces an 
uphill battle. I understand the labor/management divisions in 
this committee that are played out, unfortunately, with the 
same arguments on both sides for decades probably.
    But I do assert, though, that there is general consensus in 
this country overwhelmingly in most of labor law. The example 
you gave of the Wisconsin dishwasher, the example I gave of the 
Parma carpenter. I would be shocked if no more than 10 percent 
of the country would believe that is the right thing to do. So 
I think we can get there if we can break down some of these 
issues that we talk about.
    But talk, if you would, about the whole issue of how we 
make sure that the paperwork burden is not too great on those 
that are already playing fair and playing by the rules, and 
talk about how, if we write this right--and I know we have 
worked together on some of this--in a more precise way that 
litigation will actually be minimized rather than when you try 
to enforce it and there are too many lawsuits, that we can work 
that so that we can get some bipartisan support for this.
    Mr. Harris. You are making a very important point. The 
surest way for an employer to avoid litigation and to avoid the 
other problems that come with violations of employment laws is 
to take preventive steps to assure that they are in compliance 
with the law. So the good, responsible employers that you are 
referring to--and I think that is the overwhelming majority in 
our country and even in the industries that we have identified 
here as potential problem areas with respect to 
misclassification--those employers are undertaking the analysis 
that your bill would require. They are recording that analysis 
and assuring that they have got it right, that the employees 
who are supposed to get the minimum wage, that are supposed to 
get their overtime protections, that are supposed to get 
workers' comp and unemployment insurance are, in fact, being 
treated in the way they are supposed to be treated. So for 
those employers, the burden will be de minimis. They will just 
have to record it. They probably are recording it already.
    It is for the employers that are either hoping by 
happenstance that they are getting it right or are 
intentionally avoiding the law in order to gain a competitive 
advantage. Those are the employers that are going to face the 
burden under this law because if they have to classify their 
employees as being covered by the law, they may have to start 
to pay the minimum wage. They may have to start to pay 
overtime. They may have to assure unemployment taxes are paid, 
Social Security taxes are paid, and Medicare taxes are paid. 
But it seems to me that is exactly the result that we want. We 
do not want the employers that are getting an unfair 
competitive advantage to be able to sustain their unfair 
competitive advantage by hiding the facts from their employees, 
from the Wage and Hour Division, from the country. That seems 
to me not where we want to go.
    It is not the logic of the Fair Labor Standards Act. The 
Fair Labor Standards Act is about fair competition, a floor on 
minimum wages, a soft ceiling on overtime that everyone--almost 
everyone is subject to unless there is good reason to exclude 
them.
    Senator Brown. I have almost run out of time. Well, I will 
yield back my time, Mr. Chairman. Thanks.
    The Chairman. Thank you, Senator Brown.
    Senator Isakson.
    Senator Isakson. Thank you, Mr. Chairman.
    In the Wisconsin dishwasher case, that was already a 
violation of the law. Right?
    Mr. Harris. Under Federal law, misclassifying an employee 
right now is not a violation of the law.
    Senator Isakson. But the employer was violating the law by 
treating him as an independent contractor, yet requiring 
specific hours of work, etc, etc, etc.
    Mr. Harris. It was a violation of the law if by 
misclassifying him, the employer failed to pay the minimum wage 
and failed to pay any legally required overtime.
    Senator Isakson. But he was still breaking the law because 
he was failing to do that when it was determined that he was 
being treated as an independent contractor person employee.
    Mr. Harris. Yes, there are minimum wage violations and 
there were overtime violations, as I understand it.
    Senator Isakson. My recollection goes back to when I was 
running the company, and I have not done that in 14 years. But 
if I am not mistaken, the penalty for treating somebody as an 
independent contractor when in fact they are an employee is 7 
years back payroll tax on the business side, as well as any 
other Federal required programs, per person misclassified. Is 
that correct still?
    Mr. Harris. Not under laws that are administered by the 
Labor Department. Under IRS laws, there are consequences for 
misclassi-fying an employee.
    Senator Isakson. I think you made a great statement that 
kind of strikes at one of the things that I am interested in 
being sure we do not do. You said the people that are doing it 
right already do this anyway. I think that was what you--well, 
you are right because I had 800 independent contractors and 200 
employees, which brings me to the next point.
    There are a number of American businesses who employ people 
as employees because of the ability to have productive 
independent contractors that would not otherwise employ those 
people if they had to treat the independent contractors as 
employees. My organization, for example, was real estate sales. 
Of the 800 independent contractors, 780 of them were women who 
needed a job where they had flexibility in hours, they did not 
have to put in 40 hours if they did not want to. They could do 
the things an independent contractor could do. It was a 
lifesaving opportunity for a woman in those years in the 1980s 
and the 1990s.
    So one thing I want to be sure we do not do is remove the 
opportunity for people like working moms and folks like that to 
be able to have meaningful jobs and meaningful income because 
of the benefit that an independent contractor provides to a 
business to capitalize the risk that it takes to start that 
business and then ultimately hires the employees to support the 
independent contractor. So we should not forget that there is a 
circle here. If you allow the circle to operate, your 
independent contractors, rather than being enemies, are 
actually producing jobs that would not have been there 
otherwise.
    So I want to associate myself with what you said, that most 
people do this anyway. I will talk with Sherrod. I have a great 
regard for Sherrod, and maybe we can find some common ground on 
this. But as I see this, this is going to apply to everybody 
who has independent contractors. So it is a new level of 
regulation. It is a new level of authority over people that are 
already doing this anyway in hopes of catching the ones who are 
trying to cheat anyway. And I think that is what Senator Enzi 
was really talking about in terms of how much more layer or 
labyrinth the Government puts on the people that are actually 
risking the capital that provides the opportunities for 
independent contractors.
    That was not a question. That was a rambling statement and 
I apologize.
    [Laughter.]
    So I will be happy to sit down with the Senator from Ohio.
    But we have to be very careful that economically 
difficult--and I went through the 1974 recession, the 1983, 
1982 recession, the 1990-91 recession. You can look at America 
today and people that operate businesses that use independent 
contractors. Staying in business is very difficult, and any new 
employee that you have to hire to meet compliance in order to 
do something you are already doing anyway is also a burden on 
them. As a U.S. Senator, I want us to get all the withholding, 
all the payroll taxes, all the unemployment compensation taxes, 
everything else that we can get in. But to do that, I do not 
want to stop enterprise that depends on the type of flexibility 
in work that independent contractor status does.
    And that was another statement. Thankfully my time has run 
out so I will not make another one.
    [Laughter.]
    The Chairman. I would insert here that on page 2, that 
remuneration and hours relating to the performance of labor or 
services by each individual described in subparagraph (b)--
Senator Enzi brought that to my attention. I was just thinking 
about that. That is what you were getting at. If someone has a 
legitimate number of several hundred independent contractors, 
how can you keep the hours and remuneration when they are out 
there doing their own thing? That is something we have got to 
take a look at. I do not understand how that is done. I would 
be glad to work with you on that.
    Senator Franken, you are next.

                      Statement of Senator Franken

    Senator Franken. Thank you, Mr. Chairman, for holding 
today's hearing on this critical issue, and I want to thank my 
colleague from Ohio for introducing the Employer 
Misclassification Prevention Act, which I am proud to 
cosponsor.
    I think today's hearing is very good. We are hearing good 
stuff from Senator Isakson and from Senator Enzi that I am sure 
can be addressed.
    And I want to say to Senator Enzi that I too have been an 
employer, because I know that was asked of Mr. Harris. I have 
been an employer. I have been an independent contractor. I have 
employed independent contractors. I have employed employees. 
Sometimes it is a little tricky. Sometimes errors are made, but 
it is not that hard to know who is an independent contractor 
and who is an employee. I actually believe that Senator Isakson 
had a bigger company than I had. Actually, I think my mom was 
an independent contractor for Senator Isakson because she 
worked for Burnett in Minnesota. So I kind of understand this, 
Senator Enzi. I have been in their shoes.
    I want to reward the businessmen who are doing this right, 
and I am like Senator Isakson. I want there to be withholding 
taxes withheld, and I want unemployment insurance paid. I want 
to punish businesses that do not play by the rules. No one is 
categorically demonizing businesses that hire independent 
contractors. I did not hear anybody doing that.
    But I have to tell you when I go back to Minnesota, one of 
the biggest complaints I hear from my friends in the 
construction industry--not the real estate industry, not the 
entertainment industry, but in the construction industry--is 
that there are good laws on the books, but that there are 
dishonest players who keep finding loopholes, and they are the 
ones that are disadvantaging people who do play by the rules. 
And that is what we are trying to do here.
    Now, I have a rather technical question, Mr. Harris, 
specific to a situation that has arisen in Minnesota. A couple 
years ago, Minnesota implemented a law to tackle the 
misclassification problem. It basically required that 
independent contractors receive a certification from the State 
Department of Labor and industry if individuals submitted 
documentation showing that they were legitimate contractors. 
And this seemed like a logical solution to the problem.
    However, unscrupulous employers have found a way around 
this. They have told workers to go register as a limited 
liability company. It is actually a very simple form to do 
this. If certified as an LLC, the workers can keep working for 
the employer. It would be considered a business-to-business 
transaction and the employer could continue to avoid paying 
taxes and the worker would not be protected by any labor laws. 
And this happens frequently to vulnerable workers, seasonal 
workers, those with less education, those with no other 
employment option.
    If Federal Wage and Hour inspectors were to show up to a 
construction site and interview workers who revealed that they 
were told where and when to show up and what to do but were 
technically LLCs, what would Wage and Hour be able to do in 
this situation? And would they be able to do anything more if 
Senator Brown's provisions were implemented into law?
    Mr. Harris. The technical status of the worker as an LLC is 
not relevant to the test under the Fair Labor Standards Act, 
the economic realities test. It is only if the individual is 
actually operating an arm's-length business that they would be 
an independent contractor, at least out from under the 
definition of employee.
    But if our investigator were to show up and find that 
someone had been misclassified, there would be no consequence 
for the employer in the first instance because under the law 
right now, it is not a violation to misclassify a worker. And 
that is one of the things that the Employee Misclassification 
Prevention Act would change.
    Second, if the employer had not kept the requisite records 
because the LLC actually was an employee, there is no penalty 
for failing to have kept the records under existing law. Our 
investigator could not issue any kind of a citation for civil 
money penalties. Under the EMPA, there would be civil money 
penalties available for recordkeeping violations.
    What is intriguing about what is happening, what you are 
describing in Minnesota, is that the Minnesota State law has in 
it a couple of the provisions that are included in EMPA, the 
establishment of a violation for misclassification, the 
existence of a presumption, if there is no recordkeeping, that 
someone is an employee. And I think what you are describing is 
showing that there is so much economic pressure on employers to 
get this competitive advantage particularly in construction 
where it is a very competitive business, that they are trying 
to find new ways of getting out from under the law.
    So it shows that even if we succeed with our regulation or 
with the EMPA or both, we have to continue to be vigilant. We 
have to have an enforcement strategy. We have to have 
cooperation with the States. We have to not let form overtake 
substance. The LLC form is not the answer. The relationship is 
the answer.
    So I think that the problem that you are describing is 
solvable. It is not solvable with a single tool. I think we 
have to all work together to find several tools to go after it.
    Senator Franken. Thank you. My time has expired.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Murkowski.

                           Senator Murkowski

    Senator Murkowski. Thank you, Mr. Chairman.
    I want to follow up with a question that Senator Isakson 
was pursuing and that is the existing statutes, the existing 
laws that are in place to go after these bad guys because I 
think we would all agree this is what we are trying to do. You 
indicated that under the IRS code there are certainly avenues 
there.
    But it is my understanding that we have got some pretty 
serious penalties under the Fair Labor Standards Act, $10,000 
in fines and possible imprisonment. Under Davis-Bacon, 
offenders can receive up to 5 years in prison for making false 
statements on a certified payroll. The law includes mail and 
wire fraud statutes, money laundering, immigration, RICO, and 
of course, the IRS statutes.
    So is putting a penalty on this recordkeeping aspect of the 
issue, the problem, on top of all these other pretty serious 
penalties? What makes you think that this is going to enable us 
to capture the bad guys? You have just stated the bad guys are 
going to keep looking for ways around some pretty serious 
stuff, $10,000 in fines, up to 5 years in prison. What makes 
you think that this is going to make the difference?
    Mr. Harris. I am skeptical that failure to keep records for 
Fair Labor Standards Act purposes would actually result in a 
violation of any of the laws that you just described. I think 
it is unlikely that it would be, for example, a wire fraud or a 
tax fraud situation.
    There is a requirement in the Fair Labor Standards Act that 
employers keep records, but there is no consequence for that if 
they do not.
    So we view recordkeeping as the leading edge of the effort 
to assure that workers are getting the minimum wage and 
overtime. If our investigators or if the worker themselves 
cannot know how many hours they have worked in a week or 6 
weeks ago or 8 weeks ago because the employer has kept no 
records, if they cannot know how much they have been paid for a 
particular period of time because the employer has kept no 
records, the employee cannot protect themselves. We cannot 
protect the employee because it is very difficult to assess 
what the violation is, whether there is a violation and the 
quantity of the back pay that the employee should be entitled 
to. So the recordkeeping penalty is designed simply to create 
an incentive for those employers that are refusing to keep 
records and to ensure that they are keeping records.
    Senator Murkowski. Would it work to amend the Fair Labor 
Standards Act then to require that there would be consequences 
then for failure to keep those records?
    Mr. Harris. I think it would. It would help. None of these 
steps are panaceas. They are all parts of larger strategies to 
go after misclassification and violations of wage and hour 
laws. But I think it will make a difference for a large number 
of employers because there is no consequence now. There is no 
remedy if you do not keep records right now, except the 
investigator showing up and your having to sit through an 
extended interview.
    Senator Murkowski. Well, no consequence for failure to keep 
records, but there are consequences if you are that bad guy 
that has really abused this system. And those consequences, 
again, are pretty substantial in some of these other areas.
    Let me ask you about the efforts within the Department of 
Labor. There has been a pretty stepped-up effort to identify 
and to prosecute the willful misclassification. The 2010 
regulatory agenda is going to propose these regulatory changes 
to make the classification decisions more thoughtful, more 
transparent.
    You have testified that, in addition to all this, the 
Department of Labor is going to move out on education and 
outreach and partnerships with States to tackle, as you 
mentioned, some of the forums that you have held in a handful 
of States there.
    So given all the attention to this issue, do we need 
statutory changes to investigate and to prosecute the willful 
violators? I mean, if we do enough that is proactive and we 
make clear that people understand and understand the 
consequences under all of these other statutes, do we need to 
necessarily make statutory changes here?
    Mr. Harris. I think we do. There are certain things that 
Congress can do that the Labor Department cannot do. For 
example, we cannot create or we think it will be difficult for 
us to create a legal presumption that someone is an employee in 
the absence of paperwork that establishes they are not. That is 
part of Senator Brown's and Senator Harkin's bill. We cannot 
impose civil money penalties for recordkeeping without Congress 
giving us the authority to do that.
    So, yes, I think it is necessary to have a statute like 
EMPA enacted. It will strengthen what we are able to 
accomplish. It will be another part of a larger arsenal that we 
are trying to go after this problem. So, yes, I think it is 
necessary.
    Senator Murkowski. Mr. Chairman, my time has expired. Thank 
you.
    The Chairman. Thank you, Senator Murkowski.
    Senator Merkley.

                            Senator Merkley

    Senator Merkley. Thank you, Mr. Chair, and thank you, Mr. 
Harris.
    Do employers sometimes use the independent contractor 
status as a way to avoid issues related to immigration? Does 
this contribute to the issue of illegal immigrants acquiring 
jobs?
    Mr. Harris. That is an excellent question. I am not sure I 
have a good answer for you.
    The position of the Labor Department has long been, both 
under Democratic and Republican Presidents, that the employment 
laws apply regardless of immigration status. So the minimum 
wage protections and the overtime protections that would apply 
to an employee, if they are classified as an employee, would 
apply regardless of whether or not they are an undocumented 
worker or if they are a U.S. citizen, for example.
    To the extent that the recordkeeping requirements in EMPA 
would make it more difficult for employers in the shadow 
economy to avoid obeying those laws, it is possible that that 
would have a consequence for undocumented workers who do not 
want to have any paperwork associated with their employment. 
But as a general matter, I think that is not going to be the 
principal thrust of what is going to happen with this bill.
    Senator Merkley. You do not need to elaborate on this, but 
I was thinking in terms of an employee having to submit a 
Social Security number, an employer having to submit an I-9, 
that this might be a convenient way for both to bypass the 
issue and might be a contributor to the question of integrity 
of employment. And I would be interested in any follow-up 
information you might be able to provide to us on that.
    Mr. Harris. Sure.
    Senator Merkley. Whereas the Labor Department does not have 
penalties for misclassification, IRS does. So are you currently 
able to coordinate or do you alert the IRS when there is an 
issue so that those penalties become a reasonable substitute 
for the penalties that you are proposing today?
    Mr. Harris. This is part of a larger effort in the 
Administration. Our effort with respect to regulations and 
others is part of a larger effort led by the Vice President's 
office and the Middle Class Task Force to have the Labor 
Department--both the Wage and Hour Division of the Labor 
Department and the UI Division in the Employment and Training 
Administration work more closely with the IRS to assure that we 
have a coordinated effort to go after and target 
misclassification because it does occur in each of the areas. 
So, for example, the Employment and Training Administration 
works with the IRS in about 29 States in something called the 
Questionable Employment Tax Practices Program where they share 
information. It allows them to understand better where 
misclassification with respect to UI taxes is occurring and 
then to collect those taxes. It has been a wonderfully 
successful program and we have added an additional almost $11 
million in the budget request for 2011 to strengthen that 
program to get more States involved in auditing to improve data 
sharing, data mining efforts to target misclassi-
fication. So we are engaging in that kind of cooperation now 
with the IRS.
    Senator Merkley. So in those States that have that 
relationship, as compared to States that do not, do you see 
that the IRS penalties become an effective substitute for the 
direct penalties you are proposing in the bill?
    Mr. Harris. I cannot speak to IRS penalties. I just do not 
have that information. I apologize.
    Every State is involved in auditing for UI tax purposes. 
Some States do an excellent job. They have very sophisticated 
data mining technology and collect a great deal more money. 
Some States need additional help, additional resources in order 
to build their capacity, and that is what we are trying to 
accomplish.
    Senator Merkley. When I was an employer, I had the 
situation of a previous employee, an employee before I became 
the director, who had been misclassified. And I can tell you 
dealing with the IRS on that was a major deterrent.
    It also inspired me to go to a seminar on this issue. It is 
a little fuzzy to me now, but I believe that there were two 
sets of standards, one for the State law definitions and one 
for the Federal IRS. Am I correct about that?
    Mr. Harris. Yes. As a general matter--and this is maybe a 
little more responsive to the question before. The definition 
of employee under the tax code is different than the definition 
under the Fair Labor Standards Act. It is narrower, 
significantly narrower. So it is possible to be an employee for 
Fair Labor Standards Act purposes and not an employee for tax 
purposes. It is not very likely, but it is certainly possible.
    So you could have misclassification under the Fair Labor 
Standards Act. It never gets picked up in the tax system. So 
that is the kind of thing that we would want to focus on as 
well.
    Senator Merkley. I will say that that was a confusing 
factor for employers to try to sort out the differing tests. If 
it was a coherent, single test, it might be an additional tool, 
making this easier for employers.
    So in general, the seminar I went to said just always 
presume that the people you are working with are employees. 
People will come to you and say, ``hey, classify me as an 
independent contractor because of this and this and this. I 
will have independence in this way.'' They said almost always 
that is going to be wrong. So start with the presumption and 
then run through the test, and then if they meet the test, put 
them in that category.
    Is that essentially what you are trying to do in this law--
trying to establish a presumption that you are an employee 
unless you go through the test, the four points or so, and make 
sure that they actually fit the legal definition?
    Mr. Harris. That is precisely what EMPA would do, yes.
    Senator Merkley. Thank you very much for your testimony.
    Mr. Harris. Thank you.
    The Chairman. Well, Mr. Harris thank you very much for 
being here and for your testimony. We appreciate it very much.
    Now we will go to our second panel. Our second panel will 
be Colleen Gardner, commissioner of Labor for New York State. 
Prior to her appointment as commissioner, she served as 
associate commissioner for Labor Affairs where she worked to 
strengthen labor protections, labor standards, apprenticeship 
programs, and workforce development programs. Prior to joining 
the Labor Department, Ms. Gardner worked for 23 years for the 
New York State AFL-CIO as the director of Organizing and 
Community Services.
    Catherine Ruckelshaus is legal co-director of the National 
Employment Law Project. Ms. Ruckelshaus joined NELP in 1995 
after working for the Employment Law Center in San Francisco. 
For over 20 years, she has litigated and advocated for policy 
reforms promoting the workplace rights of immigrant and other 
vulnerable workers.
    Mr. Frank Battaglino is the owner of Metro Test and 
Balance, a heating, ventilating, air conditioning contracting 
company. He started this 18 years ago, and since that time the 
business has grown into a $10 million operation with 55 
employees.
    Next we have Mr. Gary Uber. Mr. Gary Uber is the co-founder 
of Family Private Care, a licensed nurse registry operating in 
Florida, Georgia, and Alabama. He has 23 years of experience in 
the military and civilian health care and currently serves as 
president of the Private Care Association of America.
    Thank you all for being here, and again, as pertained to 
Mr. Harris, it pertains to you. All your statements will be 
made a part of the record in their entirety. We will just go 
from left to right. And if you could sum up in 5 or so minutes, 
I would certainly appreciate it.
    Ms. Gardner, welcome and please proceed.

 STATEMENT OF COLLEEN C. GARDNER, COMMISSIONER, NEW YORK STATE 
                DEPARTMENT OF LABOR, ALBANY, NY

    Ms. Gardner. Good morning, Chairman Harkin, Ranking Member 
Enzi, and members of the committee. My name is Colleen Gardner 
and I am the commissioner of the New York Department of Labor.
    Mr. Chairman, I would like to submit my longer written 
testimony for the record.
    On behalf of Governor David Paterson, I commend the 
committee for your work in protecting workers and businesses 
from employment misclassification, and I would like to convey 
New York State's support for S. 3254, the Employee 
Misclassification Prevention Act, which will help us expand 
efforts to combat misclassification.
    Through enhanced enforcement efforts in New York, in 
collaboration with other States, we have made progress toward 
curbing misclassification. However, this is a national problem 
that requires national action.
    Misclassification occurs when employers improperly treat an 
individual as an independent contractor instead of as an 
employee or when an employer pays an employee off the books. It 
not only hurts workers, but as the members of the committee 
have already said, it puts law-abiding businesses at a 
competitive disadvantage because they must compete against 
businesses that illegally cut their costs by misclassifying 
workers. It deprives government of resources at a time when we 
need every tax dollar and every contribution to our UI trust 
fund.
    New York established a joint enforcement task force on 
employee misclassification in September 2007 through our 
Governor's executive order after a study by Cornell University 
found that more than 10.3 percent of private sector workers in 
our State were being misclassified. Twelve States now have 
similar structures and we collaborate with nine States in the 
northeast on a monthly basis to talk about joint enforcement.
    Our task force's efforts have resulted in 67 enforcement 
investigations throughout the State which identified nearly 
35,000 instances of employee misclassification, over $457 
million in unreported wages, more than $13.2 million in 
unemployment insurance taxes due, and over $14 million in 
unpaid wages. However, we have only scratched the surface of 
the problem in New York.
    New York's task force is comprised of several divisions 
within the Labor Department, the Workers Compensation Board, 
the Department of Tax and Finance, the Attorney General's 
Office, and the New York City Controller's Office.
    The task force tears down the silos of government agencies 
and promotes collaboration while at the same time ensuring that 
confidential data is protected and used only for enforcement 
purposes. This inter- and intra-agency coordination has yielded 
significant results and greater efficiencies that would not 
have been possible if each agency or division acted alone.
    Through strategic joint enforcement, referrals of audit 
results, and data sharing, we ensure that an employer who is 
found to be engaging in misclassification is financially and 
legally liable for all of the resulting violations. The most 
egregious cases are referred to the State attorney general or 
local district attorneys for criminal prosecution.
    We also publicize the results of our sweeps to raise public 
awareness of the issue and promote compliance.
    Currently the task force is using the existing strained 
resources of its partner agencies. Increased national focus and 
support to the States would greatly expand the results we have 
already achieved. The Obama administration's request for an 
additional $25 million in enforcement resources will provide 
needed help to the States. Our experience is that the cost of 
these investigations are often minimal in comparison to the 
return on investment.
    Through our investigations we have found some employers who 
intentionally under-report the number of workers in their 
businesses. We have seen one group of workers as properly paid 
in the books and another group of workers who work side by side 
with the first group are paid off the books by a subcontractor. 
We conducted four main street sweeps where we investigated 
businesses along a retail strip. Of the 303 businesses visited, 
nearly 40 percent had unemployment insurance violations, 25 
percent had labor standards violations, and 6 percent lacked 
workers' compensation coverage.
    Just this month, we announced the results of four worker 
misclassification sweeps on construction projects where 
subcontractors either misclassified 281 workers as independent 
contractors or paid them off the books and owed more than 
$275,000 in wages and overtime.
    These cases also brought to light the human costs of 
misclassification. In one case, we received a call from workers 
who were brought in from out of State, worked nearly a month 
without pay, and then were fired and abandoned at a mall 
parking lot.
    We also saw the cost of business. We found one painting 
subcontractor which treated all 55 of its employees as 
independent contractors. This illegal practice allowed 
unscrupulous contractors to underbid legitimate employers.
    S. 3254 would provide consistent and stronger enforcement 
through greater coordination. Some employers use State 
boundaries as a way to try to avoid the law, and when they 
leave, States have a much harder time enforcing orders against 
them. The Federal Government has the ability to enforce the 
laws across jurisdictions and therefore would be more effective 
than States working in isolation.
    This bill establishes coordinated strategies that have 
worked so well in New York and other States.
    Finally, employee misclassification is pervasive and 
harmful to employees, workers, government, and our economy. We 
must combine forces and take new steps to fight it. S. 3254 
would provide additional important tools.
    New York looks forward to continuing to work with you on 
this important issue.
    Again, I thank you for this opportunity and welcome your 
questions.
    [The prepared statement of Ms. Gardner follows:]
                Prepared Statement of Colleen C. Gardner
                                summary
     The worker misclassification problem hurts workers, 
businesses and government. New York has taken steps to raise awareness 
of this problem, as well as enhanced enforcement efforts in New York 
and increased collaboration with other States to curb this epidemic.
     Misclassification hurts workers who are deprived of many 
employment rights under State and Federal law. It also hurts legitimate 
businesses that have to compete against businesses that illegally cut 
their costs through the misclassification of workers, and lastly it 
hurts government which does not receive required employment and income 
taxes.
     In 2000, the U.S. Department of Labor commissioned a study 
that found that 10 to 30 percent of firms audited in nine States 
misclassified at least some employees. In New York, the Cornell 
University School of Industrial and Labor Relations estimated that 
approximately 10.3 percent of New York State's private sector workforce 
is misclassified each year.
     The New York State Joint Enforcement Task Force on 
Employee Misclassifica-
tion has achieved an unprecedented level of collaboration among State 
agencies and local governments throughout New York. Created in 
September 2007 and including activities through the end of March 2010, 
the Task Force has worked on 67 enforcement sweeps in a dozen cities 
throughout the State, identified nearly 35,000 instances of employee 
misclassification, discovered over $457 million in unreported wages, 
and identified more than $13.2 million in unemployment insurance taxes 
due and over $14 million in unpaid wages.
     Through joint enforcement sweeps, coordinated 
investigations, referrals of audit results and data-sharing, the Task 
Force conducts a coordinated approach to enforcement. The process 
ensures that an employer who is found to be engaging in 
misclassification is financially and legally liable for all resulting 
violations. Violations that are determined to be criminally fraudulent 
are referred to the State attorney general or local district attorneys 
for criminal prosecution. Through media events, we have widely 
publicized the results of the sweeps to not only promote compliance by 
specific industries, but also to raise awareness among employers and 
workers that misclassification is illegal and hurts the competitiveness 
of businesses playing by the rules. The coordination of State agencies 
also allows for efficiencies that lead to greater enforcement and 
compliance.
     Our discussions with employers, unions and business 
organizations revealed the real impact on law-abiding employers who are 
trying to survive in this difficult economy. This illegal practice 
means that legitimate employers are underbid nearly every time by 
unscrupulous contractors who are often from out of State with no 
connection to local communities.
     Several other States have followed New York's lead and 
have created joint enforcement task forces. Since the New York Task 
Force began in 2007, 12 other States have established structures 
similar to ours. Last October, New York cosponsored a Northeast 
Regional Summit on Misclassification with the State of Massachusetts. 
More than 70 people, representing nine States, attended the Summit and 
discussed enforcement strategies. We now have monthly phone calls with 
these Northeast States to discuss best practices and strategies. New 
York is also a partner in the IRS Questionable Employment Tax Practices 
(QETP) program which assists in uncovering misclassification and 
schemes aimed at avoiding employment tax obligations.
     Our experience in New York demonstrates the value and 
importance of many of the provisions of S. 3254, the Employee 
Misclassification Prevention Act, which will help us expand our work. 
The requirement that offices and divisions within the U.S. Department 
of Labor share information on misclassification violations will have 
the same positive effects nationally that our own data-sharing and 
enforcement coordination has had in New York. Additionally, the 
requirement that the U.S. Wage and Hour division carry out targeted 
enforcement will have the same impact that the targeted sweeps have had 
in New York. Many of the bill's provisions will lead to the detection 
and deterrence of business models using incorrectly classified 
independent contractors.
                                 ______
                                 
    Good morning, Chairman Harkin, Ranking Member Enzi, and members of 
the committee. On behalf of Governor Paterson, thank you for the 
opportunity for New York State to address this important issue. My name 
is Colleen C. Gardner, and I am the commissioner of the New York State 
Department of Labor. Let me commend the committee for your work in 
protecting workers and businesses from misclassification and note New 
York's support for S. 3254, the Employee Misclassification Prevention 
Act, which will help us expand our work.
    I will be speaking today about the problem of worker 
misclassification and how it hurts workers, businesses, and government. 
I will also discuss our steps to raise awareness of this problem as 
well as our enhanced enforcement efforts in New York and our 
collaboration with other States to curb this epidemic. Let me begin 
with a snapshot of the results of the New York State Joint Enforcement 
Task Force on Employee Misclassification and the unprecedented level of 
collaboration it has achieved among State agencies and local 
governments throughout New York. Beginning with its creation in 
September 2007 through the end of March 2010, the Task Force's efforts 
have resulted in 67 enforcement sweeps in a dozen cities throughout the 
State, which identified nearly 35,000 instances of employee 
misclassification, discovered over $457 million in unreported wages, 
identified more than $13.2 million in unemployment insurance taxes due 
and discovered over $14 million in unpaid wages. However, we have only 
scratched the surface of the problem in New York. There is much more 
work to be done.
    A worker is considered ``misclassified' any time he or she is 
improperly denied the benefits and protections provided to an 
``employee'' as that term is defined by law. This can occur when a 
worker who meets the legal standards for classification as an employee 
is instead treated as an independent contractor by an employer. It can 
also occur when an employee is paid ``off-the-books'' and is not 
reported at all for tax and other purposes. Misclassification hurts 
workers who are deprived of their employment rights under State and 
Federal law. It also hurts legitimate businesses that have to compete 
against businesses that illegally cut their costs through the 
misclassification of workers. Finally, it hurts government which does 
not receive appropriate employment and income taxes.
                              the problem
    As we know, worker misclassification is not a new problem. In 2000, 
the U.S. Department of Labor commissioned a study that found that 10 to 
30 percent of firms audited in nine States misclassified at least some 
employees.
    In New York, the Cornell University School of Industrial and Labor 
Relations documented the growth of worker misclassification in a 
February 2007 study. Cornell estimated that each year, approximately 
10.3 percent of New York State's private sector workforce is 
misclassified in one of two ways as noted earlier: as independent 
contractors or paid off-the-books.\1\ This means that, because of 
misclassification, 10 percent of our workforce may not get the wage and 
hour protections to which they are entitled, including overtime pay and 
meal breaks. That also means that these employers fail to contribute to 
the unemployment insurance tax system for 10 percent of our workforce 
and fail to pay workers' compensation premiums in the same manner.
---------------------------------------------------------------------------
    \1\ Linda H. Donahue, James Ryan Lamare, Fred B. Kotler, J.D., 
``The Cost of Worker Misclassification in New York State'' (Cornell 
University, H.R. School, February 2007).
---------------------------------------------------------------------------
    Further, these employers pay no withholding taxes on workers who 
are off-the-books, and the workers they misclassify as independent 
contractors have been found to underreport and to underpay their 
withholding taxes. At a recent hearing of the U.S. House Education and 
Labor Committee's Subcommittee on Workplace Safety, a representative of 
the Mason Contractors Association of America stated,

          ``By misclassifying employees as independent contractors, 
        unscrupulous employers are able to avoid paying taxes and 
        insurance. Businesses that misclassify employees as independent 
        contractors can expect to reduce their labor costs by between 
        15 and 30 percent. This places contractors . . . at a 
        competitive disadvantage in an industry with 20 percent gross 
        margins.''

    In this difficult economy, it is more important than ever that we 
maintain a fair playing field for businesses who play by the rules.
    The Cornell report also estimated that approximately 14.9 percent 
of the construction industry workforce is misclassified in a given 
year. These are real numbers that impact real workers, businesses and 
economies. Studies conducted in other States have shown similar or even 
higher rates of misclassified workers. Our own field experience has 
shown that the level of worker misclassification in New York may be 
even higher than what the Cornell study shows because of the high 
incidence of off-the-books work.
                           new york's efforts
    The New York State Joint Enforcement Task Force on Employee 
Misclassification was created by an Executive order in September 2007. 
It is comprised of the New York State Department of Labor, the New York 
State Workers' Compensation Board, the Workers' Compensation Board 
Office of Fraud Inspector General, the New York State Department of 
Taxation and Finance, New York State Attorney General's Office, and the 
New York City Comptroller's Office. The Executive order charged the 
Task Force with:

     sharing information and referrals among agency partners 
about suspected employee misclassification violations, and pooling and 
targeting investigative and enforcement resources to address them;
     identifying significant cases of employee 
misclassification, which should be investigated jointly;
     developing strategies for systematically investigating 
employee misclassification in industries in which misclassification is 
most common;
     facilitating the filing of complaints;
     working cooperatively with business, labor and community 
groups to identify and prevent misclassification;
     soliciting the cooperation and participation of local 
district attorneys and other law enforcement agencies, and referring 
appropriate cases for criminal prosecution; and
     proposing appropriate administrative, legislative and 
regulatory changes to prevent employee misclassification from 
occurring.

    After almost 3 years of operation and an unprecedented level of 
inter- and intra-agency coordination, the Task Force has made great 
progress on these goals. Unlike most areas of employment, 
misclassification cuts across many areas of Federal, State and local 
law enforcement. Prior to the creation of the Task Force, if one State 
agency--or division within a State agency--discovered a 
misclassification violation or received a tip about a potential 
violation, it did not usually refer it to another State agency or 
division. The Task Force tears down the silos of government agencies 
and promotes collaboration, while at the same time ensuring 
confidential data is protected, and used only for enforcement purposes.
    Through joint enforcement sweeps, coordinated investigations, 
referrals of audit results and data-sharing, the Task Force uses a 
coordinated approach to enforcement. Our process ensures that an 
employer who is found to be engaging in misclassification is 
financially and legally liable for all of the resulting violations. 
Violations that are determined to be criminally fraudulent are referred 
to the State attorney general or local district attorneys for criminal 
prosecution.
    We hold media events around the State to publicize the results of 
our sweeps. This publicity raises public awareness of the issue, 
promotes compliance by businesses, and emphasizes that 
misclassification is illegal and hurts the competitiveness of 
businesses who play by the rules--which in turn hurts workers.
    We have also raised the level of scrutiny given to 
misclassification cases. Joint sweep and enforcement cases are chosen 
strategically and are evaluated in a coordinated fashion. Strategies 
are pursued in each case for the greatest deterrent effect. This past 
fall, New York also conducted comprehensive cross-training of 
investigators from our partner agencies to help them recognize 
violations in other subject areas, to share investigative and 
interviewing techniques, and to increase awareness of misclassification 
issues.
    The coordination among State agencies also allows for efficiencies 
that lead to greater enforcement. Through May 31, 2010, we have 
received over 5,600 tips or leads (through emails and phone calls). We 
have shared those tips with our partners, and have further shared 
information on an additional 3,500 cases of interest to our partners. 
Each agency can use the tips, evidence, interviews and audits obtained 
by other State agencies in conducting its own enforcement efforts. 
These types of efficiencies are essential as we all strive to do more 
with fewer resources. Currently, the Task Force and its partner 
agencies do not have dedicated or additional enforcement resources for 
misclassification. Instead, we use the existing resources of the 
partner agencies, which has impacted the ability of our State-funded 
enforcement unit to conduct their regular tasks. While we have been 
able to do a great deal, we are hampered by our lack of 
misclassification resources and our eroding enforcement resources. 
Despite the limited resources, our efforts are making a difference in 
New York. With increased national focus and support to the States, we 
could greatly expand on the results we have already achieved.
    The Obama administration's request for an additional $25 million 
will help provide needed enforcement resources to penalize employers 
that improperly misclassify employees as independent contractors. When 
considering this and related Federal resource investments, please note 
the cost of these investigations can be minimal in comparison to the 
return on investment related to bringing businesses into compliance. 
For example, a sweep performed recently at one construction site cost 
the State approximately $25,000 in staff and administrative costs, yet 
the sweep yielded $81,313 in additional taxes and $27,566 in penalties. 
And this includes neither the restitution of wages to impacted 
employees nor the future benefit to the competing employers who follow 
the rules.
                        the results for new york
    Worker misclassification takes many forms. We have found 
misclassification in large and small cities, and in poor, middle-class 
and affluent communities. Some employers intentionally underreport the 
number of workers in their business. NYSDOL has visited 24-hour diners 
where the employer lists five family members on its unemployment 
filings but the visit shows that at least 20 workers are needed to run 
the business. We have also found employers with a business model of 
core employees, who work under the direction and control of the 
employer, who are told to create separate business entities to appear 
as independent contractors. We also often see subcontracting within a 
business entity where one group of workers is properly paid on the 
books and another group of workers, who work side-by-side with the 
first group, are paid off-the-books by a subcontractor.
    Moreover, we have found that employers owed more than $14 million 
in unpaid wages and overtime to workers identified by the NYSDOL 
Division of Labor Standards. We have referred 16 employers for felony 
prosecutions, and to date, 4 employers (or their corporations) have 
been convicted of crimes related to misclassifying their workers. 
Please note, only the most egregious cases are referred for 
prosecution: the primary goal is to bring employers into compliance and 
to ensure that workers are paid what they are owed including applicable 
civil penalties.
    Just this month, we announced the results of four worker 
misclassification sweeps on construction sites around New York State 
that brought the issue of this epidemic to the public's attention. In 
all four of these cases, large construction projects were being built 
by mainstream, established developers or contractors. Yet, many of the 
workers on the project, hired by subcontractors, were either being 
misclassified as independent contractors or being paid off-the-books 
and were subject to serious labor law violations. In these cases, 
subcontractors on projects to construct private, upscale off-campus 
housing for students near three different State and private colleges 
and a major new hospital were found to be cheating 281 workers out of 
more than $275,000 in wages and overtime. We have also issued nearly 
$430,000 in penalties for these wage violations and have assessed over 
$167,000 in unemployment insurance taxes and penalties on these 
projects.
    These cases also brought to light instances of the serious 
mistreatment of workers and the human cost of misclassification. In one 
case, we received a call from workers who were brought in from out-of-
state, had worked for nearly a month without pay, and then were fired 
and abandoned at a mall parking lot. They were stranded and had no 
money to get home. Similarly, we were contacted by a store owner near 
one of the construction projects because six workers were left stranded 
without money after working on the project for 3 months without being 
paid. They were being housed by the subcontractor in an apartment and 
only given some money for food.
    In an effort targeted at assessing compliance in urban and suburban 
retail tracts, we conducted four ``Main Street'' sweeps in different 
parts of New York State where we walked door-to-door and investigated 
most businesses along a retail strip. Of the 303 businesses visited, 
nearly 40 percent had UI misclassification violations, nearly 25 
percent had labor standards violations, and 6 percent were issued stop-
work orders by the Workers' Compensation Board for lack of workers' 
compensation coverage. UI findings on the firms visited indicated over 
1,600 misclassified workers and unpaid UI taxes of nearly $398,000.
    These results from teams of dedicated Task Force investigators from 
multiple State agencies brought to light the grim reality of employee 
misclassification and its impact on real workers. But this is only part 
of the story. Our discussions with legitimate employers, unions and 
business organizations revealed the negative impact on law-abiding 
employers who are playing by the rules everyday and trying to survive 
in this difficult economy. This illegal practice means that legitimate 
employers are underbid nearly every time by unscrupulous contractors 
who often have no connection to local communities. In one of our 
investigations, we found one painting subcontractor, which treated all 
55 of its employees as independent contractors. The painting contractor 
who pays taxes on behalf of all of its employees cannot compete with 
the painting contractor who considers each of its employees to be an 
independent contractor. The diner or supermarket which pays all of its 
employees on the books cannot charge the same prices as the one that 
tries to cheat workers and our competition-based system.
        new york's task force has been a model for other states
    Since the New York Joint Enforcement Task Force began in 2007, 12 
other States have established structures similar to the one in New 
York. Last October, the NY Task Force co-sponsored a Northeast Regional 
Summit on Misclassification with Massachusetts. More than 70 people, 
representing nine States, attended the Summit and discussed 
enforcement, data sharing strategies and greater coordination of 
enforcement among States. We now have monthly phone calls with these 
northeast States to discuss best practices and strategies. Many of the 
States have their own excellent statistics to report on the benefits of 
targeted enforcement, data-sharing and collaboration between State 
agencies.
                      additional national efforts
    New York, as well as 36 other States, has also partnered with the 
IRS, USDOL, the National Association of State Workforce Agencies 
(NASWA), and the Federation of Tax Administrators in the Questionable 
Employment Tax Practices (QETP) program. In fact, New York has engaged 
in data sharing with the IRS for 24 years, using at least 10 different 
IRS data extracts to enhance compliance efforts. With the advent of 
QETP, our ability to detect misclassification and other schemes aimed 
at employment tax avoidance has been enhanced. Since 2007, QETP data 
sharing has assisted NYS in finding over 21,500 misclassified workers, 
over $5 million in additional UI taxes due, and unreported wages 
exceeding $389 million.
                          federal legislation
    What I have described today is our Task Force accomplishments with 
targeted enforcement, limited shared resources, and outreach and 
education. However, given the extent of this problem, and given the 
losses to workers, the Government and legitimate businesses, we need to 
do much more. While New York State has been a leader in enforcement 
against fraud and misclassification, we need Federal legislation to 
help provide consistent and stronger enforcement. A major reason for 
greater Federal involvement is that there are employers with national 
operations who use the same illegal practices in many of the States in 
which they operate. Other employers, such as construction companies, 
use State boundaries as a way to try to avoid the law, and when they 
leave, we have a much harder time enforcing our orders against them. 
Unlike the States, the Federal Government has the ability to enforce 
the laws across jurisdictions, and therefore would be more effective 
than States working in isolation.
    Our experience in New York demonstrates the value and importance of 
many of the provisions within S. 3254. The requirement that offices and 
divisions within the U.S. Department of Labor share information on 
misclassification violations will have the same positive effects that 
our own data-sharing and enforcement coordination has had in New York. 
The requirement that the USDOL Wage and Hour Division carry out 
targeted enforcement will also have the same positive effects 
nationally that our own targeted sweeps have had in the State.
    Additionally, the provisions in the bill requiring the U.S. 
Department of Labor to measure and credit States' performance in 
conducting Unemployment Insurance (UI) tax audits will lead to greater 
detection of misclassification will greatly aid the efforts of our UI 
Division in NY State and State UI Divisions across the country. New 
York has advocated for, and strongly encourages USDOL to count overall 
State efforts aimed at addressing misclassification through a 
broadening of definitions to include both audits under USDOL Tax 
Performance standards as well as other types of investigations States 
may engage in. Doing so will provide the broadest possible picture of 
the misclassification that is occurring and will ensure that States use 
their resources to go beyond the standard audits and conduct other 
types of investigations.
    Finally, many of the S. 3254 legislative provisions will lead to 
the detection and deterrence business models using incorrectly 
classified independent contractors. The bill's provisions that require 
employers to keep records that accurately reflect the classification of 
each worker, that create penalties for failure to keep these records, 
and that provide a presumption of employment for employees where the 
records are not kept will strengthen the ability of both the Federal 
Government and the States to detect misclassification violations. The 
bill will further deter misclassification violation by clarifying that 
worker misclassification alone is a violation of the Fair Labor 
Standards Act, as well as by increasing penalties for this violation. 
Additionally, the requirement that government Web sites provide workers 
with notification of their employment status and rights will help lead 
to more complaint-driven compliance. New York also encourages the 
addition of a specialized notice for workers who are treated as 
independent contractors for tax purposes under section 530 of the IRS 
code.
    Employee misclassification is pervasive and harmful to our 
employers, workers, government and our economy. We must combine forces 
and take new steps to combat it. The provisions of S. 3254 will add 
important tools to the Federal Government's ability to enforce the Fair 
Labor Standards Act in regards to misclassification. On behalf of 
Governor Paterson, New York looks forward to continuing to work with 
Congress, Federal agencies, employers, and other States on this 
important issue. Again, I thank you for this opportunity and welcome 
your questions.

    The Chairman. Thank you very much, Ms. Gardner.
    And now Mr. Battaglino. Welcome and please proceed.

 STATEMENT OF FRANK BATTAGLINO, OWNER, METRO TEST AND BALANCE, 
                      CAPITOL HEIGHTS, MD

    Mr. Battaglino. Chairman Harkin and members of the 
committee, thank you for inviting me here today.
    My name is Frank Battaglino and I am the owner of Metro 
Test and Balance located in Capitol Heights, MD. I am here 
today representing the Sheet Metal and Air Conditioning 
National Association, as well as the Campaign for Quality 
Construction.
    The Campaign for Quality Construction represents six 
construction contractor associations with approximately 27,000 
contractor members nationwide. The majority of the CQC members 
are family-owned businesses, most with 10 or fewer employees.
    I am here today because it is time for Congress to act. 
SMACNA testified in 1996 on the issue of misclassification and 
stated that worker misclassification in the construction 
industry was rising rapidly. Nothing was changed. The epidemic 
continues to grow, and the rise has nothing to do with career 
enhancement or worker opportunity. It has everything to do with 
unfair, low-wage competition.
    As I said before, I am the owner of Metro Test and Balance. 
I presently employ 55 people in the Washington metropolitan 
area. I have been in business since 1991 when I started my 
company. I began with a set of equipment that I mustered 
together with an old Ford van. I now have a 15,000-square foot 
facility with over 20 trucks on the road.
    A person takes risks when they decide to become a business 
owner, but they also accept certain responsibilities. Workers' 
rights and workers' conditions are important to me now, but 
they were important to me 20 years ago when I started. I was 
still able to grow and make money. I am living proof that when 
a company chooses the path of legality and responsibility for 
its workers' rights, it can still be very successful. Do not 
let employers who do not want to do the right thing tell you 
otherwise.
    My company performs a number of services ranging from 
commercial HVAC duct work fabrication, installation, test and 
balance, and indoor air quality. Our customers include Federal, 
State, and local governments, as well as private work.
    We face a very big disadvantage due to the worker 
misclassi-
fication. Lately we are being beat out of competitive bids by 
unusually low bids. This is a direct result of companies 
deliberately misclassifying their workers as independent 
contractors. There is no other way we could be outbid by such a 
large amount.
    Maryland recently passed a law to help with this problem in 
the construction industry, but the law is new and it focuses 
only on the construction industry.
    A company that regularly uses so-called independent 
contractors can be at least 20 to 30 percent below our bids. So 
an honest company gets beat out by a company scamming the 
system and plain hard-working people are just being taken 
advantage of.
    This does not hurt just small companies. It hurts big 
companies too. Let me give you one example of a large SMACNA 
contractor in Atlanta with several hundred workers. The 
contractor had a new potential worker come to him to ask if he 
could sign up for a worker training program. The guy had been 
working for another contractor for several years, but in order 
to work, the guy had to agree to be an independent contractor. 
The Atlanta contractor now understands how he was being beat 
out on a lot of bids.
    This causes a number of problems not only for companies but 
also for taxpayers, Federal, State, and local governments. They 
lose revenue and we end up paying for social services that 
usually are covered by employee-mandated benefits. As an 
employer, I pay 50 percent of my employees Social Security and 
Medicare. I pay unemployment insurance and workers' comp 
insurance.
    By the way, this past year--this April--I paid my first 
quarter Maryland workers' comp/unemployment insurance premiums 
in April of this year, and the check was for over $32,000. That 
was the highest it has ever been. So it is ridiculous and that 
is just the first quarter, generally the highest, but it was 
the first quarter.
    I am also required to pay overtime. There are a lot of 
expenses associated with being an employer, and I do not mind. 
But it is time for Congress to make sure all businesses are 
paying their fair share. Responsible employers and government 
alike have to partner for this cause. With the loss of tax 
revenues, we both are being asked--more accurately being 
forced--to cover these expenses while companies scamming the 
system are benefitting with higher profits and less 
responsibility. Right now, unethical businesses are stealing 
work from honest contractors with little fear of getting 
caught. There is no direct law prohibiting misclassification, 
and there are too many loopholes and violations in the laws 
that we do have.
    I urge the committee to please take quick and strong action 
to stop worker misclassification and to pass S. 3254, the 
Employee Misclassification Prevention Act, as soon as possible. 
Thank you.
    [The prepared statement of Mr. Battaglino follows:]
                 Prepared Statement of Frank Battaglino
                                summary
    Metro Test and Balance in Capitol Heights, MD.

     Representing the Sheet Metal and Air Conditioning 
Contractors' National Association (SMACNA) and the Campaign for Quality 
Construction (CQC).
     CQC represents six construction contractor associations 
with approximately 27,000 contractor members nationwide.
     The vast majority of SMACNA members and CQC members are 
very small, family-owned businesses--the majority with 10 or fewer 
employees.

    Time for Congress to act.

    SMACNA testified in 1996 on the issue of misclassification and 
stated that worker misclassification in the construction industry was 
rising rapidly. Nothing has changed.

     The epidemic continues to grow and has nothing to do with 
career enhancement or worker opportunity.
     It has everything to do with unfair, low-wage competition. 
It is important to legitimate businesses like mine all across the 
country.

    Background--employ 55 people in the Washington metropolitan area.

    Work is commercial HVAC duct work fabrication and installation, 
Test and Balance services and indoor air quality testing. Customers 
include Federal, State and local governments and private work--a host 
of pharmaceutical, defense-based contractors and numerous medical 
facilities.

     I have been in business since 1991 when I started my 
company.
     Purchased some equipment and an old Ford van.
     I now have a 15,000-square foot facility with over 20 
trucks on the road.

    A person takes risks when they decide to become a business owner 
but--they also accept certain responsibilities.

     I was still able to grow and make money.
     I am proof that when a company chooses the path of 
legality, it can still be successful.
     Don't let employers who don't want to do the right thing 
tell you otherwise.

    Misclassification is hurting my business.

    We are put at a competitive disadvantage due to the worker 
misclassification problem. Other companies deliberately misclassify 
their workers to save money.

     A company can save at least 20 to 30 percent on labor 
costs by misclassifying.
     I pay 50 percent of my employees' social security and 
medicare, plus unemployment insurance and worker's compensation 
premiums. (My 1st quarter unemployment insurance was $32,000). I am 
required to pay overtime & provide OSHA safety training and more.
     Honest companies gets beat out by companies scamming the 
system--who then make higher profits and have fewer responsibilities.
     Big companies & small companies get hurt--SMACNA example 
from large Atlanta firm.
     Taxpayers and Federal, State and local governments lose 
tax revenue and pick up the tab for a variety of social services.
     Maryland recently enacted a law addressing 
misclassification in construction.

    Unethical business owners are ``stealing'' work from honest 
contractors with little fear of getting caught--there is no direct law 
prohibiting the practice and too many loopholes.
    I urge the committee to take quick and strong action to stop worker 
misclassification and to pass S. 3254, The Employee Misclassification 
Prevention Act as soon as possible.
                                 ______
                                 
    Good morning Chairman Harkin and members of the committee. Thank 
you for the opportunity to testify here today.
    My name is Frank Battaglino and I am the owner of Metro Test and 
Balance, Inc. located in Capitol Heights, MD. I am here today 
representing the Sheet Metal and Air Conditioning Contractors' National 
Association as well as the Campaign for Quality Construction.\1\
---------------------------------------------------------------------------
    \1\ The Campaign for Quality Construction represents six 
construction associations allied in an ongoing legislative Campaign for 
Quality Construction. These groups are: the Mechanical Contractors 
Association of America (MCAA), the Sheet Metal and Air Conditioning 
Contractors' National Association (SMACNA), the National Electrical 
Contractors Association (NECA), the International Council of Employers 
of Bricklayers and Allied Craftworkers (ICE), the Finishing Contractors 
Association (FCA), and The Association of Union Constructors (TAUC). 
According to 2002 U.S. Census Bureau Construction Statistics, specialty 
subcontracting comprises 61 percent of industry employment.
    Our organizations represent the high-skill, leading edge sector of 
the specialty contracting industry, providing the top-tier training, 
wages, health and welfare and pension benefits necessary for a strong 
workforce skill base. According to 2002 U.S. Census Bureau Construction 
Statistics, specialty subcontracting comprises 61 percent of industry 
employment. The figure for the specialty segment of the industry, 
however, is slightly higher in more recent figures published by the 
U.S. Department of Labor's Bureau of Labor Statistics.
---------------------------------------------------------------------------
    The Sheet Metal and Air Conditioning Contractors' National 
Association (SMACNA) is supported by more than 4,500 construction firms 
engaged in industrial, commercial, residential, architectural and 
specialty sheet metal and air conditioning construction in public and 
private markets throughout the United States. Working on a wide variety 
of projects across the Nation in urban and suburban areas, SMACNA 
contractors specialize in heating, ventilating and air conditioning; 
architectural sheet metal; industrial sheet metal; kitchen equipment; 
specialty stainless steel work; manufacturing; siding and decking; 
testing and balancing; service; and energy management and maintenance.
    I am also representing The Campaign for Quality Construction which 
represents six construction contractor associations with approximately 
27,000 contractor members nationwide. CQC members compete in public and 
private sector markets and perform both as prime and subcontractors. I 
would like to emphasize that the vast majority of SMACNA members and 
CQC members are very small, family-owned businesses--the majority of 
which have 10 or fewer employees.
    I am here today because it is time for Congress to act. SMACNA 
testified in 1996 on the issue of misclassification and stated that 
worker misclassification in the construction industry was rising 
rapidly. Nothing has changed. The epidemic continues to grow and the 
rise has nothing to do with career enhancement or worker opportunity. 
It has everything to do with unfair, low-wage competition. Addressing 
this problem is important with regard to workers' rights in our country 
and it is important to legitimate businesses like mine all across the 
country.
                             my background
    As the owner of Metro Test and Balance, I currently employ 55 
people in the Washington metropolitan area. I have been in business 
since 1991 when I started my own company. I started out with a set of 
equipment that I mustered together and an old Ford van. I now have a 
15,000-square foot facility with over 20 trucks on the road.
    A person takes risks when they decide to become a business owner 
but they also accept certain responsibilities. Workers' rights and 
working conditions are important to me now, but they were also 
important to me in my old Ford van in 1991 when I started.
    I was still able to grow and make money. I am living proof that 
when a company chooses the path of legality and responsibility for its 
workers' rights it can still be very successful. Don't let employers 
who don't want to do the right thing convince you that it can't be done 
or that following the law will kill entrepreneurship. It should be 
noted that movement from skilled production jobs into supervisory, 
management and even business ownership are unrivaled in the union 
sector of the construction industry.
      what we do and how misclassification is hurting my business
    My company performs a number of services ranging from commercial 
HVAC duct work fabrication and installation, Test and Balance services 
to indoor air quality testing. Our customers include Federal, State and 
local governments as well as private work--a host of pharmaceutical, 
defense-based contractors and numerous medical facilities.
    We have found ourselves bidding for work at a disadvantage because 
of the worker misclassification problem. Increasingly we were being 
beat out of competitive bids by unusually low bids. We know this is a 
direct result of companies deliberately misclassifying their workers as 
independent contractors. There is no other way we could be outbid by 
such large amounts. In fact, the problem was so pervasive that the 
State of Maryland recently enacted a law to address the problem in 
construction.
    Misclassification occurs when an employer improperly classifies a 
worker as an independent contractor. Misclassification is known to be 
particularly prevalent in the construction industry and is blatantly 
used as a cost-cutting tool. Employers who misclassify their workers 
reap substantial savings and gain unfair competitive marketplace 
advantages by avoiding payment of Social Security and Medicare taxes, 
payment of Federal and State unemployment insurance taxes, and payment 
of workers' compensation premiums. Employers who misclassify workers as 
independent contractors gain other competitive advantages such as lower 
administrative costs and more limited liability.
    A company that regularly uses this practice can be at least 20 to 
30 percent below our bids. So an honest company gets beat out by a 
company scamming the system and plain hard working people are just 
being taken advantage of. Vague, complex and subjective rules regarding 
independent contractor determinations, legal loopholes and lax 
enforcement all contribute to the growth of this problem.
    I am not the only one with this problem. Let me give you one 
example of a large SMACNA contractor in Atlanta. The contractor had a 
new potential worker come to him to ask if he could sign up for a 
worker training program. The guy had been working for another 
contractor for several years but in order to work the guy had to agree 
to be an independent contractor. The Atlanta contractor now understands 
why he was losing bids and he is a larger contractor with several 
hundred workers. So misclassification hurts legitimate contractors 
large and small.
    This causes a number of problems not only for companies such as 
mine but also for taxpayers, Federal, State and local governments that 
lose tax revenue. There are broader social consequences when taxpayers 
and governments end up paying for social services that are usually 
covered by employee-mandated benefits.
    As an employer I pay 50 percent of my employees' Social Security 
and Medicare. I pay unemployment insurance and worker's compensation 
premiums. By the way, I paid my Maryland worker's unemployment 
insurance premiums in April of this year and the check was for over 
$32,000. The highest it has ever been. I am required to pay overtime. 
There are a lot of expenses associated with being an employer and I 
don't mind, but it is time for Congress to make sure all businesses are 
paying their fair share.
                               conclusion
    Responsible employers and government alike have to partner for this 
cause. CQC employers contribute to a healthy economy and provide 
opportunities for economic advancement for employees. As I have said in 
my testimony, too often these ethical contractors compete against 
employers, in both the private and public market, who deliberately 
classify workers as independent contractors and who otherwise are not 
fully compliant with the law. Unfortunately, it is an epidemic that 
contributes to a degradation of the quality of the workforce and to the 
quality of life for American workers.
    With the loss of tax revenue both ethical companies and taxpayers 
are being asked, or more accurately, being forced to cover these 
expenses while these companies scamming the system are benefiting with 
higher profits and less responsibility.
    It is not too strong to say unethical business owners are 
``stealing'' work from honest contractors with little fear of getting 
caught. There is no direct law prohibiting misclassification and too 
many loopholes for violations of the laws we do have.
    The CQC supports, without reservation, efforts to stem the 
workforce degradation that is the direct result of misclassification. I 
urge the committee and Congress to take quick and strong action to stop 
worker misclassification and to pass S. 3254, The Employee 
Misclassification Prevention Act as soon as possible.
    Thank you.

    The Chairman. Mr. Battaglino, thank you very much for that 
very profound statement and for being here.
    We will turn to Ms. Ruckelshaus, and please proceed.

   STATEMENT OF CATHERINE K. RUCKELSHAUS, LEGAL CO-DIRECTOR, 
         NATIONAL EMPLOYMENT LAW PROJECT, NEW YORK, NY

    Ms. Ruckelshaus. Thank you, Chairman Harkin and members of 
the committee. Thank you for the opportunity to testify today.
    My name is Cathy Ruckelshaus and I am the legal co-director 
of the National Employment Law Project. We are a nonprofit 
based in New York, and we promote access to and retention of 
good jobs for low-income workers.
    At NELP, we have had the opportunity to learn about job 
conditions in industries such as agriculture, construction and 
day labor, garment, meat packing, janitorial, trucking, home 
care, and retail. In too many of these industries we see sub-
minimum wages, lack of the health and safety protections, and 
we see employees being treated as independent contractors when 
they should not be.
    Today and in my written testimony, I describe independent 
contractor misclassification and its impacts on workers, on 
State and Federal Government coffers, and on law-abiding 
employers.
    We have heard this morning about who independent 
contractors are, but I think it is important to note, as has 
been noted, this morning that we all know that every day 
employers legitimately contract with other independent 
businesses typically to perform specialty jobs that the 
contractor performs for a variety of other customers. These 
routine practices are not the subject of independent contractor 
misclassification reforms.
    Second, genuine independent contractors constitute a small 
proportion of the American workforce because by definition, an 
independent contractor is in business for him or herself. True 
independent contractors bring a specialized skill. They invest 
capital in their business, and they perform a service that is 
not part of the receiving firm's overall business. True 
independent contractors aim to make a profit. They are 
entrepreneurs that can pass on increased costs to their 
customers like higher gas prices or an increase in the cost of 
safety equipment. Examples of true independent businesses are a 
plumber, called in by an office manager to fix a leaky sink, or 
a computer technician on a retainer with a manufacturing 
company to troubleshoot computer glitches.
    How does it happen? We have heard that employers 
misclassify employees as independent contractors by giving them 
a 1099 instead of a W-2. They often pay them off the books 
providing no tax reporting or withholding. Many of these 
employers require workers to sign a contract stating that they 
are an independent contractor as a condition of getting a job. 
They do this because the employers can be off the hook for 
workplace rules. They can be off the hook for safety net 
benefits. They can save upwards of 30 percent of payroll costs, 
and they can underbid their competitors in labor-intensive 
sectors, especially like construction and building services.
    We have heard again this morning that calling employees 
independent contractors is a broad problem and it affects a 
wide range of jobs. I am going to just mention three examples 
that I have experienced in my practice.
    One is Faty Ansoumana who worked as a delivery worker in a 
Gristede's store in Manhattan. He worked 7 days a week, 12 
hours a day for $90 a week. He and his fellow delivery workers 
were hired through two middlemen labor brokers who stationed 
the workers in stores around New York City. They reported 
directly to the stores and provided deliveries for the 
customers. When we challenged the low pay, the store said the 
workers were not their employees and the labor broker said they 
were all independent contractors.
    Janitors from South America and Korea were sold franchise 
agreements in Massachusetts for the ability to clean stores in 
Massachusetts. They were told where to clean, what stores to 
clean, and what materials to use. They were found to be 
employees and got unemployment benefits even though their 
employer told them they were independent contractors.
    And NELP represented some home care workers in Pennsylvania 
who were not paid for travel time and overtime. Once we filed 
the lawsuit, their employer called everybody in and said sign 
this independent contractor agreement. You are no longer our 
employees. If you want to keep your job, you have to sign this 
independent contractor agreement. This was a tactic obviously 
to try to avoid the liabilities, but it did not work.
    The impacts are when workers are labeled an independent 
contractor, even though it does not have any necessarily legal 
meaning, it does carry a punch and it deters workers from 
claiming their rights. We have a complaint-driven system and 
that is a big problem.
    We have heard already that it impacts the States and 
Federal coffers. My testimony outlines that 20 States have done 
studies tallying up the lost dollars and it is in the billions.
    What we should do about it is follow the Department of 
Labor's lead and target misclassification and we should also 
pass the Employee Misclassification Protection Act which is 
essentially a right-to-know or transparency bill. The EMPA 
would require employers just to notify workers of their status 
and then to keep records on hours and pay. These are typically 
records that employers are already keeping even for their 
contractors, for vendors and for other contractors, including 
payments and hours off and that are worked for a job. These 
proposed reforms in the EMPA are reasonable, possible, and 
necessary. They could be implemented with little effort and to 
much impact on our country's workers.
    Thank you for permitting me to testify and I look forward 
to the questions.
    [The prepared statement of Ms. Ruckelshaus follows:]
             Prepared Statement of Catherine K. Ruckelshaus
                                summary
    My name is Cathy Ruckelshaus, and I am the legal co-director of the 
National Employment Law Project (NELP), a non-profit organization that 
seeks to promote access to and retention of good jobs for workers. In 
the over 20 years I have spent working with and on behalf of workers 
around the country, I have been struck by the success some businesses 
have had in devising ways to evade responsibility for fair pay, health 
and safety, and other workplace standards. Calling employees 
independent contractors (``1099-ing'' them, so-called because of the 
IRS Form 1099 issued to independent contractors), and the related 
tactic of paying workers off the books or in cash with no tax reporting 
or withholding, is a top choice of these employers.
    My testimony describes independent contractor misclassification and 
its impacts on workers, on State and Federal Government coffers, and on 
law-abiding employers. It highlights the heightened activity on this 
important issue in the States, following studies showing staggering 
losses in the billions of dollars in the form of unpaid and 
uncollectible income taxes, payroll taxes, and unemployment insurance 
and workers' compensation premiums due to this practice. I support the 
introduced Federal Employee Misclassification Protection Act (EMPA), 
and suggest some further ideas for policy reforms to contend with this 
unchecked and growing practice.
    Businesses legitimately contract every day with other independent 
businesses, often to perform specialty jobs that the contractor 
performs for a variety of customers. Yet, genuine independent 
contractors constitute a small proportion of the American workforce, 
because by definition, an ``independent contractor'' is in business for 
him- or herself. True independent contractors bring specialized skill, 
invest capital in their business, and perform a service that is not 
part of the receiving firm's overall business.
    Calling employees ``independent contractors'' is a broad problem 
and affects a wide range of jobs. It could be happening to someone you 
know. A 2000 study commissioned by the U.S. Department of Labor found 
that up to 30 percent of firms misclassify their employees as 
independent contractors. Many States have studied the problem and find 
high rates of misclassification, especially in construction, where as 
many as 4 in 10 construction workers were found to be misclassified.
    If enacted, the EMPA would be an important first step to encourage 
transparency in employment relationships. If workers know about their 
employment classification and the impacts of that status, they will be 
better prepared to report any violations. In addition, U.S. DOL will be 
better equipped to determine whether there is compliance if employers 
maintain basic records of their contractors's pay and hours.
                                 ______
                                 
    Senator Harkin and members of the committee, thank you for this 
opportunity to testify today on the important subject of independent 
contractor misclassification and its impacts on workers and their 
families, law abiding employers, and our economy.
    My name is Cathy Ruckelshaus, and I am the legal co-director of the 
National Employment Law Project (NELP), a non-profit organization that 
seeks to promote access to and retention of good jobs for workers. In 
the over 20 years I have spent working with and on behalf of workers 
around the country, I have been struck by the success some businesses 
have had in devising ways to evade responsibility for fair pay, health 
and safety, and other workplace standards. Calling employees 
independent contractors (``1099-ing'' them, so-called because of the 
IRS Form 1099 issued to independent contractors), and the related 
tactic of paying workers off the books or in cash, is a top choice of 
these employers.
    I and my colleagues at NELP have worked to ensure that all workers 
receive the basic workplace protections guaranteed in our Nation's 
labor and employment laws; this work has given us the opportunity to 
learn up close about job conditions in a wide variety of industries: 
garment, agricultural, construction and day labor, janitorial, retail, 
hospitality, home health care, trucking, poultry and meat-packing, 
high-tech, and other services. We have seen low, often sub-minimum 
wages, lack of health and safety protections and work benefits, and 
rampant discrimination and mistreatment of workers in these jobs.
    An important part of our work focuses on simply enforcing the basic 
fair pay laws already on the books. Because unscrupulous employers use 
independent contractor schemes to flout these rules, we have worked 
with allies in State legislatures and agencies to tighten enforcement 
of core labor standards in those sectors where independent contractor 
abuses persist. This background in enforcement and State practices 
informs my testimony today.
    Today, I will describe independent contractor misclassification and 
its impacts on workers, on State and Federal Government coffers, and on 
law-abiding employers. I will highlight the heightened activity on this 
important issue in the States, following the State studies showing 
staggering public losses due to the practice. I will conclude with 
comments on the introduced Federal Employee Misclassification 
Protection Act (EMPA), and suggest some further ideas for policy 
reforms to contend with this unchecked and growing practice.
 i. what is independent contractor misclassification and how common is 
                                  it?
    Employers legitimately contract every day with other independent 
businesses, typically to perform specialty jobs that the contractor 
performs for a variety of customers. These routine practices are not 
the subject of independent contractor misclassification reforms.
    Yet, genuine independent contractors constitute a small proportion 
of the American workforce, because by definition, an ``independent 
contractor'' is in business for him- or herself.\1\ True independent 
contractors bring specialized skill, invest capital in their business, 
and perform a service that is not part of the receiving firm's overall 
business. Examples are a plumber called in by an office manager to fix 
a leaky sink in the corporate bathroom, or a computer technician on a 
retainer with a manufacturing company to trouble-shoot software 
glitches.
---------------------------------------------------------------------------
    \1\ See, Employment Arrangements: Improved Outreach Could Help 
Ensure Proper Worker Classification, GAO-06-656 (July 2006), at p. 43.
---------------------------------------------------------------------------
    But, with increasing frequency, employers misclassify employees as 
``independent contractors,'' either by giving their employees an IRS 
Form 1099 instead of a Form W-2, or by paying the employee off-the-
books and providing no tax forms or tax reporting and withholding. Many 
of these employers require workers to sign a contract stating that they 
are an independent contractor as a condition of getting a job. Here are 
some reasons why this independent contractor misclassification is on 
the rise:

     Firms argue they are off-the-hook for any rule protecting 
an ``employee,'' including the most basic rights to minimum wage and 
overtime premium pay, health and safety protections, job-protected 
family and medical leave, anti-discrimination laws, and the right to 
bargain collectively and join a union. Workers also lose out on safety-
net benefits like unemployment insurance, workers compensation, and 
Social Security and Medicare.
     Misclassifying employers stand to save upwards of 30 
percent of their payroll costs, including employer-side FICA and FUTA 
tax obligations, workers compensation and State taxes paid for 
``employees.''
     Businesses that 1099 and pay off-the-books can underbid 
competitors in labor-intensive sectors like construction and building 
services, and this creates an unfair marketplace.

    The U.S. Government Accountability Office (GAO) concluded in its 
July 2006 report, ``employers have economic incentives to misclassify 
employees as independent contractors because employers are not 
obligated to make certain financial expenditures for independent 
contractors that they make for employees, such as paying certain taxes 
(Social Security, Medicare, and unemployment taxes), providing workers' 
compensation insurance, paying minimum wage and overtime wages, or 
including independent contractors in employee benefit plans.'' \2\
---------------------------------------------------------------------------
    \2\ Employment Arrangements: Improved Outreach Could Help Ensure 
Proper Worker Classification, GAO-06-656 (July 2006), at p. 25.
---------------------------------------------------------------------------
    Most workers in labor-intensive and low-paying jobs are not 
operating a business of their own. As the U.S. Department of Labor's 
Commission on the Future of Worker-Management Relations (the ``Dunlop 
Commission'') concluded, ``[t]he law should confer independent 
contractor status only on those for whom it is appropriate--
entrepreneurs who bear the risk of loss, serve multiple clients, hold 
themselves out to the public as an independent business, and so forth. 
The law should not provide incentives for misclassification of 
employees as independent contractors, which costs Federal and State 
treasuries large sums in uncollected social security, unemployment, 
personal income, and other taxes.'' \3\
---------------------------------------------------------------------------
    \3\ U.S. Dep't of Labor, Commission on the Future of Worker-
Management Relations, (1995), available at http://www.dol.gov/_sec/
media/reports/dunlop/dunlop.htm#Table.
---------------------------------------------------------------------------
A. Misclassification is Found in Nearly Every Low-Wage Job Sector
    Calling employees ``independent contractors'' is a broad problem 
and affects a wide range of jobs. It could be happening to someone you 
know. A 2000 study commissioned by the U.S. Department of Labor found 
that up to 30 percent of firms misclassify their employees as 
independent contractors.\4\ Many States have studied the problem and 
find high rates of misclassification, especially in construction, where 
as many as 4 in 10 construction workers were found to be 
misclassified.\5\
---------------------------------------------------------------------------
    \4\ Lalith de Silva et al., ``Independent Contractors: Prevalence 
and Implications for Unemployment Insurance Program'' i-iv, prepared 
for U.S. Department of Labor, Employment and Training Division by 
Planmatics, Inc. (Feb. 2000), available at http://wdr.doleta.gov/
owsdrr/00-5/00-5.pdf.
    \5\ See Fiscal Policy Institute, ``New York State Workers 
Compensation: How Big is the Shortfall?'' (January 2007); Michael 
Kelsay, James Sturgeon, Kelly Pinkham, ``The Economic Costs of Employee 
Misclassification in the State of Illinois'' (Dept of Economics: 
University of Missouri-Kansas City: December 2006); Peter Fisher et 
al., ``Nonstandard Jobs, Substandard Benefits,'' Iowa Policy Project 
(July 2005); Francois Carre, J.W. McCormack, ``The Social and Economic 
Cost of Employee Misclassification in Construction (Labor and Worklife 
Program, Harvard Law School and Harvard School of Public Health: 
December 2004);'' State of New Jersey, Commission of Investigation, 
``Contract Labor: The Making of an Underground Economy'' (September 
1997).
---------------------------------------------------------------------------
    Most government-commissioned studies do not capture the so-called 
``underground economy,'' where workers are paid off-the-books, 
sometimes in cash. These workers are de facto misclassified independent 
contractors, because the employers do not withhold and report taxes or 
comply with other basic workplace rules. Many of these jobs are filled 
by immigrant and lower-wage workers.\6\
---------------------------------------------------------------------------
    \6\ Francois Carre, J.W. McCormack, ``The Social and Economic Cost 
of Employee Misclassi-
fication in Construction (Labor and Worklife Program, Harvard Law 
School and Harvard School of Public Health:'' December 2004), at p. 8.
---------------------------------------------------------------------------
    In my practice, I have met workers who were misclassified. Here are 
a couple of examples:

     Faty Ansoumana, an immigrant from Senegal, worked as a 
delivery worker at a Gristede's grocery store in midtown Manhattan. He 
worked as many as 7 days a week, 10-12 hours a day and his weekly 
salary averaged only $90. He and his fellow delivery workers, who had 
similar pay and hours, were all hired through two middlemen labor 
agents, who in turn stationed the workers at grocery and pharmacy chain 
stores throughout the city. The workers all reported directly to the 
stores and provided deliveries pursuant to the stores' set delivery 
hours and under the stores' supervision. Many delivery workers were 
required to bag groceries and to do other non-delivery work, including 
stocking shelves. When NELP challenged the abysmally low pay, the 
stores said the workers were not their employees, and the labor brokers 
said the deliverymen were independent contractors.\7\ We were able to 
recover $6 million for the over 1,000 workers in the lawsuit, but only 
after overcoming the stores' claims that they were not responsible.
---------------------------------------------------------------------------
    \7\ Ansoumana et al.  v. Gristedes et al., 255 F.Supp.2d 184 
(S.D.N.Y. 2003).
---------------------------------------------------------------------------
     Janitors from Central and South America and Korea were 
recruited by a large building services cleaning company, Coverall, 
Inc., to clean office buildings in MA and other States. The janitors 
were ``sold'' franchise agreements for tens of thousands of dollars, 
permitting them to clean certain offices assigned by Coverall. The 
janitors were told where to clean, what materials to use, and were not 
permitted to set their own prices for the cleaning services. When one 
janitor quit when she couldn't make ends meet, she applied for 
unemployment benefits in MA and was told she was an ``independent 
contractor'' and not eligible. She challenged that decision and 
Massachusetts' Supreme Judicial Court ruled in her favor. NELP wrote an 
amicus brief in Coverall and provided assistance.\8\
---------------------------------------------------------------------------
    \8\ Coverall North America, Inc. vs. Commissioner of the Division 
of Unemployment Assistance, SJC-09682, 447 Mass. 852 (2006).
---------------------------------------------------------------------------
     Home health care workers in Pennsylvania were hired as 
employees by a home health care agency to place them in individual 
homes, where they cared for elderly and disabled people. The employees 
were not paid overtime or for their time spent traveling from household 
to household during their workdays, and they brought a lawsuit with 
NELP's help to claim their unpaid wages. Several months after the 
lawsuit was filed, the home care agency told each of these employees 
that they had to sign an agreement calling them ``independent 
contractors'' if they wanted to keep their jobs. Nearly all of the 
workers did so to keep their jobs, even though none of the other 
aspects of their job conditions, pay, or assignment and direction 
changed, and none was running an independent business.\9\ Independent 
contractor misclassi-
fication occurs with an alarming frequency in: construction,\10\ day 
labor,\11\ janitorial and building services,\12\ home health care,\13\ 
child care,\14\ agriculture,\15\ poultry and meat processing.\16\
---------------------------------------------------------------------------
    \9\ Lee's Industries, Inc. and Lee's Home Health Services, Inc. and 
Bernice Brown, Case No. 4-CA-36904 (Decision by National Labor 
Relations Board Division of Judges), 2/25/10.
    \10\ Christian Livermore, State Fines Hospital Subcontractor in Pay 
Scheme, Times Herald-Record, June 10, 2010, http://
www.recordonline.com/apps/pbcs.dll/article?AID=/20100610/BIZ/6100321/-
1/NEWS; Francois Carre, J.W. McCormack, et al., ``The Social and 
Economic Cost of Employee Misclassification in Construction'' 2, Labor 
& Worklife Program, Harvard Law School and Harvard School of Public 
Health, Dec. 2004, available at http://www.faircontracting
.org/NAFCnewsite/prevailingwage/pdf/Work_Misclass_Stud_1.pdf.
    \11\ Abel Valenzuela and Nik Theodore, On the Corner: Day Labor in 
the United States (January 2006).
    \12\ See Coverall North America, Inc. vs. Commissioner of the 
Division of Unemployment Assistance, SJC-09682, 447 Mass. 852 (2006); 
Vega v. Contract Cleaning Maintenance, 10 Wage & Hour Cases 2d (BNA) 
274 (N.D. IL 2004).
    \13\ See Bonnette v. Cal. Health & Welfare Agcy., 704 F.2d 1465 
(9th Cir. 1983).
    \14\ See, e.g., IL Executive Order conferring bargaining status on 
child day care workers otherwise called independent contractors: http:/
/www.gov.il.gov./gov/execorder.cfm?eorder=34.
    \15\ Sec'y of Labor  v. Lauritzen, 835 F.2d 1529 (7th Cir. 1988).
    \16\ Employment Arrangements: Improved Outreach Could Help Ensure 
Proper Worker Classification, GAO-06-656 (July 2006), at p. 30.
---------------------------------------------------------------------------
    We find the same misclassifications in high-tech,\17\ delivery,\18\ 
trucking,\19\ home-based work,\20\ and the public \21\ sectors. These 
are the sectors that should be targeted by any enforcement efforts.
---------------------------------------------------------------------------
    \17\ Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir. 1996).
    \18\ Ansoumana et al. v. Gristedes et al., 255 F.Supp.2d 184 
(S.D.N.Y. 2003).
    \19\ Steven Greenhouse, The New York Times, Clearing the Air at 
American Ports, http://www.nytimes.com/2010/02/26/business/
26ports.html.
    \20\ Employment Arrangements: Improved Outreach Could Help Ensure 
Proper Worker Classification, GAO-06-656 (July 2006), at p. 31.
    \21\ Phillip Mattera, ``Your Tax Dollars at Work . . . Offshore,'' 
Good Jobs First (July 2004) http://www.goodjobsfirst.org/publications/
Offshoring_release.cfm.
---------------------------------------------------------------------------
         ii. what is the impact on workers and their families?
    Just because an employer calls a worker an ``independent 
contractor'' does not make it legally true. But, these labels carry 
some punch and deter workers from claiming rights under workplace laws 
that rely on individual complaints for enforcement.\22\ Because 
misclassified independent contractors face substantial barriers to 
protection under labor and employment rules, workers and their families 
suffer. The same occupations with high rates of independent contractor 
misclassification are among the jobs with the highest numbers of 
workplace violations.\23\ The result is, our ``growth-sector'' jobs are 
not bringing people out of poverty and workers across the socio-
economic spectrum are impacted.
---------------------------------------------------------------------------
    \22\ The vast majority of DOL's Wage & Hour Division's (WHD) 
enforcement actions are triggered by worker complaints. See, e.g. U.S. 
Gov't. Accountability Office, GAO-08-962T, Better Use of Available 
Resources and Consistent Reporting Could Improve Compliance 7 (July 15, 
2008) (72 percent of WHD's enforcement actions from 1997-2007 were 
initiated in response to complaints from workers); David Weil & Amanda 
Pyles, Why Complain? Complaints, Compliance, and the Problem of 
Enforcement in the U.S. Workplace, 27 Comp. Lab. L. & Pol'y J. 59, 59-
60 (2005) (finding that in 2004, complaint-derived inspections 
constituted about 78 percent of all inspections undertaken by WHD.)
    \23\ See, National Employment Law Project, Holding the Wage Floor,  
http://nelp.3cdn.net/95b39fc0a12a8d8a34_iwm6bhbv2.pdf.
---------------------------------------------------------------------------
    Workers could lose out on: (1) minimum wage and overtime rules; (2) 
the right to a safe and healthy workplace and workers' compensation 
coverage if injured on the job; (3) protections against sex harassment 
and discrimination; (4) unemployment insurance if they are separated 
from work and other ``safety net'' benefits; (5) any paid sick, 
vacation, health benefits or pensions provided to ``employees;'' (6) 
the right to organize a union and to bargain collectively for better 
working conditions, and (7) Social Security and Medicaid payments 
credited to employee's accounts.
   iii. what is the impact on federal and state government receipts?
    Federal and State governments suffer hefty loss of revenues due to 
independent contractor misclassification, in the form of unpaid and 
uncollectible income taxes, payroll taxes, and unemployment insurance 
and workers' compensation premiums.
Federal Losses
    A 1994 study by Coopers and Lybrand estimated the Federal 
Government would lose $3.3 billion in revenues in 1996 due to 
independent contractor misclassification, and $34.7 billion in the 
period from 1996 to 2004.\24\
---------------------------------------------------------------------------
    \24\ Coopers & Lybrand, Projection of the Loss in Federal Tax 
Revenues Due to Misclassification of Workers. Prepared for the 
Coalition for Fair Worker Classification (1994).
---------------------------------------------------------------------------
    A 2000 study commissioned by the U.S. DOL found that between 10 
percent and 30 percent of audited employers misclassified workers.\25\ 
Misclassification of this magnitude exacts an enormous toll: 
researchers found that misclassifying just 1 percent of workers as 
independent contractors would cost unemployment insurance (UI) trust 
funds $198 million annually.
---------------------------------------------------------------------------
    \25\ Planmatics, Inc., Independent Contractors: Prevalence and 
Implications for Unemployment Insurance Programs (February 2000).
---------------------------------------------------------------------------
    A 2009 report by the Government Accountability Office (GAO) 
estimated independent contractor misclassification cost Federal 
revenues $2.72 billion in 2006.\26\ The GAO's estimate was derived from 
data reported by the IRS in 1984, finding that 15 percent of employers 
misclassified 3.4 million workers at a cost of $1.6 billion (in 1984 
dollars).
---------------------------------------------------------------------------
    \26\ U.S. General Accounting Office, Employee Misclassification: 
Improved Coordination, Outreach, and Targeting Could Better Ensure 
Detection and Prevention (August 2009).
---------------------------------------------------------------------------
    According to a 2009 report by the Treasury Inspector General for 
Tax Administration,\27\ the IRS's most recent estimates of the cost of 
misclassification are a $54 billion underreporting of employment tax, 
and losses of $15 billion in unpaid FICA taxes and UI taxes.\28\ The 
$15 billion estimate is based on 1984 data that has not been updated. 
The report explained,
---------------------------------------------------------------------------
    \27\ N/A.
    \28\ Treasury Inspector General for Tax Administration, While 
Actions Have Been Taken to Address Worker Misclassification, and 
Agency-Wide Employment Tax Program and Better Data Are Needed (February 
4, 2009).

          ``Preliminary analysis of Fiscal Year 2006 operational and 
        program data found that underreporting attributable to 
        misclassified workers is likely to be markedly higher than the 
        $1.6 billion estimate from 1984.''
State Losses
    A growing number of States have been calling attention to 
independent contractor abuses by creating inter-agency task forces and 
committees to study the magnitude of the problem. Along with academic 
studies and other policy research, the reports document the prevalence 
of the problem and the attendant losses of millions of dollars to State 
workers' compensation, unemployment insurance, and income tax revenues.
    A review of the findings from the 20-State studies of independent 
contractor misclassification demonstrates the staggering scope of 
misclassification, the difficulties in reaching precise counts of 
workers affected and funds lost, and the potential for enforcement 
initiatives to return much-needed funds to State coffers.\29\
---------------------------------------------------------------------------
    \29\ See NELP, Independent Contractor Misclassification Imposes 
Huge Costs on Workers and Federal and State Treasuries, http://
www.nelp.org/page/-/Justice/2010/Independent
ContractorCosts.pdf?nocdn=1. For an additional compendium of some 
State-based independent contractor studies, see http://
www.carpenters.org/EmployerPayrollFraud/studies_reports.aspx.
---------------------------------------------------------------------------
     States are losing hundreds of millions of dollars. Audits 
conducted by California's Employment Development Department between 
2005 and 2007 recovered a total of $111,956,556 in payroll tax 
assessments, $18,537,894 in labor code citations, and $40,348,667 in 
assessments on employment tax fraud cases.\30\ Each year, Connecticut's 
State income tax receipts were reduced by $65 million; the workers' 
compensation system lost $57 million in unpaid premiums; and the 
unemployment insurance fund lost $17 million.\31\ In Illinois, a 2006 
study estimated that independent contractor misclassification resulted 
in a loss of $39.2 million in unemployment insurance taxes, and between 
$124.7 million and $207.8 million in State income taxes each year from 
2001 to 2005.\32\ From 1999 to 2002, 11 percent of all Maine employers 
and 14 percent of construction employers misclassified their workers, 
resulting in an annual average loss of $314,000 in unemployment 
compensation taxes, $6.5 million in workers compensation premiums, 
between $2.6 million and $4.3 million in State income taxes, and $10.3 
million in FICA taxes from construction alone.\33\ A recent study of 
the Massachusetts construction industry found that misclassification of 
employees resulted in annual losses of up to $278 million in 
uncollected income taxes, unemployment insurance taxes, and worker's 
compensation premiums.\34\ A recent analysis of workers' compensation 
and unemployment compensation data in New York State found that 
noncompliance with payroll tax laws means as many as 20 percent of 
workers' compensation premiums--$500 million to $1 billion--go unpaid 
each year.\35\ A 2009 report by the Ohio attorney general found that 
the State lost between $12 million and $100 million in unemployment 
compensation payments, between $60 million and $510 million in workers 
compensation premiums and between $21 million and $248 million in 
foregone State incomes tax revenues.\36\ Pennsylvania's unemployment 
trust fund lost over $200 million, and its workers compensation fund 
lost $81 million in 2008.\37\
---------------------------------------------------------------------------
    \30\ California Employment Development Department, Annual Report: 
Fraud Deterrence and Detection Activities, report to the California 
Legislature (June 2008).
    \31\ William T. Alpert, Estimated 1992 Costs in Connecticut of the 
Misclassification of Employees. Department of Economics, University of 
Connecticut (1992). The first annual report from the Joint Enforcement 
Commission on Worker Classification reported that the Labor Department 
reclassified 7,900 workers as employees, uncovered more than $53 
million in wages and additional unemployment tax of $750,000, assessed 
over $2 million in additional tax, and collected $90,000 in civil 
penalties against violating employers. State of Connecticut Joint 
Enforcement Commission on Worker Misclassification, Annual Report, 
(February 2010).
    \32\ Michael P. Kelsay, et al., The Economic Costs of Employee 
Misclassification in the State of Illinois. Department of Economics, 
University of Missouri-Kansas City. (2006).
    \33\ Francoise Carre and Randall Wilson, The Social and Economic 
Costs of Employee Misclassification in the Maine Construction Industry. 
 Construction Policy Research Center, Labor and Worklife Program, 
Harvard Law School and Harvard School of Public Health (2005).
    \34\ Francois Carre, J.W. McCormack, et al. ``The Social and 
Economic Cost of Employee Misclassification in Construction'' 2, Labor 
& Worklife Program, Harvard Law School and Harvard School of Public 
Health, Dec. 2004, available at http://www.faircontracting.org/
NAFCnewsite/prevailingwage/pdf/Work_Misclass_Stud_1.pdf.
    \35\ New York State Workers' Compensation: How Big Is the Coverage 
Shortfall?, (New York: Fiscal Policy Institute, Jan. 2007). A 2007 
study issued by the Cornell University School of Industrial and Labor 
Relations estimated annual misclassification rates of about 10.3 
percent in the State's private sector and approximately 14.9 percent in 
the construction industry. Average UI taxable wages underreported due 
to misclassification each year was $4,238,663, and UI tax underreported 
was $175,674,161. Linda H. Donahue, James Ryan Lamare, Fred B. Kotler, 
The Cost of Worker Misclassification in New York State. Cornell 
University School of Industrial Labor Relations (Feb. 2007).
    \36\ Richard Cordray, Ohio attorney general, Misclassification of 
Employees as Independent Contractors (May 11, 2010).
    \37\ Testimony of Patrick T. Beaty, Deputy Secretary for 
Unemployment Compensation Programs, Pennsylvania Department of Labor 
and Industry, before the House of Representatives Commonwealth of 
Pennsylvania, Labor Relations Committee on HB 2400, The Employee 
Misclassification Prevention Act (April 23, 2008).
---------------------------------------------------------------------------
     Studies most likely underestimate the true scope of 
misclassification. Many of the studies are based on unemployment 
insurance tax audits of employers registered with the State's UI 
program. The audits seek to identify employers who misclassify workers, 
workers who are misclassified, and the resulting shortfall to the UI 
program. Researchers extrapolate from UI audit data to estimate the 
incidence of misclassification in the workforce and its impact on other 
social insurance programs and taxes. UI audits rarely identify 
employers who fail to report any worker payments to State authorities 
and workers paid completely off-the-books, where misclassification is 
generally understood to be even more prevalent.
     Independent contractor misclassification rates are rising. 
In California, for example, the number of unreported employees 
increased by an impressive 54 percent from 2005 to 2007. In Illinois, 
the rate of misclassification by violating employers increased by 21 
percent from 2001 to 2005.\38\ A recent report by the Ohio attorney 
general reported a 53.5 percent increase in the number of workers 
reclassified from 2008 to 2009.\39\ A study of misclassification in 
Massachusetts's construction industry from 2001 to 2003 noted that both 
the prevalence of misclassification and the severity of the impact have 
worsened over the years.
---------------------------------------------------------------------------
    \38\ Michael P. Kelsay, et al., The Economic Costs of Employee 
Misclassification in the State of Illinois. Department of Economics, 
University of Missouri-Kansas City. (2006).
    \39\ Richard Cordray, Ohio attorney general, Misclassification of 
Employees as Independent Contractors (May 11, 2010).
---------------------------------------------------------------------------
          iv. empa and state models for federal policy reforms
A. States Are Taking the Lead on Reforms
    The problem is so pervasive that States have led the way in 
reforms\40\:
---------------------------------------------------------------------------
    \40\ Each year, NELP summarizes the leading State legislative and 
executive independent contractor reforms. For the 2009 sessions, See, 
NELP, Summary of Independent Contractor Reforms: New State Activity 
(June 2009), and previous round-ups cited therein, available at: http:/
/www.nelp.org/page/-/Justice/
SummaryIndependentContractorReformsJuly2009.pdf.

     Many States create a presumption of employee status so 
that workers providing labor or services for a fee are presumed to be 
``employees'' covered by labor and employment laws. This is already law 
in over 10 States' workers' compensation acts.\41\ Several States with 
recently enacted construction industry-specific laws \42\ and in 
Massachusetts' wage act.\43\
---------------------------------------------------------------------------
    \41\ See definition of ``worker'' in the WA State workers' 
compensation act as an example: http://apps.leg.wa.gov/RCW/
default.aspx?cite=51.08.180. At least 10 States (AZ, CA, CO, CT, DE, 
HI, NH, ND, WI, WA) have a general presumption of employee status in 
their workers' compensation acts (regardless of what job the injured 
worker has).
    \42\ IL, MD, DE. See, e.g., Illinois HB 1795, creates a presumption 
of employee status in construction across several IL State labor and 
employment laws. An employer may overcome the presumption of employee 
status by showing an ``ABC-Plus'' test: (a) the individual is free from 
control or direction over performance of the work, both under the 
contract and in fact; (b) the service is outside the usual course of 
business for which the service is performed, and (c) the individual is 
customarily engaged in an independently established trade, occupation 
or business, or (d) the individual is deemed a legitimate sole 
proprietor or partnership. The law requires cooperation and data-
sharing by the State departments of labor, employment security, 
revenue, and workers' compensation. http://www.ilga.gov/legislation/
fulltext.asp?GAID=
9&SessionID=51&GA=95&DocTypeID=HB&DocNum=1795&LegID=30630&SpecSess=&Sess
ion.
---------------------------------------------------------------------------
     Several States have created inter-agency task forces to 
share data and enforcement resources when targeting independent 
contractor abuses.\44\
---------------------------------------------------------------------------
    \43\ http://www.mass.gov/legis/laws/mgl/149-148b.htm.
    \44\ See, NELP, Summary of Independent Contractor Reforms: New 
State Activity (June 2009), and documents cited therein, available at: 
http://www.nelp.org/page/-/Justice/Summary
IndependentContractorReformsJuly2009.pdf.
---------------------------------------------------------------------------
     Others create ``statutory employees'' in certain 
industries (construction, trucking) where independent contractor 
schemes prevail.\45\ Similarly, States have created job-specific 
protective laws that target persistent abuses to encourage compliance, 
regardless of the label (independent contractor or employee) attached 
to the worker. At least five States have farm labor contracting laws 
(CA, FL, IA, OR and WA).\46\ Six States have laws that regulate day 
labor (AZ, FL, GA, IL, NM and TX).\47\
---------------------------------------------------------------------------
    \45\ Id.
    \46\ See, NELP, Subcontracted Workers: The Outsourcing of Rights 
and Responsibilities (March 2004).  http://nelp.3cdn.net/
6c45e49f59c0266787_yxm6bnvfc.pdf.
    \47\ Ariz. Rev. Stat. 23-551 et seq.; Fla Stat. Ann.  448.20 et 
seq.; Ga. Code Ann. 34-10-1 et seq.; 820 Ill. Comp. Stat. 820/175 et 
seq.; N.M. Stat. Ann. 50--15-1 et seq.; Tex. Lab. Code Ann. 92.001 et 
seq.
---------------------------------------------------------------------------
     Last year, State attorneys general in at least three 
States (MT, NJ, and NY) announced that they intended to file lawsuits 
against FedEx Ground Package System, Inc., alleging that the delivery 
company misclassified more than 1,000 truck drivers in the three 
States.\48\
---------------------------------------------------------------------------
    \48\ Reuters, Three States may sue FedEx for labor violations, 
http://www.reuters.com/article/idUSTRE59J52520091020.
---------------------------------------------------------------------------
B. The Employee Misclassification Prevention Act (EMPA)
    The Employee Misclassification Prevention Act (EMPA) (S. 3254), 
introduced in the Senate by Senator Sherrod Brown this past April, 
would amend the FLSA to require employers to keep records of 
independent contractors engaged to work, provide notice to those 
workers of their status as an ``employee'' or ``independent 
contractor,'' would require the U.S. DOL to create an ``employee rights 
Web site,'' and would impose a penalty for employer 
misclassification.\49\
---------------------------------------------------------------------------
    \49\ Rep. Lynn Woolsey introduced a companion bill in the House, 
H.R. 5107.
---------------------------------------------------------------------------
    If enacted, the EMPA would be an important first step to encourage 
transparency in employment relationships. If workers know about their 
employment classification and the impacts of that status, they will be 
better prepared to report any violations. U.S. DOL will be better 
equipped to determine whether there is compliance if the employers 
maintain the basic records of their contractors. These are records 
employers would likely keep in any event when dealing with outside 
vendors and contractors, including payments and the labor that was the 
basis for those payments, including, in some cases, hours worked on the 
job.
    These minimal requirements would help in misclassification cases, 
when workers are denied basic wage and hour protections; they would 
also help law-abiding employers playing by the rules who are undercut 
by misclassifying firms, and provide the information needed to recover 
much-needed tax and payroll revenues lost when workers are mistreated 
as independent contractors.
    A complementary bill, the Taxpayer Responsibility, Accountability 
and Consistency Act of 2009 (S. 2882) was introduced by Senator Kerry 
late last year.\50\ This bill would amend the Internal Revenue Code to 
modify the rules giving employers a ``safe harbor'' when they 
misclassify employees as independent contractors, and would permit the 
IRS to issue guidance on the subject. This bill is vital to serious 
reform seeking to combat independent contractor abuses.\51\
---------------------------------------------------------------------------
    \50\ http://www.govtrack.us/congress/billtext.xpd?bill=s111-2882.
    \51\ A major bar to effective enforcement against independent 
contractor abuses is the safe harbor provision in the Internal Revenue 
Code, at Section 530 of the Revenue Act of 1978, 26 U.S.C. 7436. 
Currently, employers decide whether their workers are employees or 
independent contractors with little scrutiny from the IRS and no 
consequences. Under current law, an employer who is found by the IRS to 
have misclassified its workers can have all employment tax obligations 
waived. Section 530 also prevents the IRS from requiring the employer 
to reclassify the workers as employees in the future. Among other 
factors, a business can rely on its belief that a significant segment 
of the industry treated workers as independent contractors, thereby 
perpetuating industry-wide noncompliance with the law.
---------------------------------------------------------------------------
    Much progress can be made to combat independent contractor 
misclassification by beefing up enforcement of existing labor and 
employment laws in those sectors where independent contractor abuses 
are most prevalent, and enhancing the Department of Labor (DOL)'s 
enforcement tools. EMPA would assist this effort by creating 
transparency for workers and employers.
    In addition, the Obama administration's budget for 2011 seeks $25 
million for the DOL's Misclassification Initiative to target 
misclassification with additional enforcement personnel and competitive 
grants to State unemployment insurance programs to address independent 
contractor abuse. The fiscal year 2011 Budget includes a joint Labor-
Treasury initiative to strengthen and coordinate Federal and State 
efforts to enforce statutory prohibitions, identify, and deter 
misclassification of employees as independent contractors.\52\ It 
should be supported.
---------------------------------------------------------------------------
    \52\ http://www.dol.gov/dol/budget/2011/bib.htm.

    The Chairman. Thank you, Ms. Ruckelshaus, for being here.
    Now we will finish up with Mr. Uber.

 STATEMENT OF GARY UBER, CO-FOUNDER, FAMILY PRIVATE CARE, HOBE 
                           SOUND, FL

    Mr. Uber. Chairman Harkin, Ranking Member Enzi, and members 
of the committee, thank you for the opportunity to testify 
today on the topic of worker misclassification.
    My name is Gary Uber and I am co-founder of Family Private 
Care, Inc., a licensed nurse registry operating in the State of 
Florida.
    I am testifying today on behalf of the Private Care 
Association, Inc., which is a member of the Coalition to 
Preserve Independent Contractor Status.
    As a threshold matter, I support the committee's interest 
in the proper classification of workers as employees or 
independent contractors. Our nurse registry has devoted 
substantial time and expense to developing systems designed to 
ensure that the independent contractors with whom it does 
business are properly classified.
    I have serious concerns, however, about the possible 
effects of certain proposals aimed at ensuring proper 
classification such as S. 3254, the Employee Misclassification 
Prevention Act. My concern is that the intensified government 
efforts to identify misclassified workers and punish the firms 
that do business with them can result in firms such as mine 
deciding that the regulatory risks of doing business with 
independent contractors have become intolerable. If that were 
to occur, the millions of legitimate independent contractors 
who, like any other business, needs clients to survive will 
begin to close their businesses and start looking for 
employment. That is not a prospect that the caregivers with 
whom we do business would appreciate.
    By way of background, I am a former Navy corpsman who 
obtained a masters degree in social work and became a hospital 
administrator. I left that job in 1998 to pursue my 
entrepreneurial passion and establish my own business, a nurse 
registry. I feel very fortunate that I had the opportunity at 
that time to leave my employment and become an entrepreneur. 
Every day I feel blessed that my nurse registry empowers 
caregivers to operate their own businesses.
    Our registry does business with approximately 800 
registered caregivers, all of whom operate as independent 
contractors. We also have an office staff of 45 employees. The 
caregivers who obtain client opportunities through our registry 
are principally certified nursing assistants and companions.
    A registry operating in the State of Florida is licensed as 
a nurse registry. In Florida, there are approximately 345 
licensed nurse registries, 2,356 licensed home health agencies 
which are providers of home care that operate with employee 
caregivers.
    The demand for home care in Florida is robust, so both 
agencies and registries are always actively seeking caregivers. 
This means that caregivers have ample opportunity to choose 
whether they will work as employees or as independent 
contractors.
    The principal function of a caregiver registry is to 
introduce consumers to caregivers who have passed a rigorous 
background screening, credential verification protocol, help a 
consumer find caregivers who meet the consumer's 
specifications, and provide administrative support for those 
relationships which generally includes reporting the amount of 
client fees a caregiver receives on an Internal Revenue Service 
form 1099.
    Caregiver registries are a high-volume/low-margin business. 
We operate with hundreds and some even thousands of caregivers. 
The economic realities test used to determine whether an 
individual is an employee or independent contractor for 
purposes of the FLSA creates substantial uncertainty for 
registries because an important consideration under that test 
is the degree to which a caregiver is economically dependent on 
the registry. We need to rely heavily on representations made 
by a caregiver to ascertain whether the caregiver satisfies 
that requirement.
    Under the bill, if DOL were to determine the caregivers 
under contract with the registry are employees of the registry, 
the registry would be exposed to a penalty of up to $1,100 per 
caregiver. In my case, that is $880,000 regardless of any 
violation of the minimum wage or overtime requirements. If the 
misclassification were determined to be repeated or willful, 
the maximum penalty would increase to $5,000 per caregiver, 
which for our registry would be $4 million.
    Since our registry has been treating caregivers as 
independent contractors for 12 years, our registry could be 
determined to have repeatedly misclassified the caregivers 
which would expose it to high penalty. Operating a business 
under a potential liability of this magnitude is intolerable 
especially in light of the possibility of personal liability 
under the FLSA.
    The bill also proposes a recordkeeping requirement for 
hours worked. A registry cannot require caregivers to comply 
with any specific guidelines for reporting their hours worked 
in order to avoid compromising the caregiver independent 
contractor status for other purposes and because they work for 
consumers, not for us. Consequently there would be no 
uniformity in the manner which caregivers could determine the 
number of hours worked.
    Furthermore, for live-in cases, a caregiver's fee is 
generally determined as a fixed amount per day. So for these 
cases, the reporting of hours would serve no purpose other than 
to satisfy a new government mandate.
    The anti-retaliation provision the bill proposes could have 
adverse consequences for our industry. As I mentioned, nurse 
registries commonly rely heavily on representations by 
caregivers as their being a legitimate independent contractor. 
If a caregiver were to provide false information in that 
regard, a registry might decide to cease doing business with 
that caregiver because the caregiver honesty and integrity are 
extremely important in this industry. Caregivers provide their 
care in their clients' homes, including many hours while their 
clients are asleep. The bill would prohibit a registry from 
taking this action.
    As I mentioned, I fully support the committee's interest in 
proper worker classification, but I believe current law is 
adequate for deterring any intentional misclassification. Under 
the FLSA, the prospect of liquidated damages plus attorney's 
fees is more than sufficient to discourage firms from knowingly 
engaging in such practices.
    In my view, a better approach for encouraging proper worker 
classification would be to develop additional safe harbors that 
provide greater certainty for firms that operate in industries 
with significant numbers of independent contractors and to help 
educate individuals who seek to work as independent contractors 
on the actions they should take to properly establish 
themselves as independent contractors.
    Thank you for the privilege to testify this morning. I 
would be pleased to answer any of your questions.
    [The prepared statement of Mr. Uber follows:]
                    Prepared Statement of Gary Uber
                                summary
    It is submitted that the Fair Labor Standards Act ("FLSA") in its 
current form provides a sufficient deterrent against worker 
misclassification. The prospect of liquidated damages plus attorneys' 
fees effectively discourages firms from knowingly engaging in such 
practices.
    Certain proposals aimed at ensuring proper classification, such as 
S. 3254, the Employee Misclassification Prevention Act, would increase 
the financial risks associated with doing business with independent 
contractors to an intolerable level, which could result in companies 
ceasing to do business even with legitimate independent contractors. If 
that were to occur, the millions of legitimate independent contractors, 
who--like any other business--need clients to survive, would begin to 
close their businesses and start looking for employment.
    Our principal concerns with S. 3254 are as follows:

    6. The proposed penalties for misclassification would increase to 
an intolerable level the financial risks associated with doing business 
with independent contractors;
    7. The proposed recordkeeping requirements are unworkable for a 
caregiver registry;
    8. The proposed notice requirement would adversely affect the 
working relationship between an independent contractor and the 
contractor's clients;
    9. The proposed anti-retaliation provision could reward unethical 
conduct; and
    10. The bill overall appears premised on the false assumption that 
the decision whether an individual will work as an employee or 
independent contractor is made by a firm doing business with the 
individual, rather than by the individual.

    The committee's interest in proper worker classification is a 
laudable one, but it should be certain that no action is taken that 
could eliminate economic opportunities for legitimate independent 
contractors.
    It is submitted that an alternative approach for encouraging proper 
worker classification would be to develop additional safe harbors that 
provide greater certainty for firms that operate in industries with 
significant numbers of independent contractors, and to help educate 
individuals who seek to work as independent contractors on the actions 
they should take to properly establish themselves as independent 
contractors.
                                 ______
                                 
    Chairman Harkin, Ranking Member Enzi and members of the committee, 
thank you for the opportunity to testify today on the topic of worker 
classification. My name is Gary Uber and I am a co-founder of Family 
Private Care, Inc. a licensed nurse registry \1\ operating in the State 
of Florida. I am testifying today on behalf of Private Care 
Association, Inc.,\2\ which is a member of the Coalition to Preserve 
Independent Contractor Status.\3\
---------------------------------------------------------------------------
    \1\ Chapter 400 of the Florida Statutes Annotated (``FSA''), 
section 400.462(15), defines a nurse registry as:

    Any person that procures, offers, promises, or attempts to secure 
health-care-related contracts for registered nurses, licensed practical 
nurses, certified nursing assistants, home health aides, companions, or 
homemakers, who are compensated by fees as independent contractors, 
including, but not limited to, contracts for the provision of services 
to patients and contracts to provide private duty or staffing services 
to health care facilities licensed under chapter 395 or this chapter or 
other business entities. (Emphasis added).
    \2\ www.privatecare.org. The Private Care Association, Inc. is a 
national association representing caregiver registries. Caregiver 
registries (i) provide background-screening and credential-verification 
services for independent-contractor caregivers, and (ii) assist such 
caregivers in finding client opportunities. Many registries also 
provide administrative support for the care relationships they 
facilitate.
    \3\ www.iccoalition.org.
---------------------------------------------------------------------------
    As a threshold matter, I support the committee's interest in the 
proper classification of workers as employees or independent 
contractors. Our nurse registry has devoted substantial time and 
expense to developing systems designed to ensure that the independent 
contractors with whom it does business are properly classified.
    I have serious concerns, however, about the possible effects of 
certain proposals aimed at ensuring proper classification, such as S. 
3254, the Employee Misclassi-
fication Prevention Act. My concerns are that the increasingly 
intensified government efforts to identify misclassified workers and 
punish the firms that do business with them can result in firms, such 
as mine, deciding that the regulatory risks of doing business with 
independent contractors have become intolerable. If that were to occur, 
the millions of legitimate independent contractors,\4\ who--like any 
other business--need clients to survive, would begin to close their 
businesses and start looking for employment. In the home-care industry, 
that is not a prospect that the caregivers with whom we do business 
would welcome.
---------------------------------------------------------------------------
    \4\ See, e.g., Bureau of Labor Statistics News Release The 
Employment Situation--May 2010, Table A-8 Employed persons by class of 
worker and part-time status, USDL-10-0748 (June 4, 2010), reporting 
8.952 million self-employed workers during May 2010, and 8.910 million 
in April 2010. It is submitted that a material number of these 
individuals are legitimate independent contractors.
---------------------------------------------------------------------------
    By way of background, I am a former military corpsman who obtained 
a masters degree in social work and became a hospital administrator. I 
left that job in 1998 to pursue my entrepreneurial passion and 
establish my own business, a nurse registry. I feel very fortunate that 
I had the opportunity at that time to leave my employment and become an 
entrepreneur. Every day, I feel blessed that my nurse registry empowers 
caregivers to operate their own business.
    Our registry has been in business for 12 years; it does business 
with approximately 800 registered caregivers--all of whom operate as 
independent contractors. We also have an office staff of 45 employees. 
The caregivers who obtain client opportunities through our registry are 
principally certified nursing assistants and companions. Most of their 
clients are consumers. The consumers generally offer two types of 
opportunities, namely, (i) hourly opportunities, and (ii) live-in 
opportunities.
    Florida began regulating registries in 1947.\5\ Currently, a 
registry operating in the State of Florida is licensed as a ``nurse 
registry.'' \6\ In Florida, as of June 11, 2010, there were 
approximately 345 licensed nurse registries,\7\ and 2,356 licensed home 
health agencies,\8\ which are providers of home care that operate with 
employee caregivers. The demand for home care in Florida exceeds the 
number of caregivers available to meet that demand, so both agencies 
and registries are always actively seeking caregivers. This means that 
caregivers have ample opportunity to choose whether they will work as 
employees or as independent contractors.
---------------------------------------------------------------------------
    \5\ See, Repeal of Nurse Registry Regulation?, Staff of Florida 
House of Representatives, Committee on Health Care Licensing and 
Regulation, at p. 5 (October, 1999).
    \6\ See, above, note 1.
    \7\ See, http://ahca.myflorida.com/MCHQ/Long_Term_Care/FDAU/docs/
SummaryAllActive
.pdf.
    \8\ Id.
---------------------------------------------------------------------------
    A principal attraction for caregivers to work as independent 
contractors is that they can make more money as independent 
contractors, because they receive a much larger portion of a client 
payment than a caregiver who works as an employee of an agency. Also, 
caregivers have more control over when they work and for whom they 
work, since registries merely offer them client opportunities, and they 
alone decide which opportunities to pursue. It is industry practice for 
caregivers to register with multiple registries, so the opportunities 
available through our registry will seldom if ever represent the 
totality of the opportunities from which a caregiver can choose. Once a 
caregiver and a client agree to work together, they are the only 
parties that can terminate the care relationship; a nurse registry has 
no right to interfere with or to terminate a care relationship. Under 
the registry model, caregivers work for their clients and they are paid 
by their clients, albeit commonly through an escrow account that a 
registry maintains to facilitate the delivery of a client's payment.
    The principal functions of a caregiver registry are to introduce 
consumers to caregivers who have passed a rigorous background-screening 
and credential-verification protocol, help a consumer find caregivers 
who meet the consumer's specifications, and provide administrative 
support for those care relationships, which generally includes 
reporting the amount of client fees a caregiver receives on an Internal 
Revenue Service Form 1099.\9\
---------------------------------------------------------------------------
    \9\ Internal Revenue Service data indicate that the compliance rate 
for recipients of Forms 1099 is 97 percent. E.g., TAX COMPLIANCE 
Opportunities Exist to Reduce the Tax Gap Using a Variety of 
Approaches, GAO-06-1000T, at 11 (July 26, 2006) GAO, Tax Gap: Making 
Significant Progress in Improving Tax Compliance Rests on Enhancing 
Current IRS Techniques and Adopting New Legislative Actions, GAO-06-
453T, at 17, (Feb. 15, 2006); GAO, Tax Compliance: Reducing the Tax Gap 
Can Contribute to Fiscal Sustainability but Will Require a Variety of 
Strategies, GAO-05-527T, at 18 (Apr. 14, 2005).
---------------------------------------------------------------------------
    Caregivers who obtain client referrals through our registry 
generally are exempt from the overtime and minimum-wage requirements 
imposed by the Fair Labor Standards Act (the ``FLSA''), because they 
are covered by the FLSA's companionship exemption \10\ when they 
perform services at a care recipient's private home.
---------------------------------------------------------------------------
    \10\ 29 U.S.C. 213(a)(15).
---------------------------------------------------------------------------
    As mentioned, I have concerns with S. 3254, the Employee 
Misclassification Prevention Act. My principal concerns are as follows:

    1. The proposed penalties for misclassification would increase to 
an intolerable level the financial risks associated with doing business 
with independent contractors;
    2. The proposed recordkeeping requirements are unworkable for a 
caregiver registry;
    3. The proposed notice requirement would adversely affect the 
working relationship between an independent contractor and the 
contractor's clients;
    4. The proposed anti-retaliation provision could reward unethical 
conduct; and
    5. The bill overall appears premised on the false assumption that 
the decision whether an individual will work as an employee or 
independent contractor is made by a firm doing business with the 
individual, rather than by the individual.
 i. the proposed penalties for misclassification would increase to an 
 intolerable level the financial risks associated with doing business 
                      with independent contractors
    Caregiver registries are a high-volume, low margin business; we 
operate with hundreds, and some even thousands, of caregivers. The 
economic realities test used to determine whether an individual is an 
employee or independent contractor for purposes of the FLSA \11\ 
creates substantial uncertainty for registries, because an important 
consideration under that test is the degree to which a caregiver is 
economically dependent on a registry. Registries commonly do not know 
that answer, and need to rely on the representations caregivers make to 
us about their other clients, but those representations are not always 
reliable.
---------------------------------------------------------------------------
    \11\ The U.S. Court of Appeals for the Fifth Circuit recently 
explained the economic realities test in Cromwell v. Driftwood Elec. 
Contrs., Inc., 348 Fed. Appx. 57, 59 (5th Cir. 2009):

    To determine if a worker qualifies as an employee under the FLSA, 
we focus on whether, as a matter of economic reality, the worker is 
economically dependent upon the alleged employer or is instead in 
business for himself. Hopkins v. Cornerstone Am., 545 F.3d 338, 343 
(5th Cir. 2008). To aid in that inquiry, we consider five non-
exhaustive factors: (1) the degree of control exercised by the alleged 
employer; (2) the extent of the relative investments of the worker and 
the alleged employer; (3) the degree to which the worker's opportunity 
for profit or loss is determined by the alleged employer; (4) the skill 
and initiative required in performing the job; and (5) the permanency 
of the relationship. Id. No single factor is determinative.
---------------------------------------------------------------------------
    Under current law, the FLSA risk is manageable for registries, 
because the companionship exemption exempts caregivers from its 
overtime and minimum-wage mandates, so long as the exemption 
requirements are satisfied. Under the bill, if caregivers under 
contract with a registry were determined to be employees of the 
registry, the registry would be exposed to a penalty of up to $1,100 
per caregiver, in my case, $880,000 (800 caregivers x $1,100)--
regardless of any violation of the minimum-wage or overtime 
requirements.
    If the misclassification were determined to be repeated or willful, 
the maximum penalty would increase to $5,000 per caregiver, which for 
our registry would be $4,000,000. Since our registry has been treating 
caregivers as independent contractors for 12 years, our registry might 
be determined to have repeatedly misclassified caregivers, which would 
expose it to the higher penalty. Operating a business under a potential 
liability of this magnitude is intolerable, especially in light of the 
possibility of personal liability under the FLSA.\12\
---------------------------------------------------------------------------
    \12\ E.g., Lambert v. Ackerley, 180 F.3d 997, 1011-12 (9th Cir. 
1999); Chao v. Hotel Oasis, Inc. 493 F.3d 26 (1st Cir. 2007).
---------------------------------------------------------------------------
    If nurse registries no longer existed, caregivers and consumers 
would both suffer. Caregivers would be left principally with two 
options, namely, working as an employee at a facility or as an employee 
of an employee-based agency. Their only other option would be to work 
for consumers directly, which would leave the consumers vulnerable 
because the critical background-screening and credential-verification 
that registries provide would be missing. Consumers would need to fend 
for themselves in that regard.
    While one might suggest another possible option: that a registry 
simply ensure that caregivers are paid overtime; that is not feasible 
for caregiver registries, because a caregiver's fee is determined and 
paid by the consumer, not the registry. A registry has no right to 
compel a consumer to pay overtime.
    Also, I have found that for most cases there is a finite amount of 
funds available to pay for home care. For consumers whose home care is 
paid for with a long-term care insurance policy, these policies 
typically pay a capitated fixed amount per day or per week. For 
consumers who pay for home care with private funds, they, too, 
typically operate on a fixed budget. Government programs, such as 
Medicaid, already are stretched, and under the recently enacted Patient 
Protection and Affordable Care Act of 2010, Medicaid programs will soon 
begin covering an estimated 16 million additional new participants,\13\ 
some of whom will likely need home care.
---------------------------------------------------------------------------
    \13\ Congressional Budget Office, Cost estimate to Speaker Nancy 
Pelosi, U.S. House of Representatives, Washington DC (March 20, 2010).
---------------------------------------------------------------------------
    Since the option of simply ensuring that caregivers are paid 
overtime is not feasible for nurse registries, and the elimination of 
registries from the marketplace would harm not only the registry owners 
and their office staff but also the caregivers and consumers who 
currently rely on registries, the bill would have devastating 
consequences for the nurse-registry industry. Moreover, even outside 
our industry, for any firm that does business with a significant number 
of independent contractors, the excessive penalties the bill proposes 
would cause such a firm to thoughtfully consider whether prudent 
judgment would permit it to continue those relationships. If firms were 
to decide to discontinue doing business with independent contractors, 
the unfortunate victims would be the millions of legitimate independent 
contractors who find it increasingly difficult to maintain their 
business, as their potential client base diminishes. I respectfully 
submit that the confiscatory penalties the bill proposes for worker 
misclassification are inadvisable.
      ii. the proposed recordkeeping requirements are unworkable 
                        for a caregiver registry
    The bill also proposes a recordkeeping requirement for hours 
worked. Because our caregiver registry does business only with 
independent-contractor caregivers, we are not familiar with the 
detailed and complex U.S. Department of Labor (``DOL'') regulations 
that govern the determination of compensable hours worked.
    Equally important, a caregiver registry cannot require caregivers 
to comply with any specific guidelines for reporting their hours 
worked, in order to avoid compromising the caregivers' independent-
contractor status for other purposes, and because they work for 
consumers, not for us. Consequently, the number of hours worked that 
caregivers would report would be determined exclusively by the 
caregivers and/or their clients; there would be no uniformity in the 
manner by which such hours are determined.
    Furthermore, for live-in cases, which generally pay a fixed amount 
per day, caregivers likely would report as hours worked all hours they 
spend at a consumer's home. A likely outcome of this exercise would be 
for a caregiver to overestimate the number of compensable hours worked 
while on a live-in case, and become dissatisfied with the daily rate 
that a consumer pays for such work. While the dissatisfaction likely 
could be resolved after ascertaining the truly compensable hours 
worked, a government policy that creates this type of conflict seems 
counterproductive. Furthermore, because for these live-in cases a 
caregiver's fee is generally determined as a fixed amount per day, the 
reporting of hours would serve no purpose other than to satisfy a new 
government mandate.
    For the reasons mentioned, the proposed requirement that firms 
maintain records of hours worked by independent contractors is 
inappropriate for independent contractors who perform services pursuant 
to fee arrangements that are not based on an hourly rate, and it is 
unworkable for the nurse registry industry.
iii. the proposed notice requirement would adversely affect the working 
  relationship between an independent contractor and the contractor's 
                                clients
    The content of the proposed notice requirement suggests that a 
caregiver's decision to work as an independent contractor is actually 
being made by the nurse registry, and is highly suggestive that such 
decision is probably not in the caregiver's best interests. The 
proposed notice would ``inform the individual of the individual's 
classification,'' would direct the individual to a DOL Web site 
containing information ``about the rights of employees under the law,'' 
and advise the individual that his or her ``rights to wage, hour and 
other labor protections depend on [the individual's] proper 
classification as an employee or non-employee.'' Such information 
injects an element of adversity into the relationship between a 
caregiver and a nurse registry, and encourages a caregiver to seek 
assistance from the Government to protect his or her interests.
    For home care, this type of notice is counterproductive. As 
mentioned, in Florida, the demand for caregivers exceeds the supply, 
and there are far more employee-based agencies than there are 
registries. Caregivers register with a nurse registry only after they 
have made the affirmative decision to work as independent contractors. 
A caregiver's independent-contractor status is not something that a 
registry imposes on the caregiver.
    Furthermore, caregivers commonly register with multiple nurse 
registries. The bill would require that each time a caregiver registers 
with another nurse registry, the registry would need to provide the 
caregiver with another notice.
    At best, the net result of this proposal would be to impose yet 
another paperwork burden on businesses that increases their cost of 
operations, with little discernable benefit. At worst, a likely effect 
of a notice such as that proposed would be to increase the probability 
of some type of lawsuit being filed against a nurse registry in the 
event a registry ever decides to cease doing business with a particular 
caregiver or is unable to offer a caregiver the volume of client 
referrals that the caregiver is seeking.
  iv. the proposed anti-retaliation provision could reward unethical 
                                conduct
    The anti-retaliation provisions the bill proposes could have 
adverse consequences for nurse registries. As noted, nurse registries 
commonly rely heavily on representations by caregivers as to their 
being a legitimate independent contractor. If a caregiver were to 
provide false information in that regard, a registry might decide to 
cease doing business with the caregiver, because caregiver honesty and 
integrity are extremely important in this industry. Caregivers provide 
their care in their clients' homes, including many hours while their 
client is asleep.
    The bill's anti-retaliation provisions would prohibit a registry 
from severing its relationship with a caregiver who provided false 
information about the caregiver's professed independent-contractor 
status and, as a result, was determined to be an employee of the 
registry for purposes of the FLSA or Federal employment taxes.
    At a minimum, I would urge that the anti-retaliation provision be 
qualified so it would apply only to the extent that an individual did 
not provide any false information that the company relied upon when 
engaging the individual as an independent contractor.
    Another potential problem the anti-retaliation provision would 
create is that it would increase the litigation risks associated with 
severing a relationship with any caregiver who opposes any practice, 
files a complaint or institutes a proceeding concerning an individual's 
status for purposes of the FLSA or Federal employment tax purposes. 
Such a caregiver could always allege that the relationship was severed 
in retaliation for such actions. While anti-retaliation provisions are 
not uncommon for employment relationships, this represents an 
unprecedented expansion of this concept to independent contractors. 
Because of the litigation risks it would create for even bona fide 
independent-contractor relationships, I respectfully urge that such a 
provision not be enacted.
 v. the bill overall appears premised on the false assumption that the 
decision whether an individual will work as an employee or independent 
contractor is made by a firm doing business with the individual, rather 
                         than by the individual
    Finally, the bill appears premised on the false assumption that the 
decision whether a caregiver will work as an employee or independent 
contractor is being made by a registry, rather than the caregiver. The 
bill would punish a firm for doing business with an individual as an 
independent contractor if the individual were determined not to be an 
independent contractor. In an industry such as ours, we offer our 
services only to self-employed caregivers. We do our best to ensure 
that any caregiver who applies for registration actually is an 
independent contractor.
    We necessarily need to rely heavily on what a caregiver tells us. 
If a caregiver provides a registry with materially false information, 
which results in the caregiver not qualifying as an independent 
contractor, the bill would still penalize only the registry; the 
caregiver would be unaffected. Worse still, the registry would be 
prohibited from severing its relationship with that caregiver.
    In my view, consideration should be given to developing some type 
of statutory protection for firms that reasonably rely on 
representations made to them by individuals who represent themselves as 
being self-employed, and such firms should not be prohibited from 
severing their relationship with an individual who provides the firm 
with materially false information and is determined to have been 
misclassified.
                             vi. conclusion
    As noted, I fully support the committee's interest in proper worker 
classification. I fear, however, that an approach to this issue that 
subjects firms that do business with independent contractors to the 
prospect of excessive financial penalties in the event of 
misclassification can have the unfortunate effect of reducing 
opportunities for legitimate independent contractors. Especially in 
today's economic climate, but even when our economy is strong, a 
government policy that has the effect of limiting economic 
opportunities for individuals is inadvisable.
    The effects of the bill would not be limited to firms that do 
business with independent contractors. They and the independent 
contractors would certainly be directly affected, but other firms and 
the larger economy would be indirectly affected. In home care, the 
employee-based firms would benefit, as they would be able to pay 
caregivers less and charge consumers more, because the competitive 
effect of nurse registries that keep client fees low and caregiver fees 
high would be eliminated. Of course, consumers and caregivers would 
suffer. Outside of home care, firms that currently do business with 
independent contractors would likely pass through to their customers, 
in the form of higher prices, the higher operating costs they would 
incur due to their inability to continue outsourcing projects to 
independent-contractor specialists to achieve high efficiency.
    In my view, a better approach for encouraging proper worker 
classification would be to develop additional safe harbors that provide 
greater certainty for firms that operate in industries with significant 
numbers of independent contractors, and to help educate individuals who 
seek to work as independent contractors on the actions they should take 
to properly establish themselves as independent contractors.
    I believe current law is adequate for deterring companies from 
intentionally misclassifying workers as independent contractors. Under 
the FLSA, the prospect of liquidated damages plus attorneys' fees is 
more than sufficient to discourage firms from knowingly engaging in 
such practices.
    Thank you for the privilege to testify this morning. I would be 
pleased to answer any questions you might have.

    The Chairman. Thank you very much, Mr. Uber, for being here 
and for your testimony.
    We will start a round of 5-minute questions.
    Ms. Gardner, I know that New York, like many other State 
governments, is facing significant fiscal challenges. The core 
safety net programs, like unemployment insurance, have been 
especially strained by the combined effect of tighter budgets 
and greater demand for services.
    Does the current prevalence of misclassification contribute 
to this dilemma, and how have your efforts in New York helped 
to address this problem?
    Ms. Gardner. Absolutely. I mean, we have seen less money 
coming into our unemployment insurance trust funds. We have 
situations where employers are not paying taxes. Our State 
budget--we are still trying to work on it right now. We are at 
a $9 billion deficit, and the fact that employers are paying 
people off the books or incorrectly classifying workers as 
independent contractors means less State money revenues are 
coming in. And given the fact that it is a growing problem, I 
think the tools that we have right now are not working, and 
that is why we need additional tools.
    The Chairman. Thank you.
    Mr. Battaglino, again my compliments to you on your work 
and taking a small business and growing it. You are the kind of 
person I think of when I think of a successful small business, 
someone who started with nothing, built it up, has employees, 
has an honest, good record.
    We have heard some concerns today that the bill that I 
sponsored with Senator Brown would impose too big a burden on 
businesses by requiring them to give notice to workers about 
their employment status and, in some circumstances, to keep 
track of hours and compensation. Now, I have had some 
discussions about that up here behind the dais but to me that 
seems like something employers should be doing already.
    Do you as a business owner think that these recordkeeping 
requirements are unduly burdensome?
    Mr. Battaglino. No, sir. Up until a few years ago, probably 
2 years ago, we used to do a lot more private work. And the 
private work does not take that much paperwork in one aspect, 
but then we got into doing more government work because of the 
economy. And so we had to start with doing all these certified 
payrolls for the Davis-Bacon laws and the first source laws in 
Washington, DC. I mean, it took a little extra, but it was not 
that burdensome on us. We did what we had to do to get the 
work.
    Does it cost more? It is a very small cost. If you asked me 
what would I rather do, would I rather hire a person to do the 
extra work or would I rather pay 5 more percent taxes at the 
end of the year on my profit, I would hire the person and give 
them a job before I have to pay 5 more percent taxes in a year 
and give it to the Federal and State government and have them 
do what they want with it. OK?
    So I kind of look at it that way. What is the less of two 
evils? And the paperwork is not that cumbersome. It just is 
not.
    The Chairman. Mr. Battaglino, you may be too practical for 
us.
    [Laughter.]
    Mr. Battaglino. Well, I probably am but that is how I look 
at things in my world. I started out real simple and I never 
thought that I would ever get--in 2008, I had 75 employees and 
because of the recession, I am down to 55 and probably out of 
the 55, I should be really down to 45, but these guys have been 
with me so long. Right now, this year has been the hardest. We 
are kind of eating through profits of last year. We are keeping 
enough work going to keep us above water. It is not the 
greatest, but we are not in the red.
    The Chairman. But you have had experiences----
    Mr. Battaglino. I have been through three recessions. I 
have been through 1991. I have been through the 2000 and now 
this one. This one has been the worst, 1991 was easy. It was 
just me. It was me and my wife and that was it. And she never 
saw me because I was building my business, and then slowly I 
started adding people on. But as I started adding people on, I 
did all the right things. I got my compensation insurance and 
my liability insurance. It is just something that resonates 
with me because at the end of the day when I put my head on my 
pillow, I want to know that the people that work for me are 
taken care of and that if something happens to them, they are 
not going to come after me because I got plenty insurance to 
take care of them. That is how my parents brought me up and I 
firmly believe in that.
    Senator Enzi, you may not agree with me on some things. We 
probably agree on a whole host of other things, but that is 
what I share and that is what I believe and that is why I am 
here today.
    The Chairman. Well, I compliment you. To me that is what a 
small business person epitomizes.
    Mr. Battaglino. You know, there is another aspect that no 
one has talked about. Right now, I kind of want to be proactive 
because that is what we do in our company. We kind of look 
ahead so that if something happens, it is not going to cost us 
a boatload of money.
    We are bringing up a generation of workers that are not 
necessarily covered under any kind of Social Security, any kind 
of retirement whatsoever. So in the next generation, if I have 
10 million people now--in the construction industry, as we get 
older, we have to bring these new people in, and if we do not 
get in front of it now, we are going to bring these new people 
in and the dishonest people are going to try to make them 
misclassified workers. What is that going to do to us in 20-30 
years when these 20-, 30-year-olds cannot work anymore? Their 
backs are broken. Their knees are shot. They got no Social 
Security because they never paid in. They got no 401(k). They 
got nothing. You know what is going to happen? It is called 
Medicaid and it is called welfare because when they get 60, 
there is nothing for them. I mean, most of these people are 
uneducated. They are disadvantaged workers and they are being 
taken advantage of.
    So that has been an important part for me.
    The Chairman. Mr. Battaglino, thank you very much. A very 
profound statement.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    Mr. Battaglino, I really admire you for being in business. 
I have been there. I have been in both the shoe business and 
the accounting business. I know how tough it is. I know that a 
person really has not been in business unless they sit straight 
up in the middle of the night and say, ``tomorrow is payroll, 
how am I going to meet payroll?''
    Mr. Battaglino. Been there.
    Senator Enzi. Yes. That is small business and it happens 
more frequently than anybody who has dreams of starting a 
business may believe. I always hope that reality exceeds their 
dreams, but it does not always happen that way.
    And I want to catch anybody that is doing these things that 
I consider to be completely illegal--completely illegal. I am 
just hoping that we can do it without putting a whole lot more 
burden on you and your business.
    We already have a little situation--I do not know how you 
feel about it--in the health care law. Any company that 
conducts business that spends more than $600 with another 
business is now going to have to file a 1099 on it. So that is 
another little requirement. We just keep adding little 
requirements at a time, and pretty quickly they become back-
breaking.
    So I am hoping that we can get at the bad guys without 
hurting the good guys. As I see it, this law is going to affect 
both pretty drastically.
    Ms. Ruckelshaus, on March 27, 2007, you appeared before a 
House committee on this very issue, and in response to a 
question from Representative Price about the 20-factor IRS 
independent contractor test and whether anything else could be 
done, you responded,

          ``In my opinion, legislative action on the actual 
        test is not necessary right now because the ways the 
        laws are drafted, if they were enforced correctly and 
        fully, we would not need any legislative changes.''

    In light of the extra $25 million in the President's budget 
and the new joint operations of the Department of Labor and 
Treasury enforcing this misclassification issue, have you 
changed your mind in support of S. 3254 today?
    Ms. Ruckelshaus. I have changed my mind to the extent to 
which the EMPA permits the Department of Labor to collect 
penalties for recordkeeping violations. It also makes it a 
violation per se to misclassify somebody even if they are 
getting full overtime and full minimum wage. That was the 
problem with the previous Department of Labor's position, and 
in my opinion the current Department of Labor's position is 
they do not see it as a violation of their statutes, of any of 
their statutes if someone misclassifies a worker without any 
other labor and employment violations.
    So I think I have because they are not enforcing the Fair 
Labor Standards Act the way I was reading it, which is, if you 
misclassify somebody as an independent contractor, typically 
there is another violation. So you should go ahead and enforce 
that statute.
    Senator Enzi. Thank you.
    Mr. Uber, you made some comments about the penalties, the 
new civil penalties of the $1,100 and then the $5,000 proposed 
under this bill. Could you kind of restate that for me again?
    Mr. Uber. Certainly. The current laws that are on the books 
in our estimation are more than adequate to deter people from 
misclassifying workers. I actually would ask the Senators today 
why are we not doing a better job of enforcing the laws that 
are already on the books.
    The other part of this that concerns me is there is a 
personal liability that I would be exposed to as a business 
owner, which means that the personal assets that I have could 
be exposed, which is creating an environment which would 
certainly cause me to ponder seriously about doing what I did 
12 years ago, which is very similar to my colleague. And we 
have 45 employees as well. So we have both employees and 
independent contractors.
    We do everything in our power to do it right, and we are 
doing it right. And the fear is--and it has been expressed in 
this room many times already--coming after the good guys with 
this particular legislation. And that is a big concern to me.
    Senator Enzi. It sounds like your business has a lot of 
competition in the States where you operate. It also sounds 
like independent contractors that you contract with also have a 
competitive choice. They can work for the State-licensed 
businesses like yours or they can work for the employment 
agencies.
    Could you describe what would happen if the independent 
contractors that you contract with felt that you were causing 
them to violate the law?
    Mr. Uber. Well, I think any additional elements that we 
place on the workforce, independent contractors, employees, it 
does not matter. But when you continue to put this pressure on 
them to function in an environment that is not well-defined--if 
you are trying to find out Department of Labor law and other 
issues as it pertains to independent contractors, you have to 
go to two different Federal areas. States have their own issues 
regarding these matters. So it is very complicated right now to 
even get the information you need to function properly.
    So there are some things that I would prefer to see us do 
in the sense of bringing all these things together so that we 
can look at them. Independent contractors that come to us 
represent themselves as independent contractors. That is their 
job. And so we need a place that they can go to and easily get 
information on what it means to be an independent contractor, 
what the requirements are on that individual if they choose to 
be an independent contractor, and the same for firms such as 
mine that choose to use both employees and independent 
contractors.
    Senator Enzi. Thank you. I thank all of you for your 
testimony, and I will have some more written questions that I 
hope you will respond to.
    I also have some letters that I would like to be a part of 
the record.
    The Chairman. Without objection, so ordered.
    [The information referred to may be found in Additional 
Material.]
    The Chairman. Senator Brown.
    Senator Brown. Thank you, Mr. Chair.
    I want to make a unanimous consent request that the written 
testimony of the Messenger and Courier Association of America 
be submitted for the record of this hearing, if I could, Mr. 
Chair.
    The Chairman. Without objection.
    [The information referred to may be found in Additional 
Material.]
    Senator Brown. Thank you.
    I will start with Ms. Gardner. Would you talk about the 
financial estimates, the estimates of tax revenue, what this 
will mean? The Obama administration has apparently said upwards 
of around $7 billion in revenue over 10 years. When we have 
looked at Massachusetts, Illinois, California, New York, Ohio, 
when we look at the estimates that various government officials 
or others have made, it seems that estimate may be 
conservative. Could you comment on that?
    Ms. Gardner. Yes. Our own estimates have found that more 
than 10 percent of workers are misclassified in New York State 
probably because we have a high rate of off-the-books work. So 
then there are not any taxes paid in those instances. There is 
not any money paid into our unemployment insurance trust fund. 
There is no additional funds to our State revenues. So we think 
it clearly gives employers about a 30 percent advantage by not 
following through with their obligations to workers.
    And in addition, we are finding a lot of instances where 
workers are not properly paid for overtime or not even paid the 
minimum wage. So it also takes money out of the hands of the 
economy. So it is costly to States.
    Senator Brown. Thank you, Ms. Gardner.
    Mr. Battaglino, as Chairman Harkin said, people like you 
really are what this country is all about that started with 
little and have, obviously, run a very successful business and 
created a whole lot of middle class households in Maryland. So 
thank you for that.
    She talked about a 30 percent advantage that an employer 
less honorable than you would have. Talk to me about what you 
have seen among other employers that you compete with on bids 
you make, on business you try to attract where you have seen 
this playing field that is far from level.
    Mr. Battaglino. OK. Let me start out with in the 
construction industry, because that is what we do, there is a 
lot of, I guess you could say, proponents between union and 
nonunion. Typically when things are good and there is plenty of 
work, especially in this town--this town has its boom times, 
and right now it is not very good. The difference between union 
and nonunion in the good times is 2 to 5 percent, very close. 
OK? It is not that significant. Generally you can negotiate the 
percentages out of your price if you want to get the job. But 
especially now in the bad times, we are seeing 30 percent 
differences, and we are looking at it saying, There is no way. 
I am bidding work and I am getting beat 20 percent below my 
cost.
    Yesterday we were bidding a job and it came back to us, and 
the guy says, ``look, this is where the number is at.'' And I 
am looking and I am discounting all my labor for using 
apprentices, using helpers, and he is still 20 percent below my 
costs. I say, there is no way. There is no way.
    So I have to attribute some of it to this possibly. I mean, 
I do not know. I lose a job. I do not go out and hide behind 
columns and see how these people pay their people. I am not 
privy to that information. I could only suspect that the only 
way they could be getting that low is they are cheating. They 
are not paying their benefits. They are not paying their 
unemployment. They are not paying their compensation. I mean, 
there is no other way that you could pay a person a decent wage 
and still be that low and still be in business.
    The Davis-Bacon--that kind of protects us a little because 
they cannot get away with it as much on government work, but on 
the private work, we cannot even touch it.
    Senator Brown. And you are just certain because in good 
times, the differential between union and nonunion is 2 to 5 
percent.
    Mr. Battaglino. Two to five percent------
    Senator Brown. So you are certain this is not a union/
nonunion issue.
    Mr. Battaglino. Oh, no. No, not at all. That is why I 
brought that up because I do not want people to say, ``well, 
you are just a union contractor and you are just trying to 
fight for your life.'' No. That ain't it. No.
    In good times, the difference is 2 to 5 percent. In good 
times we are sometimes lower than the nonunion guys. OK? So 
there is a disparity there that people have about union and 
nonunion.
    What you got to look at is how these dishonest contractors 
are running their businesses. I cannot name names. There is a 
few of them that I have on my mind. I am not going to do it on 
a camera or anything.
    [Laughter.]
    But we have our suspicions, and actually they have kind of 
been caught on the Davis-Bacon stuff. So they chased them away 
from there because they were cheating on that.
    Senator Brown. But they are still doing private work.
    Mr. Battaglino. They are still doing private work and we 
cannot touch them.
    Senator Brown. Thank you, Mr. Battaglino.
    Mr. Battaglino. Battaglino.
    Senator Brown. Battaglino. Why can I not say that? Geez. 
All the Italians in my State.
    You should know this that I sent a note to Senator Enzi who 
has told me this is the first example of two Italian Senators 
from the same State in American history, he and Senator 
Barrasso. And I sent a note that Mr. Battaglino should be the 
third Italian Senator from Wyoming if you would care to move 
out there.
    [Laughter.]
    Mr. Battaglino. No. I like my business.
    Senator Brown. Some of us in bigger States think that 
Wyoming, considering its population--we have the same number of 
Senators they do, but anyway, that is a whole other question.
    [Laughter.]
    Let me ask you one other question, Mr. Battaglino. If our 
legislation, Senator Harkin's and my legislation, passes, how 
would your business change. Just briefly. We are kind of 
running short on time. But how would your business actually 
change?
    Mr. Battaglino. Well, for me it would not change at all.
    I did not want to bring this up, but I believe the 
Department of Labor has solicited my company and probably a 
bunch of other ones, and they want us to voluntarily 
participate in something they are doing. So they sent us this 
form. And my bookkeeper says, the Department of Labor wants us 
to participate. And my first reaction was, wow, what do they 
want us to participate in? What are they doing? What is this 
about? All I got to think is could they talk to the IRS if I do 
not participate?
    Senator Brown. We are from the Government. We are here to 
help you.
    Mr. Battaglino. Yes. I got this diabolical thing going on. 
I am going, ``well, what is it?'' She goes, ``well, they just 
want us to report our hours to them.'' Again, if I could use 
the phone, I could find out exactly what it is, but they said, 
``we just want you to report your hours'' and I think--not the 
wages, but the hours and how many full-time employees we had 
consistently each month, which I said, ``well, go ahead and do 
it. I know what they are trying to get at.'' And I say, ``I 
think maybe it has got to do with what I am going to do.'' I 
say, ``go ahead and do it.''
    And she does it, and once it is set up, it is set up. 
Computers are wonderful things. Quick Books Pro for 
Construction is great. It is not that cumbersome.
    Senator Brown. Thank you, Mr. Battaglino.
    The Chairman. We are in a vote. There is less than 10 
minutes left, and I want to get to Senator Merkley before we 
have to go vote.
    Senator Merkley. Thank you very much, Mr. Chair.
    Ms. Ruckelshaus, I wanted to ask you. My impression--this 
is what I am drawing from many years ago as an employer--was 
that the test was things such as do you set your own hours, do 
you provide your own equipment, do you have multiple customers, 
and do you advertise to obtain your own customers. And one 
piece of evidence in Oregon was do you have a business card, 
for example. Is that pretty much the difference? Am I missing 
some key factors here between an employer and an independent 
contractor?
    Ms. Ruckelshaus. Yes, that is pretty close. Another key one 
that the courts look at and the States look at is whether or 
not the service you are providing is integrated into the 
overall service of the business with whom you are contracting 
because if you are doing things that regular employees would 
likely be doing, then that is a factor again, considering them 
an independent contractor.
    Senator Merkley. Like a part-time worker essentially.
    Ms. Ruckelshaus. Right.
    Senator Merkley. OK.
    Well, so we have situations that arise that are a little 
fuzzy. Mr. Uber was noting that his role as a registry is 
different--well, he did not quite say this, but this is what I 
am interpreting--is different from that of a temp service 
because he is facilitating independent contractors finding 
their customers. And there are Web sites that do that in other 
areas and so on and so forth.
    So in that sort of situation, under this law, would there 
be a way for such an employer or company owner to make sure 
that they are protected? Because he is raising a legitimate 
question about not being at risk, not being uncertain. Is there 
a way that they could establish going to a Federal Department, 
and say, ``this is the way I operate'' and have it documented 
so that they are not putting their personal assets at risk and 
living in a world of uncertainty?
    Ms. Ruckelshaus. I mean, his business--and he points this 
out in his testimony. A lot of his workers are exempt anyway 
under the Fair Labor Standards Act because they are companions. 
But putting that aside, I think if EMPA were to pass, he would 
provide each of his workers with a notice, which would 
basically affirm what they have already agreed, which is that 
they are independent contractors, and they both agree. If the 
worker does not agree or there is some question and she is 
confused, then that is good because it would raise the issue 
and they could talk about it and clear up any confusion that 
might be connected to that relationship.
    Then the keeping that he would be required to undertake 
under EMPA is again records that employers likely already keep 
because you have to give a 1099 anyway to these independent 
contractors. So it is really just a mechanism, a transparency 
and right-to-know mechanism. It is actually going to help them 
if the Department of Labor ever comes knocking.
    Senator Merkley. Fair enough, but let us not take Mr. Uber 
as an example. Some other owner who is looking at it. Well, 
there is some uncertainty here. Is there a way that they could 
reach outside of their organization to get an affirmation that 
would give them legal protection that they have made the right 
decision in classifying someone as a worker or as an 
independent contractor?
    Ms. Ruckelshaus. Under current law, you can with the 
Internal Revenue Service. You can get a determination from the 
Internal Revenue Service. And then you have a safe harbor going 
forward.
    The Department of Labor can give consultations. They do not 
bless your relationship, but they can give you consultation and 
information.
    Senator Merkley. Well, I think that safe harbor might be 
something we should explore if we do not feel like it is 
satisfactory.
    Did you want to comment on that, Mr. Uber?
    Mr. Uber. Yes, Senator. I would just like to comment from 
the vantage point of it, which is not as clear as it is 
described. You know, to have to constantly function in an 
environment where we want to comply--we are as much on board 
with this as far as identifying misclassified workers as anyone 
in the room. On the other hand, I do not see that what this 
bill will give us is a better way of gaining certainty as to 
whether we are using independent contractors properly.
    I do not believe that it is increased paperwork. It is more 
things that we have to do. I stand by my testimony in that we 
have current laws on the books that need to be enforced, and if 
we will enforce those laws, then I think we can get a long way 
to where we are going or where we want to go.
    Senator Merkley. Ms. Gardner, in your work in New York, do 
you have a situation where you are able to assist employers or 
owners of companies who are wrestling with the lack of clarity 
as to whether someone is an independent contractor or an 
employee and can give them some sort of affirmation so that 
they feel like they are on solid and safe ground?
    Ms. Gardner. Yes, we do that all the time. We did a 
targeted sweep in the car wash industry and found a high rate 
of misclassification. And one of the things we did following 
those sweeps is we found a lot of the employers just did not 
know the law. So we did some compliance education to help those 
employers bring them into compliance moving forward.
    Senator Merkley. Thank you very much.
    Thank you, Mr. Chair.
    The Chairman. Thank you, Senator Merkley.
    I thank you all. I have more questions. I was going to do 
another round, but as you can see, we have got about 2 minutes 
left in this vote. Therefore, we will leave the record open for 
10 days for questions to be submitted in writing to you from 
anyone who is on the committee or who may not have been here 
today.
    I want to thank all of you very much for being here today. 
It has been a great session. I think we learned a lot, and 
hopefully, we will be able to move this legislation forward, 
taking into account the fact that there are good actors out 
there, as well as bad ones. But we have to stop this 
misclassification because it is hurting the good people out 
there that are doing the right thing, and that is what we want 
to do. Thank you all very much.
    The committee will stand adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

       Prepared Statement of Dale E. Brown, CAE, President & CEO 
               of the Financial Services Institute, Inc.
    The Financial Services Institute (FSI) \1\ commends the Senate 
Committee on Health, Education, Labor, and Pensions for its examination 
of the issues surrounding the proper classification of workers as 
independent contractors or employees. By misclassifying workers as 
independent contractors, companies avoid withholding income taxes and 
paying Social Security and Medicare taxes. Intentional 
misclassification of workers creates an unlevel playing field by giving 
an unfair competitive advantage to businesses who fail to classify 
their workers correctly.
---------------------------------------------------------------------------
    \1\ The Financial Services Institute, Voice of Independent Broker-
Dealers and Independent Financial Advisors, was formed on January 1, 
2004. Our members are broker-dealers, often dually registered as 
Federal investment advisers, and their independent contractor 
registered representatives. FSI has 121 Broker-Dealer member firms that 
have more than 188,000 affiliated registered representatives serving 
more than 15 million American households. FSI also has more than 14,700 
Financial Advisor members.
---------------------------------------------------------------------------
    Despite our support of the committee's examination of these issues, 
FSI has significant concerns with legislation introduced to address the 
misclassification of workers. On April 22, the Employee 
Misclassification Prevention Act (S. 3254) was introduced, by Senator 
Sherrod Brown (D-OH). The bill would amend the Fair Labor Standards Act 
of 1938 (FLSA) by increasing the financial consequences for a company 
that misclassifies an individual as an independent contractor and 
imposes new recordkeeping and notice requirements for companies that do 
business with independent contractors.
    The bill would have serious unintended consequences for independent 
broker-dealers and independent financial advisors that deliver 
essential financial products, service and advice to middle-class 
Americans who are planning for their retirement, the education of their 
children or other important financial goals. Independent broker-dealers 
and independent financial advisors operate in a heavily regulated and 
documented industry in which cash payment for services is strictly 
prohibited. They responsibly pay their taxes and are properly 
classified as independent contractors. In fact, financial advisors 
choose to affiliate with independent broker-dealers so they can own and 
operate their own small business and exert greater control over the 
means of its operation. Nevertheless, the bill would introduce a 
significant degree of uncertainty that would result in an unlevel 
playing field for independent broker-dealers who offer an important 
alternative to financial advice and services from Wall Street firms.
    financial advisors of independent broker-dealers are correctly 
                 classified as independent contractors
    For more than 30 years, the independent broker-dealer industry has 
provided the investing public with comprehensive and affordable 
financial solutions to their financial needs. The lynchpin of the 
independent broker-dealer industry is a network of financial advisors 
who operate with maximum flexibility and are responsible for the 
entirety of their business operations. These independent financial 
advisors are small business owners and entrepreneurs who benefit from a 
decentralized business structure. As small business owners, these 
financial advisors usually own or rent their own office, employ their 
own staff, and are subject to independent broker-dealer inspection 
primarily for the purposes of complying with securities laws. In the 
United States, approximately 188,000 financial advisors--or 
approximately 61.7 percent of all practicing registered 
representatives--operate as self-employed independent contractors.\2\
---------------------------------------------------------------------------
    \2\ Cerulli Associates at http://www.cerulli.com/.
---------------------------------------------------------------------------
    The independent broker-dealer business model focuses on offering 
financial solutions to clients who constitute the backbone of America's 
investor class. Financial advisors associated with independent broker-
dealers primarily serve ``Main Street Americans''--families able to 
invest only tens or hundreds of thousands--rather than millions--of 
dollars. The independent broker-dealer model provides those investors 
with access to products and services that maximize their ability to 
achieve their financial goals. The independent broker-dealer industry 
is able to efficiently serve consumers and offer services at affordable 
prices because the primary business relationship is between the 
financial advisor and the consumer, not the broker-dealer and the 
consumer.
    In order to protect investors, independent broker-dealers and their 
financial advisors are heavily regulated under Federal and State 
securities laws. The Securities Exchange Act of 1934 mandates that 
anyone who effectuates securities transactions register with the SEC or 
associate with a broker-dealer that is registered with the SEC.\3\ 
There is a corresponding SEC requirement that a registered broker-
dealer become a member of a self-regulatory organization, such as the 
Financial Industry Regulatory Authority (FINRA) (formerly, the National 
Association of Securities Dealers).\4\ Under requirements of FINRA, 
broker-dealers are responsible for overseeing the securities operations 
of their associated financial advisors.\5\ Under FINRA's ``Conduct 
Rules,'' a broker-dealer must provide significant supervision and 
monitor its financial advisor workforce, including establishing written 
procedures to ensure compliance with Conduct Rules by each financial 
advisor.\6\ Due to the nature of their business model, independent 
broker-dealers have long set the standard for supervision and 
compliance in the securities industry.
---------------------------------------------------------------------------
    \3\ 15 U.S.C. 78o(a)(1); see also 1999 FSA 385 (May 10, 1999).
    \4\ 15 U.S.C. 78o(c).
    \5\ NASD Rule 3010(a).
    \6\ Id.
---------------------------------------------------------------------------
    Under Federal tax law, how a worker is classified is primarily a 
function of the degree to which the employer exercises ``control'' over 
the worker--the more control, the more likely the worker will be 
classified as an employee. A careful analysis of the relationship 
between a registered representative and an independent broker-dealer 
firm makes it clear that registered representatives associated with 
independent broker-dealer firms are properly classified as independent 
contractors for purposes of employment taxes.\7\ In fact, there is 
precedent holding that financial advisors associated with broker-
dealers can be properly classified as independent contractors.\8\ 
Despite these facts, regulatory mandates give the appearance of 
significant control by the broker-dealer. As a result, independent 
broker-dealers are periodically required to engage in an expensive 
defense of the appropriateness of worker classification status of their 
financial advisors.
---------------------------------------------------------------------------
    \7\ For a full analysis of the proper classification of financial 
advisors associated with independent broker-dealer firms for the 
purposes of employment taxes, please see the July 9, 2008 legal 
memorandum prepared by the McIntyre Law Firm, PLLC for the Financial 
Services Institute.
    \8\ The Taxpayers Relief Act of 1997 Act states:

    ``In determining for purposes of the Internal Revenue Code of 1986 
whether a registered representative of a securities broker-dealer is an 
employee . . . no weight shall be given to instructions from the 
service recipient which are imposed only in compliance with investor 
protection standards imposed by the Federal Government, any State 
government, or a governing body pursuant to a delegation by a Federal 
or State agency.'' Pub. L. No. at 921, (1997).
---------------------------------------------------------------------------
impact of proposed legislation on independent broker-dealers, financial 
                       advisors and their clients
    While independent broker-dealers properly classify their workers, 
compliance with the securities regulatory requirements can easily be 
mistaken for an employer's efforts to control the activities of their 
employees. As a result, independent broker-dealers are periodically 
subject to erroneous claims of improper worker classification. The 
proposed legislation would likely increase the volume of such claims 
and the cost of defending against them. The legislation would subject 
such firms to great uncertainty, as disgruntled former affiliated 
independent financial advisors, along with the Internal Revenue 
Service, would be empowered to question their worker classification 
status. The bill would do so by:

     Enhancing the Consequences of Worker Misclassification.--
The bill would modify the FLSA to provide that any failure to 
accurately classify an individual as an employee would constitute an 
FLSA violation. It also would double the amount of liquidated damages 
the FLSA imposes for a violation of its minimum-wage or overtime 
requirements with respect to an individual who was misclassified as a 
non-employee (i.e., increase from two times actual damages to three 
times actual damages). A company would be subjected to a new civil 
penalty of up to $1,100 for each individual whom the company 
misclassifies as a non-employee, or with respect to whom the company 
violates the FLSA's minimum wage, overtime or recordkeeping 
requirements. The maximum penalty would increase to $5,000 for a 
company that repeatedly or willfully commits such violations.
     Shifting the Burden of Proof.--If a company fails to 
comply with the new recordkeeping or notice requirements with respect 
to an individual, the individual would be presumed to be an employee of 
the company, which presumption could be rebutted only by clear and 
convincing evidence of the individual's independent-contractor status.
     Intensifying State Enforcement Efforts.--The bill would 
amend the provisions of the Social Security Act that impose conditions 
a State must satisfy to qualify for Federal funding of its unemployment 
programs to require a State to focus additional resources on worker 
classification in order to qualify for Federal funding for its 
unemployment programs.

    In effect, these provisions go beyond mere enforcement of proper 
worker classification. Instead, we fear they will coerce firms who 
correctly classify workers into abandoning their business model in 
order to reduce their exposure to nuisance suits and regulatory 
inquiries. If independent broker-dealers were forced to reclassify 
their financial advisors as employees, the additional costs and 
compliance burdens would cripple their ability to remain profitable 
while also providing the services needed by their advisors and their 
clients. As a result, the status of this successful and valuable 
business model would be significantly threatened by the legislation.
    We urge the committee to consider these important implications for 
independent broker-dealers and their affiliated financial advisors as 
it examines the issue of worker classification.
  Prepared Statement of Charles F. Chiusano, Vice President and CFO, 
Avant Business Services; on behalf of the Messenger Courier Association 
                           of America (MCAA)
    Chairman Harkin and Ranking Member Enzi, I appreciate having this 
opportunity to provide testimony to the committee on the important 
issue of the need for businesses to properly classify individuals as 
independent contractors or employees. I share your concern over 
businesses which intentionally misclassify employees as independent 
contractors and I would like to share with the committee the background 
on the messenger courier industry, our business model which relies upon 
independent contractors, and our concerns with legislation introduced 
in both the House and Senate addressing the misclassification of 
employees as independent contractors.
    I am the vice president and CFO of Avant Business Services which is 
a messenger courier company based in New York with operations 
throughout the New York City metropolitan area and Connecticut. Our 
company has been providing business services to our customers for over 
70 years. Throughout that time, Avant Business Services has relied upon 
using independent contractors to meet our customers' needs.
    Avant Business Services employs approximately 250 individuals and 
utilizes the services of about 150 independent contractors to make 
deliveries. We have offices in Manhattan, Stamford and Hartford. 
However, not all deliveries are made by independent contractors. In 
fact, we use employees to make deliveries in New York City where there 
is no investment on the individual's part, no delivery equipment is 
needed, the individual bears no risk of profit or loss and we need to 
provide direction and control. Avant Business Services is a 
longstanding member of the Messenger Courier Association of America 
(MCAA) which is the non-profit association of the messenger courier 
industry. My testimony today is submitted on behalf of the MCAA to 
speak for our industry on this critical issue.
    The same-day courier industry is an integral part of the American 
economy, providing transportation of packages, medical supplies, bulk 
materials and documents among businesses and corporations in the United 
States and beyond. What distinguishes the expedited courier sector from 
other components of the delivery supply chain is the emphasis on less 
than 24 hours, just-in-time delivery of packages based on customer 
demand.
    Courier businesses are small businesses and have a long history of 
positive influence in their communities. Firms typically employ about 
25 individuals, who receive good salaries and benefits, and utilize up 
to three times that many independent owner-operator drivers annually. 
There are more than 5,000 small businesses that make up the multi-
billion dollar same-day courier industry.
    Couriers pick up and deliver important business documents or 
packages that need to be sent or received quickly either locally, 
regionally, or nationally. Couriers also deliver items that the 
customer is unwilling to entrust to other means of delivery because 
they are either time-sensitive or require specialized individual 
handling, such as medical supplies, blood, machine parts, and organs 
for transplant.
    While there are many industries that use courier services, certain 
industries critically depend on couriers for expedited same-day or less 
than 24 hours delivery on a daily basis. Biomedical labs and analysis 
centers use couriers to retrieve and deliver samples for testing and 
evaluation. The manufacturing industry relies on couriers to distribute 
parts to keep their plants operating smoothly. Financial institutions 
must transfer multiple documents every day between branches processing 
centers and the Federal Reserve. Law firms must deliver confidential 
documents on very strict deadlines and use couriers to ensure rapid 
delivery. Pharmaceutical distributors utilize couriers to transport 
medications to pharmacies, hospitals and nursing homes daily. And 
pharmacies utilize couriers to deliver medications to the homebound. 
These are just a few examples of our primary customer markets--each 
courier company, dependent on their expertise and regional needs, has a 
unique customer market profile.
    Due to the critical need, fragility, confidentiality or special 
handling of items, these packages cannot be slotted into the existing 
delivery times for next day or 2-day delivery offered by the Postal 
Service and the large overnight delivery companies; they must be 
delivered according to the customer's schedule and specifications. 
Organs must be delivered in a certain timetable in order to be viable 
for transplantation, medical specimens delivered for testing can be the 
most useful to the patient if results are available quickly, and legal 
documents are often prepared and delivered to the client or judge on 
unforgiving deadlines.
    For these types of goods, courier service is the only form of 
delivery that does not jeopardize the item delivered or the business 
involved. Owner-operator drivers are a key part of the same-day 
delivery practice as they provide the ability for flexible scheduling 
and ensure a courier will always be available for a customer delivery.
    The business model for the courier industry is particularly reliant 
on independent contractors, which are engaged to perform a variety of 
deliveries. The nature of the industry, with its on-demand, often 
unscheduled delivery model, requires a varying number of courier 
drivers on any given day and time of day to complete a set service. The 
business model is also supported by numerous dedicated employee 
resources in a variety of executive, clerical and administrative 
functions.
    To meet their customers' demands, courier services contract with 
competent, ambitious, and responsible individuals on an ``as needed'' 
basis to service their community every day. These independent owner-
operators pick up and deliver letters, important business documents or 
packages that need to be sent or received quickly within a local area. 
Because these items are transported according to the customer's own 
timetable and oftentimes these shipments are time sensitive, the owner-
operator business model allows courier companies to staff each day of 
work appropriately.
    In our industry, independent contractors contribute to a healthy 
competition in many respects. Independent contractors bid for work from 
courier companies and by so doing set the price paid for their work. It 
is common in our industry for individuals starting out as an 
independent contractor providing services to courier companies and 
overtime starting their own courier company and competing with the 
company to which they formerly provided services. In fact, Birol Aran 
was an individual who started as an independent contractor in 1993 and 
now owns and operates Manhattan Express Courier Service and is a 
competitor of Avant Business Services.
    In many instances, independent contractor owner-operator drivers 
can make significantly more money offering their services competitively 
to multiple businesses rather than receiving work from just one 
company. We have independent contractors who have made a good living 
and have provided services to our company dating back to 1990. It is 
this entrepreneurial spirit and opportunity that helps drive our 
industry and our country.
    Many independent contractors in our industry enjoy the flexibility 
of being an independent contractor. Accepting or rejecting work based 
on their desire and ability to work is very attractive to many 
independent contractors. There are many examples of independent 
contractors telling companies that they will not work on certain days 
or not accept dispatch after certain hours or refuse a job because they 
don't want to drive a long distance.
    The use of independent contractors by our industry is not a recent 
trend or a new phenomenon. Independent contractors have been an 
integral part of our industry since our early beginnings dating back 
well over 100 years. Our industry has evolved as the economy has 
changed, but the need for independent contractors has remained a 
constant.
    We share your concern over businesses which intentionally 
misclassify employees as independent contractors. As an industry 
reliant upon independent contractors for our mutual success, we are 
keenly aware of the need to properly classify individuals as 
independent contractors or employees. MCAA urges all of its members to 
use industry best practices in making determinations of whether an 
individual is an employee or an independent contractor. Our member 
companies make the determination about whether an individual is an 
independent contractor or an employee based upon guidance from Federal, 
State and private sources. These are not decisions taken lightly.
    When engaging with an independent contractor, Avant Business 
Services executes a written contract with the independent contractors 
they use. A 1099 form for the services of the independent contractor is 
issued and the independent contractor is informed of their 
responsibility to pay their taxes on the income their company has 
earned. We also confirm that the independent contractor has the proper 
insurance for themselves and their vehicle. This is how we operate at 
Avant Business Services. And after 37 years in this industry, it is 
safe to say that this is the norm for other companies in this industry.
    Our industry has great concerns over the legislation introduced in 
the Senate and House of Representatives addressing the issue of 
classification of individuals as independent contractors. Legislation 
to eliminate the safe harbor found in Section 530 of the Internal 
Revenue Code in particular is very troubling to our industry. The 
intention of these bills may be to go after those companies or even 
industries that have intentionally misclassified individuals. However, 
the reality is that these bills will affect all companies using 
independent contractors.
    We have two broad concerns with S. 3254 introduced by Senator Brown 
and supported by many members of this committee. First, this 
legislation creates additional new mandates and requirements on all 
businesses using independent contractors. These new requirements, in a 
vacuum, may not seem to some as too onerous. Unfortunately, we don't 
operate our businesses in a vacuum. These changes must be considered in 
the context of existing and new mandates being imposed on our 
businesses. For example, the recently enacted health care reform bill 
will require significant new reporting requirements for transactions 
between our businesses and other businesses.
    Second, our concern about the employees rights Web site called for 
in this legislation does not appear to recognize the benefits of being 
an independent contractor. Independent contractors often have much 
greater economic opportunity than employees as well as the freedom to 
work when they want and where they want.
    We would urge this committee to proceed cautiously with this 
legislation. Our industry has seen the successful use of industry 
guidance as a way to ensure proper compliance. In the State of 
Minnesota, our industry was able to pass a State law providing such 
guidance with the support of organized labor and the trucking industry. 
We also urge the committee to review the New York State Department of 
Labor (NYS DOL) Guidelines for the Messenger Courier Industry (a copy 
is attached). We believe this guidance established after an extensive 
period of discovery between the NY State Messenger Courier Association 
and the NYS DOL can act as a template for successful guidance 
throughout the country. We would recommend Congress consider this 
approach as an alternative to the changes in law proposed by Senator 
Brown.
    The Courier Industry is connected to every important segment of 
American commerce, literally saving lives daily and improving the 
health and well-being of our citizens. The most important deliveries, 
including financial transactions, critical machine parts, lab reports 
and life saving medications, are performed by independent contractors 
working for over 5,000 small courier companies. For over 100 years, our 
industry has been served by a business model that is a great example of 
the American Dream. Our independent contractor is a person who works 
hard, follows the rules and provides efficient flexible services that 
cannot be duplicated. We recommend that any future legislation consider 
how it will impact our industry and its essential core component: the 
independent contractor.
                                 ______
                                 
    Attachment.--New York State Department of Labor Guidelines For 
         Determining Worker Status: Messenger Courier Industry
    The following guidelines are used by the Unemployment Insurance 
Division, the Division of Labor Standards and the Division of Safety 
and Health to establish whether an employment relationship or an 
independent contractor status exists when companies engage the services 
of messengers and/or couriers who own or lease vehicles.
    Independent contractors are excluded from coverage under the 
Unemployment Insurance Law and not afforded certain protections 
provided by Labor Standards and Safety and Health law. These are 
persons who are actually in business for themselves and hold themselves 
available to the general public to perform services. A person is an 
independent contractor only when free from control and direction in the 
performance of such services. All factors concerning the relationship 
between the two parties must be taken into consideration to determine 
if the party contracting for the services exercises, or has the right 
to exercise, supervision, direction and control over the courier or 
messenger. No one single factor is controlling, nor do all factors need 
to be present to establish the nature of the relationship.
    Employers may request a formal determination of the status of 
couriers/messengers performing services for unemployment insurance 
purposes by writing to the Liability and Determination Section and 
furnishing complete details of the relationship. An employer who 
assumes a courier/messenger to be an independent contractor and does 
not report and pay taxes based upon the assumption, may find they are 
subject to retroactive assessment, interest or penalty, if it is later 
determined through an audit, benefit claim or some other review, that 
there was an employment relationship. Therefore, it is to the 
employer's advantage to request a determination when the status of a 
courier/messenger is in question.
    The Department of Labor is implementing these guidelines with an 
effective date of January 1, 2006. Therefore, employers may discontinue 
reporting couriers/messengers for unemployment purposes when the 
application of these guidelines results in a status of independent 
contractor as of January 1, 2006. Please note the prospective nature of 
the implementation. As a result, the Unemployment Insurance Division 
will not issue redeterminations and refunds for previously reported 
individuals.
    Employers with questions regarding the interpretation or 
application of the factors outlined in the guidelines in relation to an 
unemployment insurance matter may contact the Liability and 
Determination Section at (518) 457-2635. Employers with questions in 
relation to a Division of Labor Standards issue should call (518) 457-
4256. Division of Safety and Health issues may be referred to (518) 
457-2238.
                          industry background
    These guidelines will be used to determine the worker status of 
couriers who own or lease a vehicle. Couriers who utilize company 
vehicles are presumed to be employees as they have no risk of 
investment or exposure to profit or loss. It is industry practice that 
bike messengers own their own bike, and along with foot messengers are 
admitted employees of messenger companies providing delivery services 
to their customers.
    A courier is a person who provides pickup and delivery of goods for 
customers, transporting the product in a motorized vehicle. A messenger 
provides similar services to customers via foot or bike delivery. Some 
companies use both messenger and courier delivery persons.
    In large metropolitan areas, the pickup and delivery could be 
within blocks, or within or across boroughs. In suburban or rural 
areas, the pickup and delivery could involve a large geographic area 
covering hundreds of miles.
    Bike and foot messengers are commonly used to transport smaller 
goods and packages in metropolitan areas, while couriers are able to 
accommodate larger and multiple customer requests.
    Products and goods to be picked up and delivered are based on the 
specific need of the customer including, but not limited to, 
manufactured goods, legal, financial, and banking documents, office 
supply products, film, pharmaceuticals, portfolios, blueprints, 
clothing, costumes, art work, and personal items.
    Courier and messenger companies may provide 24/7 on-demand pickup 
and delivery services for customers, and a courier company may also 
provide established routes involving multiple pickup and delivery 
services for customers. A courier may perform both on-demand and route 
delivery services.
    Courier and messenger companies offer on-demand assignments via a 
dispatch system using communication devices such as two-way radios, 
pagers, beepers, cell phones or palm pilots to relay the details of the 
assignment. Assignments are offered to one courier or messenger at a 
time.
    The courier and messenger company establishes the fee charged to 
its customer which may be based on factors such as size and weight of 
package, volume, distance, urgency of the delivery, frequency of the 
route, and number of stops. Couriers are generally paid a percentage of 
the fee charged to the customer for on-demand assignments while 
messengers are normally paid the higher of an hourly rate or fee basis 
for similar type assignments. A courier who performs a fixed route 
delivery is aware of the established stops and the fee to be received 
at the beginning of each day's route. The fee is usually not hourly or 
a percentage of the amount charged to the customer but rather a set 
amount which might for example be on a daily or weekly basis.
    A courier company may utilize a third party as its agent for the 
purposes of paying the courier, issuing end of year tax documents, 
offering discount insurance and benefit packages, and performing 
background checks on its potential courier pool. The courier may be 
required to enter into a contract with the third party who acts as the 
agent of the courier company. The third party provisions contained in a 
contract with a courier are mutually agreed on between the courier 
company and the third party and the provisions are as if required and 
enforced by the courier company. Third parties may be paid an 
administrative fee by both the courier company and courier for its 
services.
                       determining worker status

Couriers

    With respect to couriers, there are two types of services that may 
be performed:

     On Demand--customer requests same day or next day pickup 
and delivery of an item from Point A to Point B that may vary each day 
and for which a courier receives an established or negotiated fee.
     Route Delivery--customer or courier company has an 
established route(s) or territory within which are multiple locations 
for pickup and delivery of items that may vary each day and for which a 
courier receives an established or negotiated fee.

    Through the application of these guidelines, the worker status of a 
courier who performs both on-demand and route delivery services will be 
based on the factors that apply to each type of service and may result 
in two different worker status outcomes.

On Demand

Indicators of Independence
    The strong factors a courier performing on-demand services as an 
independent contractor are:

    (1) The courier owns or leases a motorized vehicle. Couriers 
driving such vehicles need not hold a commercial driver's license.
    A lease must have evidence of substantial investment by the courier 
such as:

     The lease is fair market value.
     It is for a minimum of at least 1 year.
     The courier is obligated to satisfy the terms of the lease 
even if courier services are discontinued.
     There is a reasonable interest rate.

    (2) The courier is responsible for all expenses such as fuel, 
vehicle repairs, maintenance and insurance, tolls, occupational 
accident insurance or workers' compensation coverage, and communication 
devices or scanning equipment.
    (3) The courier is free to negotiate the fee offered for services 
and is not prohibited from renegotiating an established fee on an 
assignment by assignment basis.
    (4) The courier is paid on a negotiated per completed assignment 
basis, and not by the hour.
    (5) The courier is free to accept or reject a dispatched assignment 
based on conditions such as work hours and schedule.
    (6) The courier receives an advertising fee for displaying courier 
company or courier company's customer's signage on the vehicle.
    (7) The courier's services are not exclusive to a courier company 
and the courier is free to obtain and accept assignments from others.
    (8) The courier establishes own route and sequence or priority of 
pickups and deliveries.
    (9) The courier receives and resolves customer complaints.
    (10) The courier is not required to display the courier company 
name on the vehicle other than what may be required on an assignment 
for security purposes.
    (11) Manifests are provided by the courier.

    Other factors that lead to independence are:

    (12) The courier possessed a ``dba'' or a Federal Employer 
Identification Number at the time of hire.
    (13) The courier is able to provide a substitute or engage other 
couriers without approval or notification of the courier company, so 
long as the substitute meets the courier company's specifications with 
respect to driver motor vehicle licensing, drug testing, criminal 
background checks and insurance requirements.
    The courier is primarily responsible for obtaining substitute or 
replacement driver but may seek assistance from the courier company or 
third party agent.
    (14) The courier is not provided with training, other than a 
general orientation session to familiarize the courier with basic 
customer pickup or delivery characteristics.
Indicators of Employment
    The strong factors a courier performing on-demand services as an 
employee are:

    (1) The courier company sets the rate of pay.
    (2) The courier company pays or reimburses the courier for expenses 
such as fuel, tolls, vehicle repairs, maintenance, insurances.
    (3) The courier is required to accept assignments.
    (4) The courier is not free to obtain assignments from others.
    (5) The courier is covered under the courier company's Workers' 
Compensation Policy.
    (6) The courier has a set work schedule or required to be available 
for assignments during a pre-established period.
    (7) The courier company establishes the route, sequence or priority 
of the pickup or delivery.
    (8) The courier company maintains authority to insure all customer 
requirements are carried out by the courier even if the courier agreed 
to the requirements at the time his/her services were engaged.
    However, the courier company's right to insure customer 
requirements are carried out by the courier regarding security and 
appearance of vehicle, delivery and pickup times, shipment integrity, 
compliance of governmental regulations, and general standards of 
conduct is a reasonable business practice and not an indication of 
control over the courier's services.
    (9) The courier company prohibits the courier from participating in 
the process of resolving customer complaints.
    (10) The courier is required to display courier company name or 
customer name on the vehicle at all times even when not on an 
assignment.
    (11) Manifests are provided free of charge by the courier company.

    Other factors that lead to employment are:

    (12) The courier company establishes earlier delivery/pickup 
timeframes than those required by the customer, or if no timeframe was 
established by the customer, the courier company specifies a timeframe 
to the courier.
    (13) The courier is required to keep in communication with the 
courier company while on route for purposes beyond relaying information 
from the courier company customer to the courier or beyond the courier 
company's customer request regarding the status of delivery.
    (14) The courier company provides substitutes or replacement 
drivers.
    (15) The courier company requires attendance at training or 
orientation sessions for issues other than those required by 
governmental agencies or on subjects such as use of the communication 
equipment, the proper completion of paperwork, or the courier company's 
customer policies and/or procedures.
    (16) The courier company restricts the courier from performing 
courier service for any customer of the courier company upon 
termination of the relationship between the parties.
    (17) The courier company requires the courier to wear a uniform or 
attire that includes identifications or logos beyond those associated 
with the courier company.
    (18) The courier is required to perform services personally.
Neutral Factors
    Factors that neither point to an independent contractor or 
employment relationship are:

    (1) The courier is required to wear a uniform or attire with the 
courier company logo or identification.
    (2) The courier is required to carry a courier company badge or 
other identification for security purposes.
    (3) The courier company or its third party agent interviews or 
screens prospective couriers by performing background checks such as 
drug testing or motor vehicle checks prior to issuing assignments.
    (4) The courier is paid by the courier company for the delivery 
even if the delivery did not meet the standards or parameters of the 
courier company's customer.
    (5) The courier may contact the courier company upon pickup or 
delivery of item/article but does so out of courtesy, as a means to 
obtain additional assignments.
    (6) The courier is required to keep in contact with the courier 
company while on route for purposes of relaying information from the 
courier company's customer to the courier, or for purposes of 
confirming with the courier company's customer its pickup and delivery 
timeframe adherence.
    (7) The delivery/pickup timeframe is set by the courier company's 
customer.
    (8) The courier is required by the courier company to attend 
training or orientation sessions for issues mandated by governmental 
agencies such as OSHA or the Transportation Security Administration, or 
on subjects such as proper completion of paperwork or courier company 
customer policies and/or procedures.
    (9) The courier may be required to obtain a ``dba'' or obtain a 
Federal Employer Identification Number as a condition of obtaining 
assignments.
    (10) The courier and the courier company jointly resolve customer 
complaints.
    (11) The courier company is responsible for customer billing and 
collecting.
    (12) The courier is required to sign a Non Disclosure agreement 
(NDA). The purpose of such an agreement is to protect the courier 
company's confidential information including but not limited to 
clients, addresses, billing rates, and contact names and telephone 
numbers.
    (13) Customer or third party provides manifests.

Route Delivery

Indicators of Independence
    The strong factors a courier performing route delivery services as 
an independent contractor are:

    (1) The courier owns or leases a motorized vehicle used for 
delivery services. A lease must have evidence of substantial investment 
by the courier such as:

     The lease is fair market value.
     It is for a minimum of at least 1 year.
     The courier is obligated to satisfy the terms of the lease 
even if courier services are discontinued.
     There is a reasonable interest rate.

    (2) The courier is responsible for all expenses such as fuel, 
vehicle repairs, maintenance and insurance, tolls, occupational 
accident insurance or workers' compensation coverage, and communication 
devices or scanning equipment.
    (3) The courier is free to negotiate or renegotiate terms of the 
route such as the stops or rate of pay.
    (4) The courier negotiates the rate of pay that is other than an 
hourly rate.
    (5) The courier is free to accept or reject assignments.
    (6) The courier receives an advertising fee for displaying courier 
company or courier company's customer's signage on the vehicle.
    (7) The courier receives an advertising fee from either the courier 
company or the courier company's customer for wearing a customer's 
badge, ID, uniform or attire.
    (8) The courier is unrestricted from performing delivery services 
for others including while on route for courier company's customer 
except as may be restricted by governmental authorities such as DEA or 
DOT Office of Hazardous Materials.
    (9) The courier's services are not routinely monitored by the 
courier company to insure customer requirements are carried out, but 
the services may be monitored for administrative purposes such as 
customer billing or determining courier compensation.
    (10) The courier receives and resolves customer complaints.
    (11) The courier is not required to display the courier company's 
name on the vehicle other than what may be required on an assignment 
for security purposes.
    (12) Manifests are provided by the courier.

    Other factors that lead to independence are:

    (13) The courier possessed a ``dba'' or a Federal Employer 
Identification Number at the time of hire.
    (14) The courier is able to provide a substitute or engage other 
couriers without approval or notification to the courier company, so 
long as the substitute or other courier meets the courier company's 
specifications with respect to driver motor vehicle licensing, drug 
testing, criminal background checks and insurance requirements.
    The courier is primarily responsible for obtaining substitute or 
replacement drivers but may seek assistance from the courier company or 
third party agent.
    (15) The courier is responsible for lost or damaged product.
    (16) The courier is responsible for providing or obtaining 
appropriate containers required for the delivery/pickup of the product.
Indicators of Employment
    The strong factors a courier performing route delivery services as 
an employee are:

    (1) The courier is paid at a base hourly rate or on a fee basis 
established by the courier company.
    (2) The courier company pays or reimburses the courier for expenses 
such as fuel, tolls, vehicle repairs, maintenance, insurances.
    (3) The courier is required to accept additional assignments.
    (4) The courier company prohibits the courier from performing 
delivery services for others.
    (5) The courier is covered under the courier company's Workers' 
Compensation Policy.
    (6) The courier company maintains authority to insure all customer 
requirements are carried out by the courier even if the courier agreed 
to the requirements at the time his/her services were engaged.
    However, the courier company's right to insure customer 
requirements are carried out by the courier regarding security and 
appearance of vehicle, delivery and pickup times, shipment integrity, 
compliance of governmental regulations, and general standards of 
conduct is a reasonable business practice and not an indication of 
control over the courier's services.
    (7) The courier company prohibits the courier from participating in 
the process of resolving customer complaints.
    (8) The courier is required to display courier company name or 
customer name on the vehicle at all times even when not on an 
assignment.
    (9) Manifests are provided free of charge by the courier company.

    Other factors that lead to employment are:

    (10) The courier is required to keep in communication with the 
courier company while on route for purposes beyond relaying information 
from the courier company customer to the courier or beyond the courier 
company's customer request regarding the status of delivery.
    (11) The courier company provides substitute or replacement 
drivers.
    (12) The courier company requires attendance at training or 
orientation sessions for issues other than those required by 
governmental agencies or on subjects such as use of the communication 
equipment, the proper completion of paperwork, or the courier company's 
customer policies and/or procedures.
    (13) The courier company restricts the courier from performing 
courier service for any customer of the courier company upon 
termination of the relationship between the parties.
    (14) The courier is required to wear, without compensation, a 
courier company badge, ID, uniform or attire that includes 
identifications beyond those of the courier company such as the courier 
company's customer.
    (15) The courier is required to perform services personally.
Neutral Factors
    Factors that neither point to an employment or independent 
contractor relationship are:

    (1) The courier is required to wear a uniform or attire with the 
company logo or identification.
    (2) The courier is required to carry a courier company badge or 
other identification for security purposes.
    (3) The courier company or its third party agent interviews or 
screens prospective couriers by performing background checks such as 
drug testing or motor vehicle checks prior to issuing assignments.
    (4) The courier is paid by the courier company for the delivery 
even if the delivery did not meet the standards or parameters of the 
courier company's customer.
    (5) The courier is required to keep in contact with the courier 
company while on route for purposes of relaying information from the 
courier company's customer to the courier, or for purposes of 
confirming with the courier company's customer its pickup and delivery 
timeframe adherence.
    (6) The frequency, sequence, timeframe or delivery instructions/
regulations of the route are established by the courier company's 
customer.
    (7) The courier is required to report daily to a distribution 
center to initiate the day's assignments.
    (8) The courier is required by the courier company to attend 
training or orientation sessions for issues mandated by governmental 
agencies such as OSHA or the Transportation Security Administration, or 
on subjects such as proper completion of paperwork or courier company 
customer policies and/or procedures.
    (9) The courier may be restricted by the courier company's customer 
from performing delivery services for others while on route for the 
customer for reasons established by the customer such as a concern for 
security or identity theft of customer's product or product integrity 
of the customer's goods.
    (10) The courier may be required to obtain a ``dba'' or obtain a 
Federal Employer Identification Number as a condition of obtaining 
assignments.
    (11) The courier and the courier company jointly resolve customer 
complaints.
    (12) The courier company is responsible for customer billing and 
collecting.
    (13) The courier is required to sign a Non Disclosure agreement 
(NDA). The purpose of such an agreement is to protect the courier 
company's confidential information including but not limited to 
clients, addresses, billing rates, and contact names and telephone 
numbers.
    (14) The courier company's customer or third party provides 
manifests.
    (15) The courier company's customer may provide special containers 
required for delivery/pickup of the customer's product.
    (16) The courier may be required to be responsible to load or 
unload the vehicle at a distribution center and may perform other 
routine functions normally associated with the delivery of the product 
such as the boxing of the product.
                        bike and foot messengers
    Within the messenger industry, it is standard practice that bike 
and foot messengers (messengers) are considered to be employees of the 
messenger company providing delivery services to its customers. It is 
also the custom that bike messengers provide their own bike, bag, lock, 
helmet, map, clipboard, cycling clothing and mobile communication 
devices and are responsible for the maintenance costs of the 
aforementioned items. The working relationship between messengers and 
the messenger company utilizing their delivery services for its 
customers contains significant common law indicators of an employment 
relationship:

     The messenger company makes standard withholding 
deductions from the messenger's earnings.
     The messenger company may provide fringe benefits to the 
messenger.
     The messenger company sets the rate of pay which is 
normally based on the higher of an hourly rate or fee basis.
     The messenger company sets the work schedule.
     The messenger company requires the services to be 
performed personally and the messenger is not able to provide his/her 
own substitute.
     The messenger company covers the messenger under the 
company's Workers' Compensation policy.
     The messenger company sets the order and priority of 
delivery.
     The messenger company requires the messenger to accept an 
assignment.
     The messenger company requires the messenger to follow all 
company rules and regulations.
      Prepared Statement of the Coalition to Preserve Independent 
                           Contractor Status
    The Coalition to Preserve Independent Contractor Status (the 
``Coalition'') appreciates the opportunity to submit testimony 
concerning the important issue of worker classification. The Coalition 
consists of industry associations, businesses and independent 
contractors that share a common interest in preserving the legal status 
accorded independent contractors, and in the creation of economic 
opportunities for all individuals, whether they offer their services as 
independent contractors or employees.
    The Coalition absolutely supports the proper classification of 
workers, and the proper and timely compliance by independent 
contractors with their Federal, State and local tax reporting and 
payment obligations. Moreover, it supports government policies aimed at 
enhancing these objectives, provided that such policies do not 
undermine the rights of independent contractors and their clients to do 
business with each other.
    In the current climate of record-high numbers of Americans out of 
work, the Coalition submits that one of the Government's top priorities 
should be to support all facets of economic growth, regardless of 
whether they involve sectors in which individuals work as independent 
contractors or employees. The Congress should not thwart these 
opportunities by undermining the sound business relationships between 
independent contractors and their clients.
    The Coalition opposes the enactment of S. 3254, the Employee 
Misclassification Prevention Act because its provisions would increase 
the regulatory risks of doing business with independent contractors to 
an excessively high level.
    We are concerned that if S. 3254 were enacted, companies that rely 
on the services of independent contractors would face additional 
burdens when engaging in those legitimate and legal business practices. 
Such burdens limit companies' flexibility to retain independent 
contractors, which would reduce their efficiency and ultimately 
threaten opportunities for not only independent contractors but also 
employees. The bill does not take into account the unique business 
models that individual companies rely on to remain competitive, and 
would be particularly detrimental in these challenging economic times.
    S. 3254 is premised on the misguided assumption that there is 
widespread misclassification of contracted individuals, and it fails to 
acknowledge that individuals who operate as independent contractors 
generally do not wish to be classified as an employee. Status as a 
contractor affords both individuals and client companies the 
flexibility to agree to terms that are in the best interest of each 
party. The bill would unnecessarily add confusion and uncertainty to 
the long-standing administration of the Fair Labor Standards Act 
(``FLSA'') and thus undermine economic growth.
    The following outlines the specific reasons for our concerns with 
S. 3254.

    1. The proposed financial sanctions for worker misclassification 
are disproportionate.

    Our principal concern with the bill involves the new financial 
sanctions it proposes for worker misclassification. The proposed 
sanctions, when added to the sanctions already imposed under current 
law, would expose a company to penalties that are highly 
disproportionate to the offense. The FLSA is already punitive in this 
regard, as it exposes a company that fails to pay minimum wage or 
overtime to actual damages plus liquidated damages plus attorneys' 
fees.\1\ The bill would make those sanctions even more onerous when 
worker misclassification is involved, by increasing the double damages 
to treble damages and adding to that a penalty of up to $1,100 or 
$5,000 per mis-classified worker. This would elevate the offense of 
worker misclassification to a higher magnitude than the criminal 
predicate acts \2\ that form the basis for a civil penalty under the 
Racketeer Influenced and Corrupt Organizations Act (``RICO''), which 
imposes only treble damages plus attorneys' fees.\3\
---------------------------------------------------------------------------
    \1\ See, 29 U.S.C.  216(b).
    \2\ RICO defines ``racketeering activity'' to include violations of 
various predicate criminal statutes including mail and wire fraud.  
1961(1). Hemi Group, LLC v. City of New York, 130 S. Ct. 983, 995 (U.S. 
2010).
    \3\ See, 18 U.S.C.S.  1964. ``Congress intended RICO's civil 
remedies to help eradicate `organized crime from the social fabric' by 
divesting `the association of the fruits of ill-gotten gains.' '' Genty 
v. Resolution Trust Corp., 937 F.2d 899, 910 (3d Cir. 1991) (quoting 
United States v. Turkette, 452 U.S. 576, 585, 101 S. Ct. 2524, 2529, 69 
L. Ed. 2d 246 (1981)).
---------------------------------------------------------------------------
    Worse yet, the $1,100 per-misclassified-worker penalty and treble 
damages would be imposed in the form of strict liability. Levying these 
extreme monetary penalties on companies that have not demonstrated a 
willful intent to wrongly misclassify individuals as contractors under 
the FLSA is inappropriate. Currently, businesses are required to apply 
multiple factors contained in an economic realities test to properly 
classify individuals, which takes into account the unique circumstances 
of the engagement, the type of services provided as well as the scope 
of work performed under the terms of their contract. Such an overly 
broad capacity for expanded penalties would likely result in punitive 
damages for legitimate contracting practices.
    While the threshold for imposing the higher $5,000 per-
misclassified-worker penalty is more demanding, it still only requires 
that a misclassification be repeated or willful. This means that a firm 
that has been doing business for many years with many independent 
contractors might satisfy the repeated requirement, which would subject 
the firm, once again, to strict liability for the higher confiscatory 
financial sanctions. The effect of this penalty scheme would be to 
impose the harshest penalties on those firms that offer the most 
opportunities to independent contractors.
    It is respectfully submitted that the bill's proposed financial 
sanctions would create a strict-liability trip wire for 
misclassification that would be so costly to businesses that few would 
continue doing business with any but the most exaggeratedly independent 
of the independent contractors, i.e., those with multiple existing 
clients, a substantial capital investment in the business and a robust 
Web presence or other evidence of significant business advertising. The 
individual freelancer who seeks to use a personal computer to earn 
extra money on a part-time basis, or who seeks to start a new freelance 
business and is searching for that first client, would likely find no 
company willing to take the risk. Even those independent contractors 
who have been in business for years, but who work principally for only 
a very few large clients, would likely find those clients less willing 
to continue those relationships, due to the risk that the individual 
could be found to be economically dependent on one of them. This bill 
poses a mortal threat to individuals who rely on contracting 
opportunities for their livelihood.

    2. Defining a non-employee to include entities whose owner is a 
service provider would penalize firms for adopting prudent policies 
designed to ensure compliance.

    The bill's per se treatment as a non-employee for purposes of the 
proposed recordkeeping and notice requirements of any individual who 
offers services through an entity in which the individual owns an 
interest is an affront to the many companies that have taken prudent 
measures to ensure that they are doing business only with legitimate 
non-employees.
    Firms that do business with large numbers of independent 
contractors commonly develop a systematic process for conducting due 
diligence on such contractors to ensure that they are truly self-
employed. Inasmuch as an important consideration in these 
determinations, particularly at the State level, is whether an 
individual is independently established as a separate trade or 
business, some firms have made the decision to do business only with 
vendors that operate in the form of an entity, as the existence of an 
entity offers compelling evidence of a bona fide trade or business.
    Similarly, growing numbers of independent contractors, recognizing 
the increasingly hostile regulatory environment for independent 
contractors, have established legal entities to allay the fears among 
potential clients that doing business with them would expose the 
clients to a misclassification risk.
    We are aware of what are sometimes referred to as pre-packaged 
incorporations, where a business, as part of its registration process 
for independent contractors, creates a legal entity for the contractor, 
but the bill does not seek to distinguish between those contrived 
arrangements and the legitimate arrangements discussed above. Rather, 
it disregards them all.
    It is respectfully submitted that the important State laws that 
govern and recognize the separate legal status accorded a valid legal 
entity should not be disregarded, absent a compelling reason. The 
bill's proposed sweeping disregard of any such entity in which a 
service provider holds an ownership interest is overly broad, and 
should be rejected.

    3. Requiring companies to maintain records of hours worked by non-
employees would be burdensome, counterproductive and disruptive to 
business relationships.

    The bill would require companies to maintain records of hours 
worked by non- employees, without regard to whether their fees are 
determined on an hourly basis.
    This new requirement would place non-employees at a competitive 
disadvantage relative to their larger competitors. While clients 
already likely maintain records of hours worked by vendors who render 
services on hourly engagements, clients likely do not maintain any such 
records for other engagements, where fees are determined on a basis 
other than hours worked.
    Even with respect to hourly engagements, it is not likely that the 
records maintained for hours worked are necessarily determined in 
accordance with U.S. Department of Labor (``DOL'') regulations 
governing the determination of compensable hours worked. If the 
proposal were construed to require compliance with such DOL 
regulations, the resultant burden imposed on non-employees and their 
clients--even with respect to hourly engagements--would be excessive 
and to no discernable purpose.
    With respect to engagements for which fees are determined on a 
basis other than hours worked, to require firms to maintain records of 
hours worked by such vendors would serve no business purpose, create 
confusion over how the hours should be determined, and likely disrupt 
the parties' business relationship.
    For example, in some industries, independent contractors have 
invested substantial resources in developing computer programs and 
other high-technology applications that permit the delivery of high-
quality services with few hours' work, at least as determined on a 
client-by-client basis. A substantial fee might be charged for these 
services, which reflects not only the hours worked for a specific 
client but also the hours worked and other investment in developing the 
underlying system. To be sure, there are myriad examples of different 
types of arrangements in which a firm engages an independent contractor 
with specialized expertise to provide a service or produce a 
deliverable, or to sell products on a commissioned or buy-sell basis, 
where the agreed compensation has no relationship at all to the number 
of hours worked. To require an independent contractor to provide its 
clients with a record of hours worked on such engagements could create 
unnecessary tension with the client. For example, an independent 
contractor might find it uncomfortable charging a client a substantial 
fee for a deliverable that required only a few hours' work, even though 
the value of deliverable far exceeds the fee. Furthermore, while the 
client might have no interest in knowing the number of hours worked on 
such an engagement, once the client does know, it could be upsetting. 
Finally, if the DOL were to require these independent contractors to 
determine their hours in accordance with DOL regulations, the 
requirement would approach the absurd.
    For the reasons outlined above, it is respectfully submitted that 
the bill's proposal to require a company to maintain records of hours 
worked by non-employees on engagements other than hourly engagements is 
inadvisable and should be rejected.

    4. Requiring companies to maintain records of the ``accurate 
classification of the status'' of non-employees is unnecessary.

    The bill would require a company to maintain records showing an 
accurate classification of the status of each individual with whom the 
company does business as either an employee or a non-employee.
    Companies commonly undertake due diligence to confirm the self-
employed status of the independent contractors with whom they do 
business. Depending upon the industry, the type of services and other 
aspects of an independent-contractor engagement, the specific due-
diligence criteria will differ. Companies that engage large numbers of 
independent contractors to provide similar types of services commonly 
do not maintain a specific due-diligence file for each individual. 
Requiring companies to do so would be unnecessary and would serve only 
to create additional barriers to a contracting opportunity for self-
employed individuals. Moreover, the burden it would impose on companies 
to create these records would significantly limit their flexibility to 
meet changing business needs and economic fluctuations.
    Also, requiring a company to maintain such a due-diligence file 
only with respect to independent contractors would put independent 
contractors at a competitive disadvantage compared to larger firms, to 
which the requirement would not apply, and would hamper contractors' 
best value proposition for companies seeking to retain them. For 
example, if a company were seeking to outsource a discrete project, the 
burden of preparing a due-diligence file on an independent contractor 
for that one project might be sufficient to dissuade the company 
against offering the project to independent contractors, and instead to 
offer it only to larger vendors to which the due diligence requirement 
would not apply.

    5. Requiring companies to provide a specified notice to non-
employees is burdensome and likely to lead to increased enmity and 
litigation between contracting parties.

    The bill would require a company to provide non-employees with a 
notice to ``inform the individual of the individual's classification,'' 
to direct the individual to a DOL Web site containing information 
``about the rights of employees under the law,'' and to advise the 
individual that his or her ``rights to wage, hour and other labor 
protections depend on [the individual's] proper classification as an 
employee or non-employee.''
    The proposed notice requirement suggests that self-employed service 
providers are having their independent contractor status imposed on 
them. For legitimate independent contractors, such a notice would be 
insulting and degrading; it also would accord them second-class 
standing relative to their larger competitors, as similar notices are 
not required for any other vendors.
    Also, the content of the notice would create uncertainty and 
unnecessary confusion for independent contractors. The proposed notice 
suggests that contractors may be entitled to certain protections 
afforded only to employees. Currently, companies must determine the 
legal classification of individuals by utilizing a multifactor test of 
economic realities. The promulgation of the proposed notice does not 
take into account the many factors used to determine an individual's 
status for many individual service contracts and might be susceptible 
to being construed to mean that certain independent contractors are 
entitled to protections for which they do not qualify.
    Finally, for a company that does business with large numbers of 
independent contractors, the notice requirement would increase the cost 
of engaging new contractors and likely give rise to additional 
confusion and questions from the contractors once they receive the 
notice. The additional costs such a company would incur in complying 
with this new duty and in responding to the questions the notices would 
produce would reduce the company's efficiency. The effects of the 
resulting reduced efficiency would be passed on to customers in the 
form of higher prices.
    The Coalition respectfully urges that this proposal not be enacted.

    6. Creating a presumption of employee status for failure to 
maintain records or provide requisite notice would be unfair.

    The bill provides that a company's noncompliance with the proposed 
recordkeeping or notice requirements with respect to an individual 
would result in the individual being presumed an employee, which 
presumption could be rebutted only by establishing the individual's 
independent-contractor status by clear and convincing evidence, which 
is a demanding standard.
    This proposal is insidious, as it would create a trap for the 
unwary. Companies would not intuitively suspect that the Government 
imposes any such duty with respect to their dealings with vendors. 
Thus, the proposal likely would disproportionately affect small 
businesses that do not have an in-house legal department. The provision 
would provide the DOL with overwhelming leverage to convince companies 
that violate the notice and/or recordkeeping requirements to reclassify 
independent contractors to employee status, as the burden of meeting 
the clear and convincing standard under the economic realities test 
would be daunting.
    The Coalition respectfully urges that this proposal be rejected.

    7. The proposed anti-retaliation provision would reward unethical 
conduct and create a new litigation hazard.

    The bill would prohibit a company from discharging or in any other 
manner discriminating against an individual who opposes any practice, 
files a complaint or institutes a proceeding concerning an individual's 
status for purposes of the FLSA or Federal employment tax purposes.
    The proposed anti-retaliation provision would advance a policy of 
protecting individuals who misrepresent their status as being self-
employed. An important component of the economic realities test is a 
consideration of the degree to which a putative independent contractor 
is economically dependent on the putative employer. A company cannot 
meaningfully evaluate this factor without obtaining information solely 
in the possession of an independent contractor, namely, the extent to 
which the contractor performs services for others. If a contractor 
provides materially false information, and as a consequence the 
contractor is misclassified, the client would have a legitimate reason 
to cease doing business with that contractor, but the bill would 
prohibit that.
    Also, the proposal would provide an independent contractor who 
fails to meet contract terms with a new form of protection against the 
client terminating their engagement, e.g., by filing an Internal 
Revenue Service (``IRS'') Form SS-8 \4\ and seeking a determination by 
IRS of their status as an employee or independent contractor. Under the 
bill, the filing of the Form SS-8 arguably would provide the individual 
with a basis for asserting that any subsequent termination by the 
client was in retaliation for that action.
---------------------------------------------------------------------------
    \4\ The Form SS-8 is the Internal Revenue Service (``IRS'') form 
used to obtain a determination from IRS as to the status of an 
individual as an employee or independent contractor for Federal taxes. 
To create another reason for individuals to submit Forms SS-8 would 
only add to an already overburdened IRS. A recently released audit 
report prepared by the Treasury Inspector General for Tax 
Administration (``TIGTA''), Employment Tax Compliance Could Be Improved 
With Better Coordination and Information Sharing, 2010-30-025 (March 
23, 2010), found that the Form 8919 that the IRS created in response to 
a prior TIGTA audit report is contributing to a substantial increase in 
the volume of Form SS-8 submissions that is overwhelming IRS staff who 
respond to them.
---------------------------------------------------------------------------
    Finally, the proposal would put individuals who operate as 
independent contractors at a disadvantage relative to larger 
competitors, because it would create a new litigation hazard associated 
with doing business with independent-contractor vendors that would not 
exist with other vendors.
    For the foregoing reasons, the Coalition opposes this provision.

    8. New mandate for States to enact laws imposing penalties for 
misclassifying workers.

    The bill would amend the provisions of the Social Security Act that 
impose conditions a State must satisfy to qualify for Federal funding 
of its unemployment programs to require a State's laws to require 
States to enact laws that create new penalties for worker 
misclassification. This would result in additional layers of complexity 
for companies and independent contractors in an already complicated 
system of determining an individual's status under existing Federal and 
State statutes.
    Additionally, such a mandate would exacerbate the already excessive 
penalties proposed under S. 3254. Such provisions would do nothing to 
clarify existing company obligations for determining an individual's 
status as an employee or independent contractor for any purpose.
    The Coalition would oppose this proposal for the foregoing reasons 
and also the reasons mentioned above under section 1.

    9. Permit DOL to share information on worker misclassification with 
IRS.

    The bill would permit the DOL's Wage and Hour Division to share 
information concerning worker misclassification with the IRS. States 
and the Federal Government already participate in extensive sharing of 
information about the classification of workers. Moreover, detailed 
information already is required from companies from several Federal 
agencies. It has yet to be demonstrated that additional systems of 
information sharing between Federal agencies will result in more 
effective enforcement of current laws. Until it is demonstrated by both 
the DOL and the IRS that the capability exists to streamline a system 
of enhanced information sharing, additional efforts will only serve to 
further burden an already beleaguered system used to enforce employment 
classification requirements. Furthermore, a determination needs to be 
made as to what type of information would be collected by the DOL and 
whether that information would be helpful to the IRS.
    For the foregoing reasons, the Coalition opposes this proposal.

    10. Require new DOL Web page containing information about the 
disparity of rights accorded employees versus independent contractors.

    The proposed creation of a new DOL Web site emphasizing the 
regulatory distinction between employees and independent contractors 
would have the effect of deemphasizing the fundamental business 
differences between these two very different means of pursuing a 
livelihood. At a minimum, such a Web site should also mention the 
business differences.
    Furthermore, the proposed Web site that would emphasize how 
independent contractors are denied protections accorded to employees 
not only would suggest that the two options are merely differences by 
degree, as opposed to being two fundamentally different approaches to 
income production, but it also would tacitly discourage individuals 
from pursuing self employment. From a public policy perspective, such a 
message from a government agency is morose. To be sure, rather than 
encouraging enterprising citizens to pursue their entrepreneurial 
dreams and grow the economy, the message would encourage individuals to 
secure refuge in the safety of employment, with all of the attendant 
government protections accorded that status.
    The Coalition opposes this proposal.

    11. The general effect of the bill would be to fundamentally re-
characterize independent contractors from small businesses to hybrid 
employees.

    An overarching concern with S. 3254 is that it would diminish the 
fundamental distinctions under the FSLA between employees and 
independent contractors, and inject an element of adversity between the 
contracting parties. The employee-type protections that the bill would 
impose on companies that do business with independent contractors, 
e.g., the anti-retaliation provisions and the recordkeeping and notice 
requirements, would have the effect of converting independent 
contractors into a new status of hybrid-employee. This would be a 
decidedly negative change for those individuals who seek to establish 
their own business and compete head-to-head with larger firms.
    Also, the new litigation hazards that the bill would create for 
companies doing business with independent contractors, and the 
exorbitant financial sanctions the bill would impose on a company for 
misclassifying workers, would tend to dissuade companies from doing 
business with independent contractors. Moreover, the proposed new 
notice requirements and DOL Web site content would tend to cause 
individuals to possibly question whether their decision to pursue self 
employment was a prudent decision; and for individuals newly 
investigating the possibility of pursuing this path, the Government's 
message to them would not be encouraging.
    The cumulative effect of the bill's proposals would likely cause a 
material reduction in the amount of business conducted by independent 
contractors and a corresponding reduction in the number of individuals 
who operate as independent contractors. The Coalition respectively 
submits that such a policy is a threat to economic growth and threatens 
the livelihood of individuals who wish to remain independent 
contractors.
    The Coalition submits that the Government should assist in the 
efforts of companies to create economic opportunities for employees and 
independent contractors alike through policies that encourage 
entrepreneurship; and it should recognize the benefits of opportunities 
afforded to individuals that are legitimately classified as independent 
contractors. Especially at a time when our economy attempts to recover 
from the magnitude of job losses not seen since the Great Depression, 
government policies should not place additional burdens on any form of 
legitimate economic activity.
    The Coalition would appreciate the opportunity to work with the 
committee to develop proposals that help ensure the proper 
classification of individuals as employees or independent contractors 
while preserving the rights and prospects of legitimate independent 
contractors.
            Respectfully submitted,
                                        Russell A. Hollrah,
                                                Executive Director,
               Coalition to Preserve Independent Contractor Status.
Prepared Statement of James P. Hoffa, General President, International 
                        Brotherhood of Teamsters
    The International Brotherhood of Teamsters strongly supports the 
Employee Misclassification Prevention Act (S. 3254). We commend Senator 
Sherrod Brown for introducing the bill, and Chairman Tom Harkin, 
Subcommittee Chair Patty Murray, and other members of the committee for 
cosponsoring this much-needed legislation. We would also like to 
express our appreciation to Chairman Harkin and Ranking Member Mike 
Enzi for convening this hearing to examine the rapidly escalating 
problem of worker misclassification--its impact on workers, compliant 
employers, and Federal and State governments--and to discuss efforts to 
crack down on this insidious practice.
    The International Brotherhood of Teamsters represents more than 1.4 
million men and women in a broad array of industries and occupations. 
Since its founding in 1903, the Teamsters Union has been a part of 
American workers' long and hard fight for dignity and fairness in the 
workplace and a fair share of our Nation's prosperity. This decades-
long struggle has produced vital workplace laws guaranteeing important 
benefits and protections for workers.
    These gains are now in jeopardy. We are seeing accelerating and 
intensified efforts to weaken and erode important workplace benefits 
and legal protections through the misclassification of workers. 
Millions of workers are illegally classified as independent contractors 
but essentially work as employees. They are ``independent contractors'' 
in name only and are cheated of important benefits and protections.
    The problem of worker misclassification has skyrocketed. It is 
spreading to a broad range of industries, including industries where 
misclassification had not been a problem. Large segments of entire 
industries, such as construction, base their business model on 
misclassification of workers and tax fraud.
    Worker misclassification cheats everyone: workers and their 
families; compliant and law-abiding businesses, Federal and State 
governments and taxpayers.
    The law grants workers many important workplace benefits and 
protections so long as the worker is an employee. Those who are self-
employed or are genuinely independent contractors have few rights in 
the workplace, but do control where they work.
    Workers who are misclassified by their employers as independent 
contractors end up with the worst of both worlds. They are without 
meaningful control over their work, and they are also without the legal 
protections and benefits of employees. They have no rights to minimum 
wage or overtime, or to employer-provided health insurance, retirement 
benefits or paid leave. They are not covered under workplace safety and 
health laws, nor do they have legal rights to equal opportunity in the 
workplace or to job-protected family and medical leave. They have no 
rights under the veterans' reemployment law.
    Workers misclassified as independent contractors have no rights to 
workers' compensation if injured or killed on the job, and no rights to 
unemployment insurance if laid off or fired. They are liable for both 
the employer's share of Social Security and Medicare taxes and for 
their own.
    Sadly, many workers are not aware they've been misclassified and 
assume that they are employees. Often it is only when they are injured 
in the workplace or let go from the job and denied benefits that they 
find out they are ``independent contractors.''
    Misclassification creates an uneven playing field. Lawful and 
ethical employers are placed at a competitive disadvantage. Companies 
that misclassify their workers as independent contractors have up to a 
30 percent competitive advantage over law-abiding businesses. They 
unfairly cut their labor and administrative costs and avoid labor and 
employment law obligations. Undercut by unfair competition, responsible 
employers are cheated out of business opportunities. This uneven 
playing field also depresses wages and labor standards. Law-abiding 
employers subsidize the ``freeloaders'' by shouldering increased 
burdens for workers' compensation and for the unemployment insurance 
fund.
    Misclassification also costs Federal and State governments billions 
of dollars in lost, but needed tax revenue. Between 1996 and 2004, 
$34.7 billion of Federal tax revenue went uncollected because employees 
were misclassified as independent contractors, according to a recent 
study. States also lose billions of dollars a year in income taxes, 
unemployment insurance taxes and workers' compensation premiums due to 
misclassification. Local governments with an income tax or ``piggy-
back'' on Federal income tax also lose revenue.
    For example, on average, 30 percent of Michigan employers 
misclassify employees or underreport employee payroll. The State loses 
$22 million-$33 million in income tax revenue per year. The cost to the 
Federal Government has been estimated at $57.9 million-$96.5 million 
annually.
    The Ohio attorney general estimates the State is losing $890 
million annually for unemployment insurance tax, workers' compensation 
and State and local income taxes.
    In Tennessee, researchers found that approximately 21 percent of 
the construction workforce was misclassified as independent contractors 
or paid under the table in 2006. That resulted in losses of $14 million 
to the State unemployment trust fund, $91.6 million in workers' 
compensation premiums and $115.4 million in Federal income and 
employment taxes.
    This revenue loss is not pocket change. There is no excuse for 
allowing so many businesses to avoid paying their fair share. It is 
imperative that Congress try to solve this problem. The Teamsters Union 
supports efforts by the U.S. Senate to crack down on businesses that 
illegally classify their employees as independent contractors.
    But first it's important to understand why misclassification is 
skyrocketing.
   what is fueling the skyrocketing prevalence of misclassification?
    According to the National Employment Law Project:

          ``under current law, there are only limited penalties, 
        reporting requirements, and complaint procedures that regulate 
        employers who hire independent contractors.''

    There are also significant tax loopholes in the law that 
facilitate, indeed encourage, misclassification.
    The Employee Misclassification Prevention Act is an important step 
in solving this escalating problem. The legislation makes it an 
explicit violation of the Fair Labor Standards Act to make an 
inaccurate classification--that is, to misclassify. It would require 
employers to properly classify their workers, keep records of their 
classification, permit workers to challenge their classification and 
protect them from retaliation. It would also increase penalties under 
appropriate circumstances.
    Passage of this legislation is needed to end this escalating abuse 
of the law. Also needed is passage of the Taxpayer Responsibility, 
Accountability, and Consistency Act (S. 2882/H.R. 3408) to close 
current tax loopholes that facilitate misclassification and payroll 
fraud. Allowing this situation to continue unabated rewards to cheaters 
at the expense of workers and law-abiding businesses and taxpayers.
    The International Brotherhood of Teamsters looks forward to working 
with you to enact this much-needed legislation.
           Prepared Statement of the National Federation of 
                      Independent Business (NFIB)
    Thank you for the opportunity to submit comments for the record on 
behalf of the National Federation of Independent Business (NFIB) 
regarding the classification of workers. The NFIB is the Nation's 
leading small business advocacy organization representing over 350,000 
small business owners across the country. The typical NFIB member 
employs about 8 to 10 employees with annual gross receipts of about 
$500,000.
    Small business plays an important role in the overall economy, 
accounting for half of the Nation's GDP and employs half of the 
American workforce, creating 75 percent of the net new jobs over the 
last decade.
    Small businesses continue to struggle through the recession. While 
lost sales continue to be the No. 1 problem facing small business 
owners, uncertainty is second.\1\ The new mandates, legal requirements, 
and regulations coming from Washington, create even more uncertainty 
for small business owners, which impedes growth and job creation.
---------------------------------------------------------------------------
    \1\ Small Business Credit in a Deep Recession--NFIB Small Business 
Poll, NFIB Research Foundation, Washington, DC, Volume 10; Issue 1; 
2010.
---------------------------------------------------------------------------
    That is why it is important for Congress to carefully consider any 
changes made to the current laws regarding independent contractors. S. 
3254, the Employee Misclassification Prevention Act, takes a number of 
additional steps that could raise new challenges for businesses looking 
to hire a contractor and for businesses hoping to fill contract jobs. 
Specifically, new paperwork and notice requirements--coupled with 
efforts already underway to increase investigations and enforcement of 
worker classification cases--will place new burdens on many small 
businesses.
      the importance of independent contractors to small business
    To better understand the role that independent contractors play in 
the small business economy, the NFIB Research Foundation conducted a 
survey regarding the use of independent contractors.\2\ As the survey 
notes, independent contractors play a large and important role in the 
small business economy.
---------------------------------------------------------------------------
    \2\ Independent Contractors--NFIB Small Business Poll, NFIB 
Research Foundation, Washington, DC, Volume 8; Issue 6; 2008.
---------------------------------------------------------------------------
    While a business may hire a contractor in any number of fields, the 
survey was limited to three common fields--construction, 
transportation/delivery, and computer services. Just examining these 
three areas, 61 percent of the entire small business population relied 
on at least one contractor in one of these three fields over the last 3 
years.\3\
---------------------------------------------------------------------------
    \3\ Ibid.
---------------------------------------------------------------------------
    The survey also attempted to understand why a small business might 
rely on an independent contractor. Lack of in-house expertise and no 
need to make an investment in an employee surfaced as the top reasons 
to rely on an independent contractor.\4\ Small business owners decided 
to hire a regular employee based on the need for reliability and 
accountability.\5\
---------------------------------------------------------------------------
    \4\ Ibid.
    \5\ Ibid.
---------------------------------------------------------------------------
    The findings of the survey make practical sense. If a business 
owner is setting up a new software system for his business, hiring a 
permanent IT employee may not make sense if the business only needs the 
services of the IT specialist for the installation of the software. 
This is a legitimate set of facts for hiring an independent contractor 
and Congress needs to make sure that changes to the law do not chill 
this type of business opportunity for both the business owner and the 
contractor.
    The use of an independent contractor covers both sides of an 
economic equation. On the one side is the firm that needs the 
specialized skills of a particular firm to fill a need for a short 
period of time. Filling this need helps the hiring firm to operate more 
efficiently. On the other side of the equation is the firm filling the 
specialized need and seeking other similar opportunities. It is this 
side of the equation that provides a steady income and the opportunity 
to create and expand smaller firms.
    Independent contractors play an especially important role for small 
businesses and, in turn, play an important role in the overall economy. 
Small businesses, even those consisting of one person, that handle 
relatively small jobs are simply part of the overall process. Scale is 
what differentiates them from their larger counterparts.
        changes to independent contractor rules and the impact 
                          on small businesses
    Business owners currently face a number of different tests and 
rules relative to the hiring of an independent contractor. In addition 
to the requirements under labor law, business owners also face a vague 
20-factor IRS test and differing State standards. A lack of clarity in 
the law can place small business owners at a disadvantage when 
attempting to comply with the law.
    This confusion is particularly true relative to the IRS test. The 
current test allows the IRS to examine the classification of employees 
based on a 20-factor test, but not all 20 factors must be used. The 
basis for the test is determining whether or not the business owner has 
control over the contractor. If the business owner has control, then 
the contractor should be classified as an employee.
    S. 3254 only makes the current system worse and disproportionately 
impacts small businesses. First, S. 3254 will place a heavy new 
paperwork burden and notice requirement on small business owners. The 
cost of complying with Federal Government paperwork is an empty expense 
for a small business owner, taking away capital that can be better 
spent on reinvesting in the business and creating jobs. Specifically, 
the bill would require the business to maintain documents relative to 
the classification of employees and independent contractors. Based on 
an NFIB Research Foundation survey, the cost of complying with 
personnel-related paperwork is about $36 per hour.\6\ When considering 
that hourly cost to the many different contracting jobs a firm may be 
involved with, this would be a major new cost to small business owners.
---------------------------------------------------------------------------
    \6\ The $36 per hour expense for personnel-related paperwork is 
adjusted for inflation from the original survey amount. Paperwork and 
Record-keeping--NFIB Small Business Poll, NFIB Research Foundation, 
Washington, DC, Volume 3; Issue 5; 2003.
---------------------------------------------------------------------------
    This new paperwork burden would be added to the enormous new 
paperwork burden recently passed by in the Patient Protection and 
Affordable Care Act (PPACA). The PPACA requires a business to report 
all service-related transactions as well as the purchase of goods for 
over $600. A copy of the information return must be sent to both the 
business from which the services or goods are purchased and the IRS. 
This is a huge new paperwork requirement on small business. Even worse, 
the intent behind all of this new reporting is to audit more businesses 
adding even more compliance costs to operating a business.
    Second, the requirements in S. 3254 also have a disparate impact on 
small business. The cost of complying with paperwork and government 
regulations falls disproportionately on small businesses. These 
businesses usually do not have the in-house staff that a larger firm 
would to handle paperwork and regulations. This means that a small firm 
must either bring in a new employee just to handle paperwork or 
outsource the task to another firm. All of this makes the small 
business less efficient and less competitive, placing small firms at a 
disadvantage compared to their larger competitors.
    In addition, to the legislation considered by the committee today, 
pending before both the Senate and House of Representatives is 
legislation that would change the tax law relative to the 
classification of employees. Both bills--S. 2882 and H.R. 3408--would 
allow the IRS to draft regulations to establish a test for classifying 
workers and, at the same time, would remove the current legal standards 
that allow business to challenge IRS audits. Under these bills the only 
way that a business could protect itself from misclassification 
penalties is if the business passed a previous IRS audit or requests a 
private letter ruling from the IRS.
    This is an unworkable system for small businesses. The only way to 
be certain that their classification of a worker will not be subject to 
IRS penalties would be to seek approval from the IRS. It makes no sense 
to force small businesses to receive permission before they make a 
decision about their business.
    S. 3254 only makes the current system worse, by adding new 
paperwork and notice requirements on small business owner. When coupled 
with the potential changes in S. 2882 and H.R. 3408, the new 
requirements in S. 3254 will make decisions with regard to hiring 
workers or contractors even more complex and risky. Making the 
situation even worse, is the increased audits and enforcements already 
underway. In fact, at the beginning of this year, the IRS announced 
6,000 random audits of businesses focusing on employment taxes, with 
particular attention on employee classification issues.
    Small business owners continue to struggle to recover from the 
recession and uncertainty is one of their two biggest concerns. 
Increasing the regulatory burden and government paperwork requirements 
does nothing to help small business owners recover from the recession. 
Increased regulations, paperwork, and audits take away money that could 
be used to grow the business and create jobs.
    Small business owners do not oppose efforts to clarify the rules 
relative to classifying workers. For more than three decades, a murky 
standard has developed around this area of the law creating a confusing 
and unclear standard for classifying workers. The challenge with the 
bill currently being considered by the committee is that it does 
nothing to clarify the standard, but simply requires the business to 
collect more information.
    Instead of adding to the regulatory and compliance burden already 
faced by small business owners, Congress needs to consider ways to 
reduce this burden. By reducing these burdens, we can reduce the cost 
of doing business and create an environment that allows small business 
to compete and innovate. This will ultimately strengthen the economy 
and help small business owners to create new jobs.
                                 ______
                                 
 National Association for the Self-Employed (NASE),
                                      Washington, DC 20004,
                                                     June 15, 2010.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
428 Dirksen Senate Office Building,
Washington, DC 20510.

Hon. Michael B. Enzi, Ranking Member,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
835 Hart Senate Office Building,
Washington, DC 20510.

    Dear Chairman Harkin and Ranking Member Enzi: Micro-businesses, 
those with fewer than 10 employees, have long been pillars of 
innovation and job creation in our Nation, fueling much of what is 
great about America. During this uncertain economic time, the role of 
these vital businesses has become even more important. Furthermore, 
with big business downsizing and many industries in flux, a large 
number of citizens find themselves in a position in which the only 
viable avenue of employment is self-employment.
    Our tax code is often the biggest hurdle faced by entrepreneurs due 
to its complexity and paperwork burden. Micro-businesses and the self-
employed are particularly disadvantaged since many of these 
entrepreneurs handle their accounting and tax preparation on their own. 
Worker classification regulations are a prime example of an area of the 
code causing consternation amongst business owners.
    Of the 23 million self-employed Americans, a large number are 
independent contractors and a significant number of micro-businesses 
utilize contractors for services within their business. Upon review of 
the Employer Misclassification Prevention Act (S. 3254), the National 
Association for the Self-Employed (NASE) is concerned that this 
legislation's approach to worker classification will negatively impact 
our Nation's smallest businesses.
    The core issues plaguing worker classification stem from the fact 
that classification of an individual into an employee or an independent 
contractor is subjective under the tax code. The IRS has a complicated 
20-point checklist that can be used as a guideline in determining 
whether or not an individual is an employee or an independent 
contractor. Yet, using this checklist does not guarantee that a person 
is correctly classified. Other IRS materials published to assist in 
classification are equally convoluted. NASE members have indicated that 
when utilizing the IRS's tax assistance help line on this issue, they 
have received different answers from different agents on this same 
issue. A large part of the problem is that there is no one, single, 
homogenous definition of the term ``employee.'' Thus, there is no clear 
and concise manner for a self-employed individual or micro-business 
owner to easily determine when an individual should be classified as an 
independent contractor or an employee.
    The Employer Misclassification Prevention Act does not address this 
central problem of classification rules. Rather the legislation focuses 
on increased enforcement and audits, instead of simplifying regulations 
which would lead to better compliance. Furthermore, the bill will 
increase accounting costs and the paper load on small businesses.
    We urge you to oppose the Employer Misclassification Prevention Act 
(S. 3254) due to the harmful impact it will have on the small business 
community. This legislation will ultimately create a disincentive for 
businesses and consumers to utilize the services of independent 
contractors, hobbling many entrepreneurs in this challenging economic 
climate.
    The NASE strongly believes that our policymakers should be focused 
on drafting legislation that removes and/or simplifies regulatory 
barriers on our Nation's smallest businesses and prospective 
entrepreneurs, freeing up both their time and money to start, manage 
and grow their business; a business that enables them to provide for 
their family and contribute to their local community.
    If you have any questions or comments, please contact Kristie 
Arslan, NASE's executive director, via phone at 202-466-2100 or e-mail 
at [email protected].
    Thank you for your consideration.
            Sincerely,
                                             Robert Hughes,
                                                    NASE President.
    [Whereupon, at 12:07 p.m., the hearing was adjourned.]

                                  


```