U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

36–728 PDF 2008

THE MISCLASSIFICATION OF WORKERS AS

INDEPENDENT CONTRACTORS: WHAT POLICIES

AND PRACTICES BEST PROTECT WORKERS?

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON HEALTH, 

EMPLOYMENT, LABOR AND PENSIONS

AND THE

SUBCOMMITTEE ON WORKFORCE PROTECTIONS 

COMMITTEE ON 

EDUCATION AND LABOR

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, JULY 24, 2007

Serial No. 110–56

Printed for the use of the Committee on Education and Labor

(

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/education/index.html 

(II)

COMMITTEE ON EDUCATION AND LABOR 

GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice Chairman 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Danny K. Davis, Illinois 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

Linda T. Sa ́nchez, California 

John P. Sarbanes, Maryland 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Mazie Hirono, Hawaii 

Jason Altmire, Pennsylvania 

John A. Yarmuth, Kentucky 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

Carol Shea-Porter, New Hampshire 

Howard P. ‘‘Buck’’ McKeon, California, 

Ranking Minority Member 

Thomas E. Petri, Wisconsin 

Peter Hoekstra, Michigan 

Michael N. Castle, Delaware 

Mark E. Souder, Indiana 

Vernon J. Ehlers, Michigan 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Ric Keller, Florida 

Joe Wilson, South Carolina 

John Kline, Minnesota 

Cathy McMorris Rodgers, Washington 

Kenny Marchant, Texas 

Tom Price, Georgia 

Luis G. Fortun ̃ o, Puerto Rico 

Charles W. Boustany, Jr., Louisiana 

Virginia Foxx, North Carolina 

John R. ‘‘Randy’’ Kuhl, Jr., New York 

Rob Bishop, Utah 

David Davis, Tennessee 

Timothy Walberg, Michigan 

Dean Heller, Nevada

Mark Zuckerman, Staff Director 

Vic Klatt, Minority Staff Director 

SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS 

ROBERT E. ANDREWS, New Jersey, Chairman

George Miller, California 

Dale E. Kildee, Michigan 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Linda T. Sa ́nchez, California 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

John Kline, Minnesota, 

Ranking Minority Member 

Howard P. ‘‘Buck’’ McKeon, California 

Kenny Marchant, Texas 

Charles W. Boustany, Jr., Louisiana 

David Davis, Tennessee 

Peter Hoekstra, Michigan 

Cathy McMorris Rodgers, Washington 

Tom Price, Georgia 

Virginia Foxx, North Carolina 

Timothy Walberg, Michigan 

SUBCOMMITTEE ON WORKFORCE PROTECTIONS 

LYNN C. WOOLSEY, California, Chairwoman

Donald M. Payne, New Jersey 

Timothy H. Bishop, New York 

Carol Shea-Porter, New Hampshire 

Phil Hare, Illinois 

Joe Wilson, South Carolina, 

Ranking Minority Member 

Tom Price, Georgia 

John Kline, Minnesota 

(III)

C O N T E N T S 

Page

Hearing held on July 24, 2007 ............................................................................... 1

Statement of Members: 

Andrews, Hon. Robert E., Chairman, Subcommittee on Health, Employment, Labor and Pensions ............................................................................ 1

Prepared statement of ............................................................................... 3

Statement of the Laborers’ International Union of North America 

(LIUNA) .................................................................................................. 67

Kline, Hon. John, Senior Republican Member, Subcommittee on Health, 

Employment, Labor and Pensions ............................................................... 3

Prepared statement of ............................................................................... 5

Additional statements submitted: 

Associated Builders and Contractors, Inc. (ABC) ............................ 71

Travis Boardman ................................................................................ 73

Randy Eystad ..................................................................................... 75

Michael P. Mannion ........................................................................... 77

National Association of Home Builders (NAHB) ............................. 80

William Vazquez ................................................................................ 85

Wilson, Hon. Joe, Ranking Republican Member, Subcommittee on Workforce Protections ............................................................................................ 8

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

Woolsey, Hon. Lynn C., Chairwoman, Subcommittee on Workforce Protections ................................................................................................................ 5

Prepared statement of ............................................................................... 7

Statement of Witnesses: 

DeCamp, Paul, Administrator of the Wage and Hour Division, U.S. Department of Labor ......................................................................................... 9

Prepared statement of ............................................................................... 11

Socolow, David J., Commissioner, New Jersey Department of Labor and 

Workforce Development ................................................................................ 49

Prepared statement of ............................................................................... 51

Stafford, Sara, President and Sole Owner, Stafford Construction Services, 

Inc. ................................................................................................................. 41

Prepared statement of ............................................................................... 43

Walters, Christine V., MAS, JD, SPHR, independent consultant, FiveL 

Company, on behalf of the Society for Human Resource Management ... 43

Prepared statement of ............................................................................... 45

Williams, Robert V., transportation recruiting and operations consultant, 

former FedEx employee ................................................................................ 37

Prepared statement of ............................................................................... 39

(1)

THE MISCLASSIFICATION OF WORKERS

AS INDEPENDENT CONTRACTORS: 

WHAT POLICIES AND PRACTICES

BEST PROTECT WORKERS? 

Tuesday, July 24, 2007

U.S. House of Representatives 

Subcommittee on Health, Employment, Labor and Pensions 

Subcommittee on Workforce Protections 

Committee on Education and Labor 

Washington, DC

The subcommittees met, pursuant to call, at 10:30 a.m., in Room 

2175, Rayburn House Office Building, Hon. Robert Andrews [chairman of the Subcommittee on Health, Employment, Labor, and Pensions] presiding. 

Present from Subcommittee on Health, Employment, Labor, and 

Pensions: Representatives Andrews, Kildee, Tierney, Wu, Holt, 

Loebsack, Hare, Kline, McKeon, Boustany, and Walberg. 

Present from Subcommittee on Workforce Protections: Woolsey, 

Payne, Bishop of New York, Shea-Porter, Hare, Wilson, and Kline. 

Staff present: Aaron Albright, Press Secretary; Tylease Alli, 

Hearing Clerk; Jordan Barab, Health/Safety Professional; Jody 

Calemine, Labor Policy Deputy Director; Lynn Dondis, Policy Advisor for Subcommittee on Workforce Protection; Carlos Fenwick, 

Policy Advisor for Subcommittee on Health, Employment, Labor 

and Pensions; Michael Gaffin, Staff Assistant, Labor; Jeffrey 

Hancuff, Staff Assistant, Labor; Brian Kennedy, General Counsel; 

Joe Novotny, Chief Clerk; Megan O’Reilly, Labor Policy Advisor; 

Rachel Racusen, Deputy Communications Director; Michele 

Varnhagen, Labor Policy Director; Robert Borden, Minority General Counsel; Cameron Coursen, Minority Assistant Communications Director; Steve Forde, Minority Communications Director; Ed 

Gilroy, Minority Director of Workforce Policy; Rob Gregg, Minority 

Legislative Assistant; Jim Paretti, Minority Workforce Policy Counsel; Molly McLaughlin Salmi, Minority Deputy Director of Workforce Policy; Linda Stevens, Minority Chief Clerk/Assistant to the 

General Counsel; and Loren Sweatt, Minority Professional Staff 

Member. 

Chairman ANDREWS [presiding]. Ladies and gentlemen, the subcommittee will come to order. I would ask everyone to please take 

their seats. 

2

We welcome our witnesses and the members of the public for today’s hearing. 

In the last 6 years, over 2 million Americans have found themselves in a situation where the 40-hour work-week law that applies 

to virtually everyone else doesn’t apply to them; where laws that 

govern pensions and health care, that apply to just about everyone 

else, do not apply to them; where laws that deal with the right to 

collectively bargain, the right to organize, the right to grieve, that 

apply to almost everyone else, does not apply to them. 

In the last 5 or 6 years, we have had an increase of more than 

2 million people who fall into the category in our workforce of independent contractors. 

Now, in some cases, that status is quite right and quite appropriate. If someone is retained for a limited purpose, usually for a 

limited time, to do a specific job function for an employer, it is 

quite necessary and appropriate that that person not be treated as 

an employee for reasons of flexibility, for reasons of fair compensation, for reasons of the appropriate organization and carrying out 

of the employer’s business. 

But in cases where someone looks an awful lot like an employee—is told what to do and when he or she can do it, is given 

no discretion over how to conduct the affairs of the business, whose 

compensation is fixed and set by the employer—when that person 

looks an awful lot like an employee, we think the law should treat 

them as an employee, should provide that person with the protections and the rights that employees have under our federal laws. 

The question before the committee today was initiated by Chairwoman Woolsey’s efforts a few weeks ago. This is a joint hearing 

of the Workforce Protections Subcommittee and our HELP Subcommittee. And Chairwoman Woolsey did a great job with our colleagues in beginning to flesh out the issue as to how prevalent is 

the problem of misclassification of people. How prevalent is it that 

someone who truly is an employee is being treated as an independent contractor and, therefore, divested of the rights that I 

made reference to earlier? 

As a result of the good work that Ms. Woolsey did at that hearing, she and I and some of our colleagues wrote a letter to the 

United States Department of Labor, asking that the department 

outline its efforts in identifying the scope of the problem and outline its efforts to deal with reducing and solving the problem. 

The purpose of today’s hearing is to get answers to those questions that were asked in our letter in May in our first panel. And 

then to proceed with the second panel, we will look at various perspectives on the scope of the problem, the nature of the problem, 

and some ideas to solve the problem. 

Our first witness today, Mr. DeCamp, is the director of the Wage 

and Hour Division of the Department of Labor. We are very happy 

he is with us today. And we look forward to an exchange where we 

can hear more about the department’s efforts to properly define the 

scope of this problem and to remediate its effects. 

I will say this to you in closing my remarks. The image that is 

often conjured up of an independent contractor is a Web site designer, you know, someone who designs Web sites and Web pages 

for a multiplicity of clients and works out of his or her home, and 

3

is very much on the fly, on the go; an independent entrepreneur 

with a laptop and a vision and a business card and a chance to 

make himself or herself a wealthy person. Long may that person 

be treated as an independent contractor, because they are. 

But there are people who are mowing lawns and driving trucks 

and working in garment linen factories, working in all different 

places around this country, who sure do look like employees to me. 

And if they have the functional job of an employee—if they are told 

what to do, when to do it, how much money they are going to 

make, what the work rules are, what they can and cannot do—if 

they have that sort of work life as an employee, then I think the 

law should treat them as an employee. And they should get the 

benefits of the 40-hour work-week and the workers’ safety laws and 

the pension and health-care laws and the other protections of this 

country. 

Legislating is about drawing lines. And where we draw this line 

and how we deal with remediating problems that fall on the wrong 

side of the line is the legislative job of the committee. I look forward to a full and vigorous discussion of those issues here today. 

At this point, I am going to turn to the ranking member of the 

HELP Subcommittee, my friend from Minnesota, Mr. Kline, for his 

opening statement. 

[The statement of Mr. Andrews follows:]

Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee 

on Health, Employment, Labor and Pensions 

Good morning and welcome to the Joint Health, Employment, Labor, and Pensions Subcommittee and Workforce Protections Subcommittee hearing on ‘‘The Misclassification of Workers as Independent Contractors: What Policies and Practices 

Best Protect Workers.’’ I am delighted to share the gavel today with my colleague, 

Chairwoman Woolsey. 

Today, we will examine the issue of worker misclassification. This joint venture 

is a follow-up to the Workforce Protections Subcommittee’s previous hearing on the 

misclassification or workers as independent contractors. Today we will have the opportunity to hear the views from the Department of Labor regarding worker misclassification and what actions they have taken to address the problem. 

Worker misclassification is a problem that adversely affects employees, employers, 

taxpayers, and states. Billions of dollars of tax revenue and unemployment insurance have been stolen by employers seeking to avoid the costs of payroll taxes, insurance premiums, and benefits. The witnesses’ testimony today will further prove 

how worker misclassification 1) strips workers of employee benefits and protections; 

2) puts good employers at a competitive disadvantage; and 3) cheats the taxpayer 

out of revenue. I thank the witnesses for their testimony today and look forward 

to the hearing. 

Mr. KLINE. Thank you, Mr. Chairman. 

Good morning to all, and welcome to our distinguished panels of 

witnesses. 

As a member of the Workforce Protections Subcommittee and as 

the ranking member of the Health, Employment, Labor, and Pensions Subcommittee, I am particularly interested in this morning’s 

joint hearing. 

At a Workforce Protections Subcommittee hearing earlier this 

year, we heard from a number of witnesses as to policy issues surrounding the potential misclassification of workers as contractors 

rather than employees. 

4

I would highlight one point that I think all of our witnesses and, 

indeed, many of our members agreed upon. This point was put particularly well by Mr. Richard Shavell, who had testified on behalf 

of the Associated Builders and Contractors. 

He testified, ‘‘It is critical to distinguish between wrongful classification and misclassification. In construction, wrongful classification by a competitor can result in a competitive disadvantage to 

other contractors. Contrast this with misclassification, which can 

easily occur because current law and rules are extremely complex. 

Those companies not paying employee taxes or worker compensation by wrongful classification can undercut the competition by offering lower bids. 

‘‘ABC in no way condones intentional misclassification by businesses that shirk their duties to society and their workers. We endorse a level playing field for all businesses and workers. For those 

workers who are faced with improper misclassification, we believe 

they should be accorded every opportunity to have their financial 

situation corrected.’’

I think that all of us here this morning share that view: that the 

wrongful classification of workers should not be tolerated. Where 

we may differ is in whether and how the law currently allows, if 

not outright condones, confusion by subjecting employers to a multitude of different tests under a multitude of different statutes. 

Perhaps that is a good question for today’s hearing and one that 

I certainly hope that we are going to get to. 

I would also point out that a number of witnesses at our hearing 

back in March, both Democrats and Republicans, made plain their 

view that our focus should not be on amending the underlying substantive laws, but rather, focusing on enforcement and, in particular, targeted enforcement. 

One witness, Ms. Catherine Ruckelshaus, the director of the National Law Employment Project, put it very succinctly when she 

testified, ‘‘The laws are sufficiently broad and sufficiently define 

’employee’ to cover most of the people I have been talking about,’’ 

said she, ‘‘and most of the people that my co-presenters have been 

discussing. It is really not a question of changing the law, as much 

as enforcing the laws that are on the books and doing it more strategically to plug up these loopholes.’’

And in that light, I am particularly pleased to welcome our first 

witness, Paul DeCamp, the administrator of the Department of Labor’s Wage and Hour Division. I know the chairman will reintroduce him. 

The Wage and Hour Division is the lead agency tasked with administering our nation’s wage and hour laws and one of a number 

of federal agencies charged with ensuring workers are correctly 

classified. I am particularly interested in hearing how the department has been strategically addressing the issue of worker classification in a targeted way. 

I look forward to Mr. DeCamp presenting to us the challenges 

the department faces in doing so and offering any suggestions as 

to how we may better assist the department in its enforcement efforts. 

Again, I welcome all our witnesses, and I yield back. 

[The statement of Mr. Kline follows:]

5

Prepared Statement of Hon. John Kline, Ranking Republican Member, 

Subcommittee on Health, Employment, Labor, and Pensions 

Good morning, and welcome to our distinguished panel of witnesses. 

As a member of the Workforce Protections Subcommittee, and as Ranking Member of the Health, Employment, Labor, and Pensions Subcommittee, I am particularly interested in this morning’s hearing. 

At a Workforce Protections Subcommittee hearing earlier this year, we heard from 

a number of witnesses as to policy issues surrounding the potential misclassification 

of workers as ‘‘contractors’’ rather than ‘‘employees.’’ I would highlight one point 

that I think all of our witnesses—and indeed, many of our Members—agreed upon. 

This point was put particularly well by Mr. Richard Shavell, who testified on behalf 

of the Associated Builders and Contractors. As Mr. Shavell testified, it is critical to 

distinguish between wrongful classification and mis-classification. In construction, 

wrongful classification by a competitor can result in a competitive disadvantage to 

other contractors. Contrast this with misclassification, which can easily occur because current law and rules are extremely complex. Those companies not paying 

employee taxes or worker’ compensation by wrongful classification can undercut the 

competition by offering lower bids. ABC in no way condones intentional misclassification by businesses that shirk their duties to society and their workers. We endorse 

a level playing field for all businesses and workers. For those workers who are faced 

with improper misclassification we believe they should be accorded every opportunity to have their financial situation corrected. 

I think that all of us here this morning share that view—that the wrongful classification of workers should not be tolerated. Where we may differ is in whether and 

how the law currently allows, if not outright condones, confusion by subjecting employers to a multitude of different tests under a multitude of different statutes. Perhaps that is a good question for today’s hearing, one that I hope our witnesses will 

address. 

I would also point out that a number of witnesses at our hearing back in March,—

both Democrat and Republican—made plain their view that our focus should not be 

on amending the underlying, substantive laws, but rather focusing on enforcement, 

and in particular, targeted enforcement. One witness, Ms. Catherine Ruckelshaus, 

the Director of the National Law Employment Project, put it very succinctly when 

she testified: 

The laws are sufficiently broad and sufficiently define employee to cover most of 

the people I have been talking about and most of the people that my co-presenters 

have been discussing. It is really not a question of changing the law as much as 

enforcing the laws that are on the books and doing it more strategically, to plug 

up these loopholes. 

In that light, I am particularly pleased to welcome our first witness, Paul DeCamp, the Administrator of the Department of Labor’s Wage and Hour Division. 

The Wage and Hour Division is the lead agency tasked with administering our nation’s wage and hour laws and one of a number of federal agencies charged with 

ensuring workers are correctly classified. I am particularly interested in hearing 

how the Department has been strategically addressing the issue of worker classification in a targeted way. I look forward to Mr. DeCamp presenting to us the challenges the Department faces in doing so and offering any suggestions as to how we 

may better assist the Department in its enforcement efforts. 

I welcome each of our witnesses this morning, and yield back my time. 

Chairman ANDREWS. Thank you, Mr. Kline. 

When she assumed the chairmanship of the Workforce Protections Subcommittee, Chairwoman Woolsey launched a vigorous effort to regenerate oversight and legislative review of the laws that 

protect people in the workplace. She has done some outstanding 

work already on public-sector employee safety. She has helped to 

guide through some important legislation already in that area. And 

I am honored to share this joint hearing with her today. 

The gentlewoman from California. 

Ms. WOOLSEY. Thank you, Mr. Chairman. 

And welcome to all of our witnesses. 

This is going to be a very useful, productive joint hearing this 

morning. 

6

As you know, and as the chairman said, the Workforce Protections Subcommittee held a hearing on this very important issue of 

misclassification of workers as independent contractors in March. 

It seems like just yesterday, right, Mr. Chairman? 

And we are really pleased to be here with this joint committee 

because we are going to continue to look at the issue. It became 

more important, not less important, after our first hearing. 

Today, we will have the opportunity to hear from the administration. And we will hear from others, also, about this serious problem. And it is a problem that hurts our workers, but not only our 

workers, but also honest contractors and all of society as states and 

federal governments lose billions of dollars in lost revenues by this 

misclassification. 

After the last hearing, Mr. Andrews and I wrote a letter to Department of Labor asking for information about the misclassification. We got the department’s response. It was just a little over a 

week ago, in time for this hearing. Thank you. 

And I am pleased that Mr. DeCamp is here to present answers 

to the questions that we asked. 

But I have some very serious reservations about whether the department is really dealing with this problem in an adequate manner. And what we need to find out today is: if the department can’t 

deal with it, what does the Congress need to do to make it possible 

for the overreaching agency to do the right thing? 

And, at the outset, I would like to say that there are true independent contractors and that this is not about them. Nobody questions that. This is about the countless workers who are really employees but have been deliberately misclassified by employers because those employers want to avoid the costs associated with an 

employee, such as workers’ compensation insurance, payment into 

Social Security and Medicare systems. 

The number-one reason that employers deliberately misclassify is 

to avoid paying workers’ compensation and otherwise avoid workplace injury and disability disputes. So if a worker gets seriously 

injured—and make no mistake, this practice usually affects mostly 

low-income workers—there is no income that he or she can go to 

when they can’t work. And there is likely no health insurance to 

help with the medical expenses. But the employer lowers its costs. 

In fact Mr. Wade Horn, a contractor who testified at the hearing 

in March, said that when companies misclassify their employees, 

they expect to reduce their labor costs between 15 and 20 percent. 

In March, our witnesses were principally from the building 

trades. They told us how widespread miscalculation is in that industry. But we know for certain misclassification occurs across a 

wide range of industries. 

For example, Representative Stupak, chair of the Subcommittee 

on Oversight and Investigations on the Energy and Commerce 

Committee, has been investigating the widespread misclassification 

of jockeys as independent contractors. 

I am very glad that Mr. Williams is here today to testify about 

his experiences with FedEx. My own state of California is waging 

a battle against FedEx’s practice of misclassifying its couriers as 

independent contractors. And in the year 2004, the California Employment Development Department issued a payroll tax assessVerDate 0ct 09 2002 17:03 Feb 26, 2008 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-56\36728.TXT HBUD1 PsN: DICK
7

ment of $7.8 million against the company. And they did that because it failed to pay payroll taxes for appropriate employees. 

In California, misclassification is an enormous problem. But we 

are an enormous state. The California insurance commissioner has 

reported that 30 percent of employers in the state do not carry 

workers’ compensation insurance, and that is one of the sure signs 

that those employers’ workers are being treated as independent 

contractors. 

This problem has so concerned my state that there is a bill in 

the assembly, State Assembly Bill 622, which, if passed, will make 

willful misclassification illegal. And it will assess penalties of up to 

$15,000 per violation and up to $25,000 for those employers who 

have engaged in a pattern of practice of misclassification. Our very 

own attorney general has started a program to protect vulnerable 

workers from unscrupulous employers throughout this process. 

But, unfortunately, other states are having problems with misclassification, as well. And it is a national problem. It has farreaching consequences. 

And I have great confidence that we are working to find out why 

we can’t do something about it. But first we have to find out what 

we need to do about it. 

Thank you very much, Mr. Chairman. 

[The statement of Ms. Woolsey follows:]

Prepared Statement of Hon. Lynn C. Woolsey, Chairwoman, Subcommittee 

on Workforce Protections 

Thank you Chairman Andrews and welcome to all of the witnesses for joining us 

here today. 

As you know, my Workforce Protections Subcommittee held a hearing on this very 

important issue of misclassification of workers as independent contractors in March. 

And I am very glad that—through this Joint Subcommittee hearing—we are continuing to look at this issue. 

Today we will have an opportunity to hear from the Administration and others 

about this serious problem, which hurts not only our workers, but also honest contractors and all of society as state and federal governments lose billions of dollars 

in lost revenues. 

After the last hearing, Mr. Andrews and I wrote a letter to DOL asking for information about misclassification. 

We got the Department’s response a little over a week ago. It was a late reply 

but in time for this hearing. 

I am very pleased that Mr. DeCamp from DOL is present to answer questions 

about DOL’s response because I have serious reservations about whether the Department is dealing with this problem in an adequate manner. 

At the outset let me say that there are true independent contractors out there—

this is not about them. 

This is about the countless other workers who are really employees but have been 

deliberately misclassified by employers because those employers want to avoid the 

costs associated with an employee, such as workers compensation insurance and 

payment into the Social Security and Medicare systems. 

So if a worker gets seriously injured—and make no mistake, this practice affects 

mostly low-income workers—there is no income when he can’t work and likely no 

health insurance to help with medical expenses. 

But the employer lowers its costs. 

In fact, Mr. Wade Horn, a contractor who testified at the hearing in March said 

that when companies misclassify their employees, they expect to reduce their labor 

costs between 15 and 20 percent. 

In March, our witnesses were principally from the building trades and they told 

us how widespread misclassification is in that industry. 

But misclassification occurs across a wide range of industries. 

8

For example, Representative Stupak, Chair of the Subcommittee on Oversight and 

Investigations on the Energy and Commerce Committee has been investigating the 

widespread misclassification of jockeys as independent contractors. 

I am very glad that Mr. Williams is here to testify about his experiences with FedEx. 

My own state of California is waging a battle against Fed Ex’s practice of 

misclassifying its couriers as independent contractors. 

And in 2004, the California Employment Development Department issued a pay- roll tax assessment of $7.8 million against the Company because it failed to pay 

payroll taxes on employees that they had misclassified as independent contractors. 

In California, misclassification is an enormous problem. 

The Insurance Commissioner has reported that 30% of employers in the State do 

not carry worker’s compensation insurance—one of the sure signs that those employers’ workers are being treated as independent contractors. 

This problem has so concerned my State that there is a bill in the State Assembly, 

S.B. 622, which if passed will make willful misclassification illegal and assesses civil 

penalties of up to $15,000 per violation and up to $25,000 per violation for those 

employers have engaged in a pattern or practice of misclassification. 

And our Attorney General has started a program to protect vulnerable workers 

from unscrupulous employers. 

I am confident that this hearing will bring us closer to solutions to it. 

Chairman ANDREWS. Thank you, Madam Chairman. I appreciate 

it. 

I will now turn to the ranking member of the Workforce Protections Subcommittee, our friend from South Carolina, Mr. Wilson? 

Mr. WILSON. Thank you, Mr. Chairman, and thank you, Madam 

Chairman, for conducting this hearing today. 

Good morning. In the interest of moving on to hear directly from 

our distinguished panel of witnesses this morning, I will keep my 

remarks brief. 

I look forward to hearing from our distinguished witnesses and, 

in particular, welcome a discussion of the current state of law as 

it relates to the classification of workers as employees or independent contractors. 

As I said at our subcommittee’s last hearing on this topic, a point 

borne out by the testimony of witnesses at that hearing, I expect 

that there may be many areas in which we agree and areas in 

which we disagree. I was particularly interested to note at our last 

hearing that there was significant agreement among the witnesses, 

Democrat and Republican, as to a number of points. 

First, that the law relating to the classification of a worker as 

a contractor or employee is complicated, often confusing and, in 

many instances, not at all clear as to the proper outcome. 

Second, that no one defends the practice of an employer purposefully or intentionally misclassifying workers. 

Third, many agree that the laws, as written, are adequate to address these concerns. And many agree that our focus should be not 

on changing the laws or statutes we have on the books. 

And finally, there was general agreement that the issue here 

may be one of enforcement, particularly targeted enforcement. 

In that light, I especially welcome Wage and Hour Administrator 

Paul DeCamp. And I look forward to him telling us what his agency, which is but one of many charged with administrating the laws 

relating to contractor status, is doing to ensure that the law is 

being followed and administrated properly. 

So with that in mind, I look forward to today’s hearing and the 

testimony of our two panels of witnesses. And I yield back my time. 

9

[The statement of Mr. Wilson follows:]

Prepared Statement of Hon. Joe Wilson, Ranking Republican Member, 

Subcommittee on Workforce Protections 

Good morning. In the interests of moving on to hear directly from our distinguished panel of witnesses this morning, I will keep my remarks brief. 

I look forward to hearing from our distinguished witnesses, and in particular welcome a discussion of the current state of the law as relates to the classification of 

workers as employees or independent contractors. 

As I said at our Subcommittee’s last hearing on this topic—a point borne out by 

the testimony of witnesses at that hearing—I expect that there may be areas in 

which we agree, and areas in which we disagree. I was particularly interested to 

note at our last hearing that there was significant agreement among witnesses, 

Democrat and Republican, as to a number of points: 

First, that the law relating to the classification of a worker as a contractor or employee is complicated, often confusing, and in many instances not at all clear as to 

the proper outcome; 

Second, that no one defends the practice of an employer purposefully or intentionally misclassifying workers; 

Third, that the laws, as written, are adequate to address these concerns, and our 

focus should not be on changing the laws or trying to ‘‘create’’ a failure in the statutes we have on the books; 

And finally, there was agreement that the issue here may be one of enforcement, 

particularly targeted enforcement. In that light, I especially welcome Wage and 

Hour Administrator DeCamp, and look forward to him telling us what his agency—

which is but one of many charged with administering the laws relating to contractor 

status—is doing to ensure that the law is being followed and administered properly. 

So with that said, I look forward to today’s hearing and the testimony of our two 

panels of witnesses and yield back my time. 

Chairman ANDREWS. I thank Mr. Wilson. 

And we welcome Mr. DeCamp to the subcommittees. 

Mr. DeCamp, your written statement is accepted into the record, 

without objection, in its entirety. We would ask if you could summarize your written remarks in about 5 minutes. 

I think you have testified here before and know the light system. 

When the yellow light goes on, you have about a minute left, and 

when the red light goes on, we would ask you to summarize. 

Paul DeCamp is the administrator of the Wage and Hour Division of the United States Department of Labor, a post he has held 

since 2006. Prior to his appointment to this position by President 

Bush, Mr. DeCamp was a senior policy advisor to the assistant secretary of labor for employment standards. 

He also practiced law with the firm of Gibson, Dunn and Crutcher in Los Angeles and here in Washington, where he focused on 

employment matters. Mr. DeCamp received his B.A. from Harvard 

and his J.D. from Columbia University. But he overcame these liabilities——

[Laughter.] 

He clerked for the Honorable Alan E. Norris for the Sixth Circuit 

Court of Appeals. 

Mr. DeCamp, we are delighted to have you with us this morning. 

Welcome to the subcommittees. 

STATEMENT OF PAUL DECAMP, ADMINISTRATOR OF THE 

WAGE AND HOUR DIVISION, U.S. DEPARTMENT OF LABOR 

Mr. DECAMP. Thank you. 

Chairman Andrews, Chairwoman Woolsey, Ranking Members 

Wilson and Kline, and distinguished members of the subcommitVerDate 0ct 09 2002 17:03 Feb 26, 2008 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-56\36728.TXT HBUD1 PsN: DICK
10

tees, thank you for the opportunity to appear before you today to 

discuss the misclassification of workers as independent contractors. 

This type of misclassification can lead to a number of harms. 

Misclassified workers may find themselves without access to employers’ benefits plans and without the protection of workers’ compensation or unemployment insurance. 

Businesses that comply with the law may be at a significant disadvantage with respect to competitors who elect to lower their operating costs by calling their employees independent contractors. 

And the federal and state governments potentially lose out on 

tax revenues, at least to the extent that the misdesignated workers 

do not pay the taxes that their employers should have withheld. 

One important point to understand at the outset is that 

misdesignation of employees as independent contractors is not, in 

and of itself, a violation of any of the approximately 70 laws that 

the Wage and Hour Division enforces. 

If, for example, an individual works 40 or fewer hours in a workweek and receives compensation at least equal to the minimum 

wage, there is no violation of the Fair Labor Standards Act—the 

law that accounts for more than 80 percent of the agency’s cases—

even if the worker is misdesignated. 

Therefore, the Wage and Hour Division historically has not focused resources on the independent contractor issue, per se. Instead, we look for the violations of our laws, such as failure to pay 

the required minimum wage or overtime, or the improper denial of 

family or medical leave, or the unauthorized transportation of migrant farm workers. 

Approximately 60 percent of the Wage and Hour Division’s enforcement centers on low-wage industries, where violations of the 

laws we enforce tend to be the most prevalent. The agency devotes 

more than one-third of its enforcement resources to nine of those 

industries, including such sectors as janitorial services, construction and landscaping. The agency’s experience has been that many 

of these same low-wage industries tend to have a high incidence of 

misdesignation of employees as independent contractors. 

In short, the Wage and Hour Division vigorously protects workers whose rights may be jeopardized by misdesignation as independent contractors. We do so, however, by focusing on their rights 

under the federal wage and hour laws. 

The Wage and Hour Division’s enforcement work represents a 

combination of investigating worker complaints and conducting investigations on the agency’s own initiative in the absence of a complaint. 

The agency recognizes that low-wage workers, among others, are 

often unlikely to report wage and hour violations for a variety of 

reasons. Therefore, we supplement our complaint-based investigations with strategically targeted cases directed at those industries 

and employers where we have reason to believe violations are going 

unreported. 

Every year, the agency devotes extensive management resources 

to our annual strategic planning process, which is how we determine the types of issues and industries to focus on in the coming 

year. Those directed cases constitute around 20 percent of our caseload. 

11

We also make available to workers and employers a significant 

amount of information regarding the issue of employee versus independent contractor. On our Web site, we have fact sheets that explain the applicable rules. Much of this information is available in 

Spanish, Chinese, Thai, and Vietnamese. 

We also have an interactive advisor on our Web site that allows 

a user to answer some questions and then receive guidance regarding how a worker should be classified. Our Web site also includes 

a chapter from our field operations handbook regarding, among 

other things, the employment relationship. 

In addition, the agency conducts approximately 2,000 training 

and outreach events each year. When we address workers or businesses in industries where misdesignation as independent contractors is a significant concern, we provide information on that issue. 

One final point that I would like to discuss involves communication with other government entities. The Wage and Hour Division 

is very reluctant to provide information to other agencies where 

doing so might jeopardize our enforcement mission. 

In order to be able to protect the wage and hour rights of all 

workers, we need information from workers regarding violations. If 

workers are hesitant to report violations to us, it becomes much 

more difficult to maintain the integrity of the labor standards set 

forth in our statutes. 

Many of the employers we investigate are in low-wage industries 

that employ ever-increasing numbers of undocumented workers. 

We, therefore, need to be very careful to avoid taking steps that 

would have the unintended consequence of deterring those workers 

from seeking our assistance. 

If workers believe that they may be worse off for having contacted the Wage and Hour Division, we will not hear from them. 

And then workers lose, as a result. It is important to our agency 

that we avoid that outcome. 

Thank you. And I will be happy to answer any questions that the 

subcommittees may have. 

[The statement of Mr. DeCamp follows:]

Prepared Statement of Paul DeCamp, Administrator of the Wage and Hour 

Division, U.S. Department of Labor 

Chairwoman Woolsey, Chairman Andrews, Ranking Members Wilson and Kline, 

and distinguished members of the Subcommittees: Thank you for the opportunity 

to discuss the efforts of the Department of Labor’s Wage and Hour Division (WHD) 

to promote compliance with the Nation’s labor standards laws. WHD has a strong 

record of enforcement on behalf of workers in this country, including employees who 

have been misclassified as independent contractors. 

WHD employs a number of strategies for ensuring that employees are paid in accordance with the laws WHD enforces. Many of these strategies address worker 

classification issues. Before discussing these strategies, however, it is important to 

understand the backdrop against which these strategies are implemented. The misclassification of an employee as an independent contractor is not itself a violation 

of the Fair Labor Standards Act (FLSA) or the many other laws that WHD enforces. 

The Government Accountability Office (GAO) acknowledged this fact in its 2006 

audit, Employment Relationships: Improved Outreach Could Help Ensure Proper 

Worker Classification (GAO-06-656). In that report, GAO also accurately noted that, 

despite the fact that such misclassification is not a violation of the FLSA, WHD nevertheless detects and addresses the issue of employees who have been misclassified 

as independent contractors in its investigations of employer compliance with the 

FLSA. It is critical to understanding WHD’s approach to enforcing the provisions 

12

of the various statutes for which it is responsible that one also understand that the 

act of misclassification is not a violation of the FLSA. 

Determining An Employment Relationship Under The Federal Wage And Hour Laws 

Under most labor standards laws, an employer-employee relationship must be established in order for the law’s provisions to apply. The FLSA, which establishes 

minimum wage, overtime, and child labor protections, defines ‘‘employee’’ more 

broadly than virtually any other federal statute. In cases such as Rutherford Food 

Corp. v. McComb, 331 U.S. 722 (1947), United States v. Silk, 331 U.S. 704 (1947), 

and Bartels v. Birmingham, 332 U.S. 126 (1947), the U.S. Supreme Court provided 

guidance for determining whether a worker is an employee under the FLSA, and 

those rulings continue to inform how WHD and the courts analyze the issue today. 

The Court provided that an employee, as distinguished from a person who is engaged in a business of his or her own (i.e., an independent contractor), is one who, 

as a matter of economic reality, is dependent on the business that he or she serves. 

The Court further indicated that there is no single rule or test for determining 

whether an individual is an independent contractor or an employee for purposes of 

the FLSA. Instead, the determination must be based on the totality of the circumstances and not on a single criterion. The relevant factors include the following: 

• The extent to which the services rendered are an integral part of the principal’s 

business; 

• The permanency of the relationship; 

• The amount of the alleged contractor’s investment in facilities and equipment; 

• The nature and degree of control by the principal; 

• The alleged contractor’s opportunities for profit and loss; 

• The amount of initiative, judgment, or foresight in open market competition 

with others required for the success of the claimed independent contractor; and 

• The degree of independent business organization and operation. 

See, e.g., Silk, 331 U.S. at 716; Brock v. Mr. W Fireworks, 814 F.2d 1042 (5th 

Cir. 1987); Donovan v. DialAmerica Mktg., 757 F.2d 1376 (3d Cir. 1985). 

I mention these specific factors for two reasons. First, all WHD investigators must 

use these criteria to establish an employment relationship to pursue remedies on 

behalf of workers under most of the statutes the agency enforces, including the 

FLSA and the Family and Medical Leave Act (FMLA). As a consequence, investigators will, at various stages throughout the investigation, examine how an employer 

classifies its workers. For example, investigators will ask for information during the 

initial conference with an employer to establish the employer’s classification practices. Investigators will review records including without limitation payroll records, 

cash disbursements journals, check registers, and 1099s to ensure that all workers 

are identified and that any worker not listed on the payroll is properly compensated. 

As a normal part of investigations, WHD investigators will tour an employer’s establishment and question workers about their pay, their duties, and their working conditions, as well as those of their co-workers, looking for, among other things, potentially misclassified employees. As GAO noted in its audit, when WHD investigators 

suspect that employers are not properly classifying workers as employees, the investigator will pursue several avenues of investigation to ascertain whether a violation 

of a wage and hour statute has occurred. 

The second reason for highlighting the FLSA employment relationship factors is 

to distinguish these criteria from the test used by the Internal Revenue Service 

(IRS) in applying the common law ‘‘right to control’’ test often used by the courts 

and from the definitions and standards set forth in other statutes. WHD acknowledges that the issue of employee misclassification raises a number of concerns wholly outside the responsibility or authority of WHD. The misclassification of workers 

may affect some state programs such as worker compensation and unemployment 

insurance programs, in addition to other federal and state worker protection statutes. Finally, misclassification issues may involve the IRS and the Social Security 

Administration. 

Consequently, in establishing an employment relationship under the FLSA, there 

may be instances where WHD investigators identify potential misclassification 

issues of other programs or statutes. WHD has no authority or expertise, however, 

to interpret or to enforce provisions outside its jurisdiction. In many instances, the 

misclassification of a worker under the FLSA will not, given the broad interpretation of the FLSA, result in a violation of another statute or program. 

WHD Strategies For Enforcing Labor Standards Provisions Relating To Independent 

Contractor Issues 

The labor standards that WHD enforces provide basic protections for all workers 

in this country. Although they differ in scope, all of the statutes enforced by WHD 

13

are intended to protect the welfare of the Nation’s workforce and to ensure fair compensation for work performed. Minimum wage, overtime, and child labor cases constitute the majority of WHD’s enforcement responsibilities. FLSA cases represent 

approximately 84 percent of all WHD cases, and FMLA investigations an additional 

one percent. The Migrant and Seasonal Agricultural Worker Protection Act (MSPA), 

the Davis-Bacon Act (DBA), and the McNamara-O’Hara Service Contract Act (SCA) 

are other key statutes enforced by WHD. 

Misclassified workers may be identified during the course of investigations that 

cover many provisions and statutes enforced by WHD. For example, WHD investigators must establish an employment relationship under the FMLA and most of the 

MSPA provisions. Investigations into compliance with these program areas necessarily contain an element of inquiry into the status of workers as employees. 

Under DBA and SCA, however, WHD does not need to establish such an employment relationship. According to the statutory language of the DBA, laborers and 

mechanics are entitled to prevailing wage rates ‘‘regardless of the contractual relationship that is alleged to exist between a contractor or subcontractor and such persons.’’ Similar language applies to service employees performing on Federal service 

contracts. Under these two statutes, the individuals performing work are entitled 

to prevailing wage and fringe benefit compensation even if they are classified as 

independent contractors. 

Because erroneous classification of an employee as an independent contractor is 

not itself a violation of the federal wage and hour laws, WHD does not maintain 

data regarding how many cases present that issue. Thus, WHD cannot provide statistics regarding the prevalence of misclassification. However, there have been instances in which a misclassification resulted in a minimum wage or overtime violation. These cases clearly demonstrate WHD’s attention to potential violations that 

may result from the improper designation of workers. The following are some recent 

examples: 

• In November 2006, WHD collected nearly $75,000 in back wages for 76 employees of an Ohio construction contractor that had misclassified its workers as independent contractors. 

• In October 2006, a Houston construction company paid nearly $130,900 in back 

wages to 81 employees who had been misclassified. 

• The Department sued a Houston drywall company in August 2006, to recover 

over $500,000 in back wages on behalf of misclassified employees who were working 

to rebuild the Mississippi Gulf Coast casinos following Hurricane Katrina. 

• In a similar case involving the employees working to rebuild the Gulf Coast region, WHD collected over $362,000 in back wages from three construction firms that 

had misclassified employees as independent contractors. 

• In March 2006, the Department sued a Glendale, California, janitorial company 

for $900,000 in back wages that resulted from the company’s improper practice of 

classifying the workers as independent contractors. 

WHD has, for a number of years, prioritized its statutory enforcement responsibilities to maximize protections for workers, including the most vulnerable in the 

workforce: low-wage, immigrant, and young workers. WHD receives approximately 

30,000 complaints during a fiscal year and utilizes approximately 70% to 78% of the 

program’s enforcement resources to resolve complaints. In addition to its responsibilities to respond to allegations of noncompliance, WHD has devoted between 22% 

and 30% of its enforcement resources to targeted investigations (i.e., investigation 

initiated without a complaint), the focus of which is in low-wage industries that employ large numbers of vulnerable, low-skilled workers. 

These industries, such as construction, janitorial, restaurants, landscaping, agriculture, garment manufacturing, and health care, are often characterized by the employment of immigrant workers who are particularly vulnerable to exploitation, as 

well as young workers who are not fully versed in FLSA protections. Investigations 

in these industries tend to disclose high rates of FLSA minimum wage and overtime 

violations. Moreover, it is the experience of WHD that undocumented workers, many 

of whom may have been misclassified as independent contractors or have been engaged in contingent employment relationships, account for an increasing percentage 

of employees in these industries. 

WHD initially focused its low-wage program on the three nationally targeted industries of garment manufacturing, agriculture, and health care. While compliance 

efforts continue in those identified industries, in FY 2004 WHD began expanding 

its low-wage program to include a broader group of identified low-wage industries. 

Working with external evaluators, WHD identified approximately 33 low-wage industries in which workers were most likely to be the subject of a minimum wage 

or overtime violation. This research enabled the agency’s local and regional offices 

14

to identify and to target in their geographic areas industries with the most serious 

compliance issues. 

In FY 2006, WHD collected nearly $50.6 million in back wages for approximately 

86,700 workers in nine of the larger group of low-wage industries, an increase in 

back wages collected in the same low-wage industries of over 10% as compared to 

the previous fiscal year. Over a third of WHD enforcement resources are attributed 

to investigations in nine low-wage industries, which include day care, restaurants, 

janitorial services, landscaping, and temporary help. This fiscal year, WHD is conducting over 100 initiatives in low-wage industries. These compliance initiatives are 

concentrated in restaurants, retail, construction, janitorial, hotels and motels, and 

health care. WHD offices in garment manufacturing centers are continuing their enforcement efforts to increase compliance in that industry. WHD offices also have enforcement and compliance assistance activities in agriculture and reforestation. 

Again, these industries share common characteristics with the industries in which 

employees are most likely to be misclassified as independent contractors. 

As a complement to its enforcement activities, WHD has an active compliance assistance program that takes advantage of opportunities to educate employers and 

employees about the laws that it enforces. WHD outreach to the employer and employee community is a critical component of its overall compliance program because 

it aims to ensure that employers have information on the statutory and regulatory 

requirements in a clear and concise manner and that employees are versed in their 

rights and the remedies available to them. In its 2006 audit, GAO acknowledged 

WHD’s outreach to workers and to employers on employment relationship concepts 

and the agency’s procedures for its field staff in identifying and reporting potential 

misclassification issues to other Federal agencies. 

Among the examples of compliance assistance information noted by GAO is Fact 

Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA), 

which describes the factors involved in determining whether an individual is an employee under the FLSA and where to find additional information or help in making 

such a determination. This fact sheet is available in Chinese, Korean, Spanish, 

Thai, and Vietnamese, as well as English. The Employment Relationship fact sheet 

and others like it, including various industry specific fact sheets, are available on 

WHD’s web site. The Employment Laws Assistance for Workers and Small Businesses (elaws) FLSA Advisor, also on the web site, is another tool that provides an 

interactive mechanism for employers and workers to determine whether a worker 

is an employee under the FLSA. 

In addition to these electronic and printed materials, WHD field personnel participate in a variety of outreach activities such as seminars, training programs, and 

community-based activities, including Spanish-language radio and television programs. WHD distributes worker rights cards to day laborers, health care workers, 

garment workers, and farmworkers, among others, in order to inform workers of 

their rights and to prevent misclassification from happening in the first place. 

Justice and Equality in the Workplace Program 

To further increase awareness of relevant labor laws, to encourage greater employer compliance with those laws, and to assist vulnerable workers in achieving the 

protections to which they are entitled, WHD has also developed strategic partnerships and collaborations with businesses and trade associations; labor unions; federal, state and local government agencies; faith- and community-based organizations; and foreign agencies. Just one example is the established in Houston, Texas, 

to educate low-wage immigrant and non-immigrant workers about their rights 

under federal law and to bring the employers of these workers into compliance 

through education and enforcement. 

In summary, WHD balances three complementary strategies—compliance assistance, partnerships and collaborations, and strong complaint-based and targeted enforcement—to promote and achieve compliance on behalf of all employees, including 

those who have been misclassified as independent contractors. 

WHD Response To GAO Recommendations To Improve Outreach To Facilitate Proper 

Worker Classification 

As mentioned previously, GAO examined WHD’s role in identifying and addressing instances in which workers were misclassified as independent contractors. While 

recognizing WHD’s efforts in addressing instances of worker misclassification under 

the FLSA, GAO had two recommendations for WHD. Both have been addressed by 

WHD. 

First, GAO recommended that because WHD’s enforcement program was primarily complaint-based, the FLSA poster should be modified to provide additional 

contact information. This revision was intended to facilitate the reporting of possible 

15

misclassification complaints that also alleged minimum wage or overtime violations. 

WHD agreed with the recommendation, and the new FLSA poster prominently displays the agency’s toll-free number and web site address. Calls to the toll-free number are answered by call center staff who refer complainants to the appropriate 

WHD local office. The call center has Spanish-speaking customer service representatives and an interpreter service that supports 150 languages. 

Second, GAO recommended that WHD evaluate the extent to which misclassification cases identified through FLSA investigations are referred to the appropriate 

federal or state agency potentially affected by employee misclassification, and take 

action to make improvements as necessary. GAO also suggested that WHD build 

upon efforts by its district offices currently engaged in such referrals. Finally, GAO 

indicated that any referral of cases should include notifying the employer that the 

misclassification case has been forwarded to the appropriate agency. 

WHD agreed with GAO that there is value in sharing potential employee misclassification with appropriate federal and state programs. As a result, WHD reviewed its internal processes for referral of potential employee misclassification to 

other agencies with all first-line field managers during a national managers training 

conference in May 2007. To ensure that all WHD district offices refer employee misclassifications that could lead to potential violations of laws enforced by other agencies, the first-line managers were reminded to follow the agency’s longstanding Field 

Operations Handbook instructions and to refer such violations using the established 

form WH-124. 

We believe that an explicit policy of automatic referrals to all other agencies, however, could have an adverse impact on WHD’s mission and ultimately harm those 

workers whom the agency is tasked with protecting. If it becomes common knowledge that WHD routinely refers potential violations to some agencies it would 

hinder the agency’s ability to persuade employees to report violations of the wage 

and hour laws or otherwise voluntarily provide workplace information. Moreover, 

employers would be less likely to produce copies of written documents or records if 

they believed such documents were going to other law enforcement authorities for 

reasons unrelated to the labor standards investigation. As a result, WHD would be 

required to compel the release of information through the courts, a timely and costly 

means of enforcing federal labor standards. In addition, because the definition of 

‘‘employee’’ under the FLSA is more inclusive than the definition used in many 

other statutes, a determination of misdesignation of an employee as an independent 

contractor by WHD may not be applicable for other purposes. Accordingly, WHD disagrees with GAO that referral is appropriate in all instances and believes that determinations as to whether to refer a matter to another agency must be made after 

considering the particular circumstances. In terms of the worker protections that 

WHD is trying to ensure, there are tradeoffs in reporting to other agencies, and 

whether or not reports are made represents the outcome of a balancing of benefits 

and costs for the workers the agency is trying to help. 

WHD also does not agree with GAO’s recommendation that employers be notified 

when WHD refers potential misclassification cases involving laws not enforced by 

the WHD to another agency. As WHD explained, this type of process would place 

WHD staff in the untenable position of explaining or defending a referral based 

upon interpretations of laws concerning which WHD has neither expertise nor interpretive or enforcement authority. 

Future WHD Compliance Activities 

Over the last several years, WHD has planned a number of compliance initiatives 

in low-wage industries to address the more common violations, such as off-the-clock 

violations and misclassification of executive, administrative, and professional employees as exempt personnel. In support of its compliance priorities in low-wage industries, WHD’s FY 2008 performance plan focuses on addressing the violations 

that may arise from employment relationships not designated as such, especially 

those involving contingent workforces, misclassified employees, and subcontracting 

structures. Each of the agency’s regional and local district offices’ low-wage initiatives will include compliance activities in at least one of the low-wage industries in 

which independent contractor misclassifications are common. WHD is committed to 

promoting compliance in low-wage industries and to ensuring that the designation 

of workers as independent contractors does not result in violations of the labor 

standards laws that we enforce. 

Madam Chairwoman, Mister Chairman, this concludes my prepared remarks. I 

will be happy to answer any questions that you or the Members of the Subcommittee may have. 

16

Chairman ANDREWS. Thank you very much, Mr. DeCamp. We 

appreciate it. 

On page four of your testimony, you indicate that the division receives about 30,000 complaints a year. And then the resolution of 

those complaints absorbs between 70 and 78 percent of your enforcement resources. Between 22 and 30 percent of your enforcement resources are to targeted investigations. 

How many targeted investigations do you do in a year? 

Mr. DECAMP. I think it varies, depending on the year, depending 

on the resources available, but somewhere in the neighborhood, I 

believe, of 7,000 to 10,000 a year. 

Chairman ANDREWS. Of the 7,000 to 10,000 a year, how many 

are for violations of the Fair Labor Standards Act? 

Mr. DECAMP. That is about 80 percent of our caseload, 5,000 to 

6,000 probably. 

Chairman ANDREWS. Okay. So it would be 80 percent of that? 

Mr. DECAMP. Or more. 

Chairman ANDREWS. And a precondition to pursuing an FLSA 

claim is that there be an employer-employee relationship, correct? 

Mr. DECAMP. Correct. 

Chairman ANDREWS. So of those FLSA investigations that you 

have conducted, how many of them yield the result that there is 

a misclassification of an employee who should be under FLSA but 

isn’t? 

Mr. DECAMP. We don’t really track the cases that way because 

independent contractor versus employee is a coverage issue, rather 

than a violation issue. So we haven’t historically kept records of 

how the violations came about. 

Chairman ANDREWS. I would think if you did some data-mining 

you would be able to figure that out, right, because if you follow 

up on an FLSA violation claim, by definition, the person is an employee, right? You wouldn’t be pursuing the claim if you conclude 

the person is not an employee. 

Mr. DECAMP. If we get to the end of the investigation and have 

concluded that, yes, the person is an employee, then, yes, we would 

have found that person is covered. 

Chairman ANDREWS. So some subset of those investigations that 

you get to the end, you have made a prior determination that the 

person is an employee or there has been some dispute about that, 

right? 

Mr. DECAMP. Yes, except that information isn’t necessarily reflected in the case file or in the records. 

Chairman ANDREWS. So if one of your inspectors goes into an employer and says, ‘‘These 12 people are not being paid overtime,’’ the 

employer says, ‘‘Well, they are not employees; they are independent 

contractors,’’ there is nothing in your case file that would say that 

that defense was raised? 

Mr. DECAMP. There might or there might not be. And it is not 

in the computer records, which is the basis from which we would 

really pull data together. 

Chairman ANDREWS. Would you favor a statutory change that 

would require you to keep that kind of record? 

Mr. DECAMP. I take no position on that. 

Chairman ANDREWS. You think it would be a good idea? 

17

Mr. DECAMP. I don’t know that it would help our enforcement 

mission in terms of protecting the workers. 

Chairman ANDREWS. Well, let us look at this for a moment. 

In New Jersey, in 2006, 871 audits of the construction industry 

were conducted. And in 41 percent of those cases, the finding was 

that there was a misclassification of workers. 

Do you have any basis to either agree or disagree with—if one 

were to put forth the proposition that that is typical of across the 

country, are you in a position to agree or disagree with that statement? 

Mr. DECAMP. I don’t know in terms of the specific numbers 

whether the New Jersey results would generalize nationwide. But 

I would agree, certainly, that in construction, that is a low-wage industry with a high incidence of misdesignation. 

Chairman ANDREWS. So you think it would be fairly probable 

there would be a high incidence of misclassification? 

Mr. DECAMP. Yes. 

Chairman ANDREWS. Okay. 

Another thing that you say in your testimony repeatedly is that 

misclassification of an employee as an independent contractor is 

not, in and of itself, a violation of the FLSA, correct? 

Mr. DECAMP. Correct. 

Chairman ANDREWS. Should we make it a violation of the FLSA? 

Mr. DECAMP. Well, it depends on what the policies of the FLSA 

are. Currently, the FLSA is about making sure that people are getting minimum wage and overtime, among other things. 

Chairman ANDREWS. Well, which people? 

Mr. DECAMP. Covered employees. 

Chairman ANDREWS. Okay. So if there is a dispute about systematic misclassification of covered employees, wouldn’t it be logical—

if the public policy behind that statute is to say that people who 

are in an employer-employee relationship should get overtime, 

should get minimum wage, should get the other protections, 

wouldn’t it be logical to make it one of the enforcement duties to 

make that determination? 

Mr. DECAMP. Again, it is an issue of whether the workers have 

been harmed. If——

Chairman ANDREWS. Well, they have been harmed, haven’t they? 

If someone has been misclassified and not being treated as an employee, and they don’t get overtime for their 41st hour, they have 

been harmed, right? 

Mr. DECAMP. Well, sure. And in that case, we would assert an 

overtime violation under the FLSA. 

Chairman ANDREWS. So would you favor making a violation of 

the FLSA the misclassification of employees? Is that a good idea? 

Mr. DECAMP. I don’t think it is because we already protect the 

workers by enforcing their rights to minimum wage and to overtime. 

Chairman ANDREWS. But how do you protect the workers if they 

have been misclassified? Because you just told us that you don’t 

keep records of that. So if someone had been misclassified and the 

investigation was not properly handled, you wouldn’t know, would 

you? 

18

Mr. DECAMP. If the worker has been misclassified, then we 

would assert an employment relationship, and then we would look 

to see whether their rights to minimum wage or overtime had been 

violated. 

Chairman ANDREWS. But you don’t know in how many cases you 

have done that because you don’t keep track of it. You assume that 

your field people have done that, but you don’t know, do you? 

Mr. DECAMP. I don’t know whether people have kept track of the 

independent contractor issue. It is not part of the computer database. 

Chairman ANDREWS. No. But if an employer has raised a defense 

that someone is an independent contractor, not an employee, your 

database doesn’t let you keep track of how you have resolved that 

defense, does it? 

Mr. DECAMP. I don’t believe that it does. 

Chairman ANDREWS. Okay. Thank you. 

I see my time is up. Mr. Kline is recognized for 5 minutes. 

Mr. KLINE. Thank you, Mr. Chairman. 

And thank you, Mr. DeCamp. 

We are in these continuing discussions of lawyers and lawyers 

here, so I will admit, once again, that I am not one, so I need to 

cut down to some sort of basics here. 

We heard in the previous hearing, I think one of our colleagues 

said that the issue of whether an individual worker is a contractor 

or an employee isn’t that complex. Would you agree with that? 

Mr. DECAMP. I think it really depends on the situation. I think 

there are many employment relationships where it is perfectly 

clear who is an employee and who wouldn’t be. I think there are 

certain industries where it becomes difficult to draw the lines. I 

think construction and some of the industries that we have talked 

about present some of the more challenging gray areas. 

Mr. KLINE. So in some cases it may be, in fact, quite complex, 

and others it might be pretty straightforward. I think Mr. Andrews 

indicated some cases where it might be pretty straightforward and 

others where it is not clear at all. He talked about people mowing 

lawns. Well, sometimes that may be clear that they are an employee, and sometimes it is clear that they are an independent contractor. So just what industry you are in and what job you are 

doing may not be the best indication of that. 

Now, let us get to a couple of things here, because I am going 

to run out of time. 

In its examination of misclassification cases, the GAO made a 

number of recommendations to the Wage and Hour Division. Can 

you explain in more detail what these recommendations were and 

how the division has responded to GAO’s recommendations? 

Mr. DECAMP. There were really two recommendations the GAO 

made in the report. 

One of the recommendations was to include contact information 

on our workplace poster that would explain to workers how to contact the Wage and Hour Division in order to pursue issues, to 

present a complaint. We have addressed that by including the tollfree number for the Wage and Hour Division on our poster. 

The second recommendation was that we regularize, I guess 

would be the best way to put it, our processes for communicating 

19

information about potential violations to other agencies. That is an 

issue where we continue to examine how best to approach that 

issue, because there are pros and cons to dealing with other agencies, such as IRS or other agencies, as well. 

We need to balance the need to enforce and protect those other 

laws that are outside our agency’s jurisdiction with the need to 

maintain the integrity of our enforcement mission. 

Mr. KLINE. Okay. Thank you. 

Now, I want to go back, because I am still thinking about this, 

how your division works. Let us take a for-instance case, a hypothetical. You have someone working for a company, Company A, 

and they are working as an independent contractor. But, in your 

judgement, they have been misclassified. 

Mr. DECAMP. Okay. 

Mr. KLINE. You are not concerned with that as a matter of a violation of law. But if that person who has been misclassified is making less than minimum wage, for example, what would you do? 

What would your department do? 

Mr. DECAMP. We would assert a minimum-wage violation and 

pursue back wages or any other remedies that were appropriate. 

Mr. KLINE. Okay. So even though they are an independent contractor, and neither the worker nor their employer is breaking a 

law because of that—or not being held accountable because of your 

department—nevertheless, because they were getting less than 

minimum wage, your department would take action. Is that correct? 

Mr. DECAMP. Well, we would say that they are being held accountable for the substantive violation of the Fair Labor Standards 

Act, the minimum-wage violation. 

Mr. KLINE. Right. But the misclassification itself is not an issue 

with you, and so, because of that, you are not recording that. It is 

not in your computer database. 

Mr. DECAMP. Right——

Mr. KLINE. But the fact that there was a violation that they were 

not paid the minimum wage or perhaps weren’t paid overtime, 

those the employer is held accountable for. Is that correct? 

Mr. DECAMP. Right. Technically, the Fair Labor Standards Act 

does not require that employees be classified one way or another. 

It requires that employees who are genuinely employees under the 

law receive overtime and receive minimum wage as required by the 

law. 

Mr. KLINE. Okay. I see my yellow light is coming on. 

Let me just explore something else with you. You have cases 

where people are reluctant to come forward and make a complaint. 

You probably also have cases where you have workers who prefer 

that status to the employee status and wouldn’t come forward either. Is that correct? 

Mr. DECAMP. That is probably fair to assume. 

Mr. KLINE. Okay. I yield back. 

Chairman ANDREWS. Thank you very much. 

I recognize the gentlewoman, the chairperson of the Labor Standards Subcommittee, Ms. Woolsey, for 5 minutes. 

Ms. WOOLSEY. I feel like we are going backwards, Mr. Chairman. 

We get to a point where we know we have a problem. And we ask 

20

the agency, the department who we think should be responsible for 

protecting all workers, and all we hear is that it ain’t their responsibility. 

So let me ask you who, then, if not the Department of Labor, is 

responsible for protecting all employees? And whose mission is it 

to investigate? And if we, the Congress, and if our laws are making 

it impossible for you to do your job, what is it we need to change? 

Because these answers are not acceptable. The answers to our 

questions in the letter were the same kind of gray mushy mush. 

It is probably not your fault; maybe you can’t be any clearer than 

this. 

We have to get clear. We know we have workers that are called 

one thing and are another. And they are not getting their full benefit from being a working American. 

So give us some guidance. What can we do? 

Mr. DECAMP. Well, again, I think the agencies that enforce the 

particular statutes are the ones who protect the workers. 

For example, the wage and hour rights: The Wage and Hour Division very aggressively pursues cases in low-wage industries 

where misdesignation of independent contractors is common. We 

protect those rights to minimum wage, to overtime. 

Ms. WOOLSEY. But you don’t know who they are. 

Mr. DECAMP. We do. 

Ms. WOOLSEY. You don’t keep track of them. 

Mr. DECAMP. We do know who they are because we are very active in the workplaces where these people are working, where these 

issues arise. We are active in the industries. So we go to the worksites. And we don’t care how an employer wants to designate a 

worker, as an independent contractor or an employee. 

Ms. WOOLSEY. Well, then let me ask it another way. Why are 

there so many of them still? What is wrong with the way you are 

doing your jobs? 

Mr. DECAMP. I wouldn’t say there is anything wrong with the 

way we are doing the job. I think it is partly a resource issue, 

frankly. I would love to see the agency able to do more investigations, to have more investigators, to be more active. And that is 

mainly a resource constraint. 

And, frankly, you know, the administration has asked for additional resources. And I hope that we will receive additional resources so that we can do more of these investigations. 

Ms. WOOLSEY. Well, get back to us about that. That is what we 

are trying to find out. What do we need to do? 

Mr. DECAMP. Again, I think it is about getting more investigators on board so that we can do more targeted investigations. I 

think targeted investigations in low-wage industries are the most 

important tool that we have to try to protect these workers, because many low-wage workers don’t come to us. They have concerns about immigration status or other concerns where they don’t 

come to us. 

Ms. WOOLSEY. Well, what does an inspector do? Do they need to 

be called into the place of employment? Do they need to interview 

the workers? Do they need to interview the employer? 

Mr. DECAMP. Right, well, investigations can come about in a couple of different ways. One is that we may receive a complaint from 

21

a worker or from another interested party, in which case that 

might spur an investigation. 

Another way is that we may, as part of our strategic planning 

process, decide we need to target this industry this year. And so, 

without a complaint, we might go into several workplaces and conduct an investigation, which would involve examining records, 

interviewing workers, interviewing all sorts of personnel to try to 

figure out what is going on in the workplace. 

Ms. WOOLSEY. And, well, how long have you been in this position, Mr. DeCamp? 

Mr. DECAMP. Since August of last year. 

Ms. WOOLSEY. Okay. Give us some examples of a success story, 

where you made a difference for a misclassified group of employees. 

Mr. DECAMP. Well, the department filed a lawsuit recently 

against Benitez Drywall Company, where the issue was 

misdesignation of employees as independent contractors. So we 

have pursued remedies for them in court. 

I have outlined, actually, in the testimony on page four, a number of recoveries that we have had, or also litigations that we have 

commenced. 

We have another case in Glendale, California, a janitorial com- pany, where we sued them for $900,000 in back wages. 

Chairman ANDREWS. Will the gentlelady yield? 

Ms. WOOLSEY. Yes, I will. 

Chairman ANDREWS. Were those two cases initiated by the department, or were they a result of complaints by workers? 

Mr. DECAMP. We actually don’t disclose that information because 

of concerns about retaliation for the workers involved. I can tell 

you that on——

Chairman ANDREWS. Okay. But if they were initiated by the department, you wouldn’t have that concern, would you? 

Mr. DECAMP. I am sorry. I didn’t understand. 

Chairman ANDREWS. If the cases were initiated by the department, you know, that would not be an issue, would it? In other 

words, you respond to complaints, and then you initiate some audits. 

Mr. DECAMP. Right. 

Chairman ANDREWS. Were these initiated by audits, or were they 

complaints? 

Mr. DECAMP. Well, this is what I am saying. If we identify only 

the cases that were initiated by the department, that also identifies 

which cases were initiated by complaints. [Laughter.] 

Chairman ANDREWS. Okay. 

Ms. WOOLSEY. Mr. Chairman, may I reclaim my time? 

Is there follow-up? Do you know what that industry is doing 

now? Do you know what like industries are doing because of the 

initial complaint? 

Mr. DECAMP. Well, whether or not it is a complaint, in those 

cases, they certainly received a lot of publicity. We are hoping that 

that has a spillover effect to increase compliance. 

But we know we need to remain very active in janitorial work, 

in construction, and in these other low-wage industries. A continuing enforcement presence is going to be critical in those industries. 

22

Ms. WOOLSEY. My time has expired. 

Chairman ANDREWS. The chair recognizes the gentleman from 

South Carolina, Mr. Wilson, for 5 minutes. 

Mr. WILSON. Thank you, Mr. Chairman. 

And I want to join with my colleague from Minnesota, Colonel 

Kline, and express, as a fellow attorney, how happy I am to be in 

the presence of so many fine attorneys. 

As we begin this morning, we have heard testimony about the 

IRS 20-factor test, as well as other tests used by other federal 

agencies and departments. 

Can you tell us, are all of these tests consistent? What factors 

does IRS look at that Wage and Hour Division does not? And, perhaps most important, do each of these tests always produce the 

same result? 

Mr. DECAMP. To take the last question first, my understanding 

is that the tests do not necessarily yield the same result in all 

cases. 

As I mentioned before, there are many situations where the tests 

would all come out the same way regarding somebody who is clearly an employee as an employee. 

But in the grayer areas—in construction, in some of these other 

types of industries that we are talking about where compliance is 

a particular concern—there may be differences in the outcomes 

under the tests. 

The test that we use under the Fair Labor Standards Act is the 

economic realities test, which was set forth by the Supreme Court 

in a number of cases beginning in the 1940s. And what that is really looking at is: Is the worker functioning as an independent business, or is the worker functioning more as a traditional employee? 

The IRS test—and I am not even certain that they still use the 

20-factor test—is dealing with the common law right-to-control 

test, which has a different focus. I am not an expert in what factors 

the IRS uses. But I think that, given that they are looking at these 

statutes from more of a revenue than a wage perspective, I suspect 

that that is more of a focus of their inquiry. But I can’t get into 

details of the IRS test. I am not an expert on that. 

Mr. WILSON. You had indicated correctly that IRS is looking at 

the financial side of it. Is there anything that Wage and Hour specifically looks at that they wouldn’t look at? 

Mr. DECAMP. Again, I can talk about what Wage and Hour looks 

at, but I am truly not familiar with the way IRS goes about its 

task. 

Mr. WILSON. Setting aside the issue of lost revenue, what sorts 

of damages will an employee who is misclassified be entitled to? In 

the absence of minimum-wage or overtime violations, are there 

other damages that misclassified workers suffer? Are these enforced by the Wage and Hour Division? 

Mr. DECAMP. Again, with regard to the statutes that the Wage 

and Hour Division enforces, our focus is going to be on minimum 

wage and overtime primarily under the Fair Labor Standards Act. 

We also deal with other types of issues under the Family Medical 

Leave Act and the other 70 or so statutes that we enforce. 

23

Generally, we are talking about back wages, and we may be talking about liquidated damages. We may be talking about other remedies that would be available for violations. 

But I wasn’t sure whether the premise of your question was that 

there was no overtime or minimum-wage violation. 

Mr. WILSON. Right. 

Mr. DECAMP. There may also be other issues that are outside the 

scope of Wage and Hour’s jurisdiction, such as contributions to benefits plans, tax payments, you know, employment insurance payments, unemployment insurance payments, workers’ comp. These 

may be harms that a worker would suffer if the worker is 

misdesignated under those statutes, under the IRS statutes or 

under state or other insurance programs. 

Mr. WILSON. And it is so important that persons know their 

rights. Practically, how does this work? Is there a poster that is 

placed at workplaces? How do people know? 

Mr. DECAMP. Well, we have a number of pamphlets and brochures and information on our Web site that helps to clarify this 

issue. We have fact sheets on our Web site that explain the difference between an employee and independent contractor, focusing 

on the tests that the Supreme Court has articulated for our statute. 

We have a chapter from our field operations handbook that explains the employment relationship. We also have a lot of informational programs that we put on where we will talk to workers, we 

will talk to employers, and we will explain these tests and we will 

take questions to try to clarify. 

We also have, as I mentioned in my opening statement, an advisor on our Web site, where, by responding to a few questions, the 

Web site will give guidance to a worker or to an employer or anyone else about the proper designation status. 

Mr. WILSON. And there are training schools for technical students that I think would come right into this. Are the rights explained to students as they are taking courses in technical schools? 

Mr. DECAMP. I don’t know about technical schools. 

Mr. WILSON. I just think that would be a way to reach really 

bright young people who are learning skills. 

I yield the balance of my time. 

Chairman ANDREWS. I thank the gentleman for yielding. I think 

that is an interesting idea about some training course, perhaps 

something we could pursue together in the Higher Education Bill. 

Mr. WILSON. Yes. 

Chairman ANDREWS. That is a good idea. 

The chair recognizes the gentleman from Michigan, Mr. Kildee, 

for 5 minutes. 

Mr. KILDEE. Thank you, Mr. Chairman. 

Mr. DeCamp, you talked about a lack of resources to respond to 

complaints. Is that a lack of depth of response or just a lack of any 

response at all to the complaints? 

Mr. DECAMP. I think the more resources that we have, the more 

investigations we can do and the more thorough we can be in the 

investigations that we do. 

Mr. KILDEE. Are some not investigated at all because of a lack 

of resources, or is it a question of the depth of the response? 

24

Mr. DECAMP. We investigate the complaints we receive. And 

then with the resources that are available over and above responding to the complaints, that is how we do our targeted investigations. 

So the more resources we have over and above those that are 

necessary to respond to the complaints we receive, the more targeted investigations we can do. 

Mr. KILDEE. Were your budgetary requests this year higher than 

what you had received previous years? 

Mr. DECAMP. Yes, by about 10 percent. 

Mr. KILDEE. And did the budget sent to the Congress reflect that 

difference? 

Mr. DECAMP. Yes, sir. 

Mr. KILDEE. I thank you very much. 

Chairman ANDREWS. I thank the gentleman for his time. 

I recognize the gentleman from Louisiana, Dr. Boustany, for 5 

minutes. 

Dr. BOUSTANY. Thank you, sir. 

I guess we have to admit that the workforce or the workplace is 

a very complex and diverse area with regard to relations among 

workers and those who deal with the transactions of, you know, 

paying out for work and so forth. And I am struck by the fact that 

the tests that were talked about did not always yield the same results. 

And so there are a number of variables out here that really complicate this. And God bless you for trying to figure it all out. It 

seems very complicated to me. I am just a heart surgeon. [Laughter.] 

I would also think that workforce shortages which we are seeing, 

particularly in the construction area, certainly in my state of Louisiana and I think nationwide, would also create a different type 

of variable in this that would have some impact on whether somebody is misclassified versus wrongfully classified. 

Because if you have a workforce shortage with plumbers or carpenters or some group like that, then clearly you will get a lot of 

free agents out there trying to do things. So trying to sort through 

this would seem to be very difficult. 

I wanted to talk to you about the strategic targeting a little bit 

and explore that. Could you tell us a little bit more about the process? You said that you have a strategic planning session each year. 

You devote I forget how much of your resources to that? Could you 

tell us a little bit more about the process and how you go through 

that? 

Mr. DECAMP. Well, each year we try to plan our targeted enforcement priorities for the coming fiscal year. Now, it is an annual 

process. It takes several months. 

And it is an iterative process where we will get our senior leadership team involving career professionals, as well as the leadership 

of the agency, together in the same room to brainstorm, largely to 

talk about, you know, are there particular industries where we are 

seeing emerging problems of compliance? Has there been confusion? Is there willful conduct in a particular industry or a particular region? Or other types of issues where we feel that expendiVerDate 0ct 09 2002 17:03 Feb 26, 2008 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-56\36728.TXT HBUD1 PsN: DICK
25

ture of resources and targeted investigations can really affect compliance in a positive way. 

And so we have several sessions over the course of the year 

where we refine our plans for targeted enforcement. 

And we know that each year we are going to focus on low-wage 

industries. We know that each year we are going to focus on agriculture, child labor and several other areas that traditionally don’t 

necessarily lead to high volumes of complaints for a variety of reasons. We know we need to be active in those areas or else the 

rights will go unprotected. 

And so we try, on an annual basis, to fine-tune those enforcement plans and figure out, you know, this year is re-forestation a 

problem, H2B workers in the Pacific Northwest or Gulf Coast work, 

in light of some of the federal government contracting issues, you 

know, in and around the Hurricane Katrina area? And we try to 

focus on what are the real compliance problems where expenditure 

of targeted, directed resources would be most beneficial. 

Dr. BOUSTANY. Thank you. 

Have you seen any trends with regard to workforce shortage in 

how this is playing out? 

Mr. DECAMP. Well, certainly in the Gulf Coast. We have seen 

issues in Louisiana, Mississippi, Alabama of a large influx of inexperienced employers who are not used to the rules, who don’t know 

the rules and don’t necessarily care about the rules applicable to 

government contracting or the other federal wage and hour laws. 

Many of these folks may be trying to comply with the law, and 

many of them don’t know the law. 

And what we see is—and we see this across the board in industries—that compliance rates for newer businesses, smaller businesses, tend to be lower, in part because the wage and hour laws—

not just the FLSA, but across the board—tend to be fairly voluminous, fairly complicated. And we are dealing with many employers 

who haven’t yet invested in compliance with wage and hour laws, 

and so they make mistakes. And sometimes it is willful; sometimes 

it is accidental. 

But what we have seen in the Gulf Coast especially is a lot of 

contractors who are less like traditional businesses and more like 

folks who aggregate teams of workers and bring them to a worksite 

to be integrated into an existing contracting regime. 

And so, one thing that we have tried to do to address that issue 

is to be more aggressive in asserting joint employment so that 

these workers are employees, not just of the contractor who rounds 

them up, but of the higher-level contractors on the project who are 

actually directing the work. 

Dr. BOUSTANY. And one final question. Year to year, have you 

seen variances in the results of your targeted enforcement program, or strategic targeting program, or is it fairly consistent? 

Mr. DECAMP. Well, I think it is fairly consistent in terms of the 

violation rates that we see on targeted cases. 

We are always looking to improve our targeting so that we have 

a higher likelihood that, when we are going to expend resources 

and send an investigator into a workplace, that it is actually a 

workplace where there is a problem, as opposed to a workplace 

26

where everybody is in compliance. So we are always looking to improve that. 

Dr. BOUSTANY. Thank you. 

And, Mr. Chairman, I would submit maybe there is an education 

component here for new employers and small employers that might 

be of benefit. 

So I yield back. Thank you. 

Chairman ANDREWS. I thank the gentleman for his time. 

And the chair recognizes the gentleman from Illinois, Mr. Hare, 

for 5 minutes. 

Mr. HARE. Thank you, Mr. Chairman. 

Mr. DeCamp, I just have three questions for you. 

You stated that you have a record of aggressive enforcement in 

protecting the workforce. And of the more than 132,000 workers 

who were misclassified in the 2008 national U.I. tax audit, can you 

tell me in how many of those cases did the Department of Labor 

conduct a follow-up investigation to determine whether those workers were receiving adequate back pay? 

Mr. DECAMP. I don’t have that information. 

Mr. HARE. Could you get that for us? 

Mr. DECAMP. We can look and see whether we can provide that 

information. 

Mr. HARE. I would appreciate that. 

You also said in your testimony that a policy of automatic referrals would discourage employees from reporting violations of wage 

and hour laws and to provide other information. Can you explain 

this to me? Because I am a little bit perplexed by that. 

Mr. DECAMP. The main issue comes about when we are dealing 

with undocumented workers. If we take information that we receive involving undocumented workers and refer that information 

over to ICE or refer it over to IRS, for example, then those workers 

themselves may find themselves in jeopardy of being arrested and 

deported for their immigration violations. 

The last thing that undocumented workers want to do, generally, 

is to be dealing with the federal government in any of its respects. 

But certainly they don’t want to be dealing with enforcement agencies dealing with the immigration laws. 

The same concern arises when a lot of undocumented workers 

use fraudulent Social Security numbers, for example. So if the IRS 

or other agencies start investigating employer records dealing with 

tax payments, and they start to notice that, you know, three workers for this employer have the same Social Security number, that 

may then lead to prosecution or at least further inquiry and scrutiny of those workers, which may make the workers very uncomfortable. 

And if word gets out that Wage and Hour is providing information in significant quantities to other agencies, then workers may 

elect to forgo their wage and hour rights so as to avoid having to 

deal with enforcement of immigration laws. 

Mr. HARE. You also said that employers would be less likely to 

produce copies of written documents or the records if they believe 

the documents are going to other law enforcement authorities. 

Well, what if they were required to do so? 

Mr. DECAMP. What if who were required to do so? 

27

Mr. HARE. If the employers——

Mr. DECAMP. If they were required to give us the documents? 

Mr. HARE. Yes. 

Mr. DECAMP. Well, right now, when we get the documents, it is 

generally a very cooperative process. We don’t have to use subpoenas. We don’t have to use formal legal process to get that information. We can use those processes if we need to, if an employer 

refuses to give us information. But we generally don’t have to go 

the formal route to get documents. 

I think that if we were to more aggressively use employer documents to refer them to other agencies, employers would be more 

likely to require a formal process, which would then present a severe resource drain in terms of the number of investigations that 

we can conduct. 

Mr. HARE. And then just one final question before I run out of 

time. 

You said that, you know, you need some additional personnel or 

the resources. Can you tell us how many additional investigators 

would you need, in your professional opinion, to adequately do 

what it is you want to do? I mean, how short are you? 

Mr. DECAMP. It is hard to know what the right number is. I 

know that the right number is north of where we are now. And I 

think that the request that we have now seeks about 40 additional 

investigators. But I think that we need to go well beyond that at 

some point. 

There is also an issue of if we get too many investigators at once, 

that actually has negative effects for the agency, because training 

resources are very intensive, for example. 

Chairman ANDREWS. Will the gentleman yield? 

Mr. HARE. I certainly would. 

Chairman ANDREWS. If I could just take some of his time. 

You made the statement earlier about needing more. These data 

are for overall inspectors, not just this target, but I want you to 

explain this to us. 

In fiscal 2001, there were 4,334 positions requested for inspectors. For fiscal 2006, the request was 4,282, from the administration. For fiscal 2007, the request was 3,889. Now, it is back up to 

4,082 for fiscal 2008. 

So the number of people the administration asked for went down 

from 2006 to 2007, and in 2006 was considerably less than what 

you inherited when you took over in fiscal 2001. 

You have been asking for fewer people, haven’t you? 

Mr. DECAMP. With all due respect, those are not the Wage and 

Hour numbers. Those are not the numbers of investigators that 

have been requested for Wage and Hour. That might include personnel for ESA. 

Chairman ANDREWS. They are. 

Mr. DECAMP. But that is not reflective of the number of investigators that we have been requesting. We actually did request——

Chairman ANDREWS. But the numbers of personnel that you 

have been asking is going down generally, right? 

Mr. DECAMP. But we have also asked for increases in the Wage 

and Hour investigators. 

28

Chairman ANDREWS. That is how your presentation was made to 

the Appropriations Committee? 

Mr. DECAMP. I don’t know how the presentations were made in 

previous years, but I can say that, in terms of the 2008 request, 

the 2007 request, we have specifically asked for increased——

Chairman ANDREWS. Okay. 

Mr. DECAMP. We asked for specific amounts for increased numbers of investigators for Wage and Hour. 

Chairman ANDREWS. But not in the overall. 

I thank the gentleman for his time. 

Mr. HARE. I yield back, Mr. Chairman. 

Chairman ANDREWS. I would recognize the gentleman from 

Michigan, Mr. Walberg, for 5 minutes. 

Mr. WALBERG. Thank you, Mr. Chair. I have no questions at this 

time. 

Chairman ANDREWS. The chair would recognize the gentleman 

from New York, Mr. Bishop, for 5 minutes. 

Mr. BISHOP. Thank you. 

I just want to quickly follow up. When you are saying ‘‘the request that we made’’ with respect to inspectors, is the ‘‘we’’ here 

the Wage and Hour Division making a request to OMB, or is the 

‘‘we’’ here the administration making a request to Congress? 

Mr. DECAMP. The latter. 

Mr. BISHOP. Thank you. 

I want to pursue this issue of automatic referral. And I want to 

use a specific case. And it is the case that is raised by a witness 

on the second panel. I don’t know whether you have had access to 

the testimony, but Mr. Williams outlined the case in which I think, 

to any reasonable person, he was an employee. 

The relationship that he had with his employer was a traditional 

employer-employee relationship. And, as I say, I think that would 

be the case to a layman. I think it would be the case by looking 

at the ABC test, by looking at the IRS 20-point test. 

Let us assume that his testimony were submitted to the Wage 

and Hour Division. And let us assume that you had sufficient staffing to pursue an investigation. 

Your investigation, if I understand the constraints under which 

you feel you are working, would limit your findings, so to speak, 

to whether or not he was being paid minimum wage, whether or 

not he was being paid overtime, and so on. Is that correct? 

Mr. DECAMP. I think that is largely correct. We wouldn’t require 

a finding of independent contractor versus employee. 

Mr. BISHOP. Let us assume that you look at this. And he is being 

paid overtime, and minimum wage is not a problem. But clearly he 

is an employee. Therefore, his employer is not paying in to the Social Security Trust Fund, not paying into the Medicare Trust Fund. 

What does Wage and Hour Division do with that finding? Do 

they refer? 

Mr. DECAMP. We might. We might refer it to IRS. 

Mr. BISHOP. Stay on that for a second. Why would there be hesitation? Why is your answer you ‘‘might’’? Why isn’t it ‘‘absolutely’’? 

Mr. DECAMP. I think what we would need to do in a case like 

that is to balance whether referring would do more harm than 

good, in particular, with the workers. 

29

Mr. BISHOP. Okay. I understand the testimony you just gave 

about exposing illegal immigrants to retaliation and so on. But, 

again, this is a national reputable company. And this is clearly a 

U.S. national that we are dealing with here who is being treated 

as an independent contractor. 

So I guess my frustration is—and this goes to the question Ms. 

Woolsey asked—if it isn’t the Department of Labor that is going to 

act on what is clearly, at least to this person, clearly an egregious 

violation, what agency within the federal government can either 

employees turn to or can the Congress turn to? 

Mr. DECAMP. Well, again, first of all, there is a significant 

chance that in a case like that, we would refer the matter to IRS, 

given the facts that you have described. In addition, the IRS and 

the state agencies dealing with unemployment insurance certainly 

have jurisdiction to enforce their laws. And they can do that, as 

well. 

Mr. BISHOP. Okay. 

The commissioner of labor for New Jersey, Mr. Socolow, in his 

testimony, he recommends that the federal government take action 

in five areas. One of them is that we establish a strong universal 

federal definition of an employee. 

What is your response to that? 

Mr. DECAMP. Not knowing enough about the tax laws or the 

other laws to understand whether there are differences in the policies that would dictate a different outcome, I think it would certainly make things easier for everybody if there were one definition. 

Mr. BISHOP. And would that enhance your—by ‘‘your,’’ the Wage 

and Hour Division—would that enable or enhance your enforcement capabilities? 

Mr. DECAMP. I don’t think it would enhance our enforcement capabilities. But it would make it clearer when we ought to be considering referring information over to other agencies. 

One issue is that, because the tests are different, we don’t know, 

for example, in every case—now, maybe in a clear case, that is a 

different matter—but in one of these gray areas, we have a broader 

definition of ‘‘employee’’ under the FLSA than exists under most 

other laws. 

We don’t want to be referring information over to other agencies 

that might not even be a violation of their laws. And we don’t train 

our investigators in the tests used by the other laws. 

Mr. BISHOP. I am about to run out of time, but I want to ask you 

one more quick question. 

On the issue of resources, we just had a hearing in the Budget 

Committee in which the people from CMS estimated that for every 

dollar of enforcement they receive, they will get back somewhere 

between $4 and $13 of savings. 

Has your division conducted any form of assessment of that kind 

of ratio? 

Mr. DECAMP. Not that I am aware of. We just know that we 

want to be able to do more investigations. 

Mr. BISHOP. Okay. Thank you. 

I am out of time. Thank you, Mr. Chairman. 

Chairman ANDREWS. Thank you very much. 

30

Next on our list is the gentleman from Iowa, Mr. Loebsack, for 

5 minutes. 

Mr. LOEBSACK. Thank you, Mr. Chair. I have no questions. 

Chairman ANDREWS. Next on our list is the gentlelady from New 

Hampshire, Ms. Shea-Porter, for 5 minutes. 

Ms. SHEA-PORTER. Thank you. 

You know, without trying to sound facetious, I have to wonder 

if you are working for the same government that we are working 

for. And I will tell you some of my concerns here, and ask you to 

please address them. 

For example, we know that we have the largest deficit in history. And the IRS reports that they are losing an estimated $2.72 billion 

in 2006 alone. And yet I heard you say that you might report it 

to the IRS and, then again, you might not. And you also do not 

train your workers about these violations and where to take them. 

Are we all on the same page, working for the same government, 

with the same goals? 

Mr. DECAMP. Right. I appreciate the question. 

There is certainly a tension there. We certainly appreciate the 

importance of all of the federal laws, including the immigration 

laws, the revenue laws and the other laws. And I don’t want my 

testimony to be misunderstood as suggesting that we somehow 

don’t value those laws. 

Our approach to not referring every case is more a focus of the 

pragmatic consequences of referring matters and thereby deterring 

workers from reporting violations. That is the concern. 

Ms. SHEA-PORTER. Well, I have trouble with that answer, also. 

Because earlier, you said your mission of protecting the workers—

and I need to ask you how. If we don’t protect them about accidents 

and Medicare and Social Security and unemployment compensation 

and retirement and benefits, exactly how are you protecting them? 

Mr. DECAMP. Well, the concern is that if we are deterring workers from coming forward to us—because, frankly, we know that the 

workers would much rather not come to us at all than risk being 

deported or having other adverse consequences like that—if we 

deter workers from coming to us, then we are going to be getting 

less good information about violations in the workplace. 

And if the labor standards for the undocumented workers and 

other low-wage workers are not protected, that undermines the 

labor standards for all the workers. And that is the concern. 

We are not just concerned about the one worker who may have 

the issue. We are concerned about the integrity of the labor standards for all the workers in the workplace. And to protect those 

standards, we need to protect the undocumented worker and every 

other worker. 

Ms. SHEA-PORTER. Well, I will tell you that it smacks of protecting the people who are breaking these rules. 

And also, as somebody who did a lot of social work, there are 

ways to protect identities without, you know, having them lose 

their jobs. What have you pursued? Have you looked at ways to be 

able to allow employees to announce these violations without having them prosecuted or lose their status? 

What exactly are you doing to take steps? Because to do nothing 

is not acceptable. 

31

Mr. DECAMP. Well, we certainly conduct investigations, and we 

enforce our laws vigorously. 

We don’t require necessarily employees to submit a complaint 

with their name on it. We will take information sometimes from 

media sources, sometimes from workers reporting things anonymously. We get out there and we investigate and we protect those 

rights. 

The concern comes into play if we refer a matter over to another 

enforcement agency that then comes in and starts scrutinizing the 

employer’s records and sees that, you know, there are problems 

with the Social Security numbers or problems with I-9s or problems with other issues. 

Then, even if we haven’t, you know, announced the identity of 

any particular worker who is complaining, the fact that the worker 

is part of a workplace that is now being investigated by another enforcement agency may put that worker in jeopardy for having tax 

problems or immigration problems. And that would have a very 

chilling effect on workers. 

Ms. SHEA-PORTER. Have you worked with communities that work 

with, say, illegal immigrants or people who have green cards? Is 

there anything specific that you are doing with these organizations 

so that they could protect them? 

Mr. DECAMP. Well, absolutely. We do a lot of outreach to exactly 

that kind of group: to religious groups, to groups that advocate on 

behalf of immigrants, in particular, undocumented workers. We do 

a lot of outreach to educate those individuals and those groups 

about the protections that apply for those workers under our laws. 

Ms. SHEA-PORTER. Well, I will tell you, I am sure you could accomplish that and still do what your mission is. And I am disturbed that you haven’t done that. 

Earlier, you were talking about not wanting to bring in more 

people because—and let me see if I had this right—that it is intensive training. When you are talking about how many people do you 

really need, and you said something along the lines of: Well, it is 

intensive training. So we wouldn’t really want to bring in too many 

because it is a rigorous process. 

Do you recall saying that? Am I quoting you right? 

Mr. DECAMP. Well, what I said was that if we add staff too 

quickly, if we add investigators too quickly, it overwhelms the 

agency. Because in talking about how it is resource-intensive, we 

want to grow. But if we grow too quickly, it overwhelms the capacity of the agency to absorb these investigators. 

Ms. SHEA-PORTER. Well, I have to say that you can look at all 

kinds of work like that—say, air traffic controllers. Remember 

when they all were let go for a while, and they managed to bring 

a lot in because they knew they needed them? It was essential. 

And I would suggest that it is essential. And it almost sounds 

like stonewalling, whether it is the intention of the agency or not. 

By saying that we can’t have these people come help us because 

they would be a burden on us sounds, at best, weak. 

Thank you. My time has ended. Thank you. 

Mr. DECAMP. Can I respond to that briefly? 

Chairman ANDREWS. Of course. 

32

Mr. DECAMP. The training process is very intensive. As I noted, 

it takes about 3 years, because of so many laws that we enforce, 

to get investigators fully trained. 

In addition, during their training, before they are really fully 

ready to go out and conduct investigations on their own, they are 

often accompanied by senior investigators, who then have to mentor them and teach them how to conduct investigations properly. 

That is part of why it is a drain. 

We want to grow our staff, certainly. We want to have more investigators. But we have to do it in a way that is not overwhelming 

the agency by bringing in so many inexperienced investigators that 

they can’t really do their job and, at the same time, they drag down 

the productivity of our senior investigators. 

Ms. SHEA-PORTER. Well, one last comment. When you talk about 

productivity, the Department of Labor found a 50 percent increase 

in the number of misclassified workers in the past 6 years—a 50 

percent increase. I would say that, whether it drags down your supervisors’ productivity or not, it is probably a good time to start. 

Thank you. 

Chairman ANDREWS. I thank the gentlelady. 

The gentleman from Massachusetts has no questions, is that correct? 

Mr. TIERNEY. Yes. 

Chairman ANDREWS. The gentleman, my friend from New Jersey, 

Mr. Payne, is recognized for 5 minutes. 

Mr. PAYNE. Thank you very much, Mr. Chairman. 

And sorry that I missed your testimony. 

However, just generally speaking, we have seen in a number of 

areas of employment the question of the workers being considered 

in a different category, as independent contractors. 

When I was elected to Congress, in my federal building, the 

Peter Rodino Building—that was my predecessor and a good friend 

of mine, and every day I went into the building, I certainly remembered him because the building had his name. 

But the terrible thing that occurred was that when I began, the 

federal government decided to privatize the custodial workforce. 

People had worked there for many, many years, had benefits. And 

it was really a very disturbing thing because then they turned to 

contractors. 

And it took about 6 months before they put out bids, or a year 

or so. But the same people—the same work that was done, people 

had reduced salaries, had no benefits. 

It might have been a great day for the GAO or the Office of 

Budget, but it was a terrible day for those hardworking people who 

had worked, had stayed on the job, took pride in their work, 

worked to send their children to school, where, in the flip of a pen, 

they lost health benefits, they lost pensions. They had to do more 

than the previous—the workload, at less money. 

Now, I just wonder, just quickly, I understand you did outreach 

and you sort of did some surveys. So, let me just ask you this. Can 

you quantify what effect your outreach efforts have had on misclassification of workers? 

I mean, mine, it was less misclassification, but it is all in the 

same general trend. We are pushing down wages. 

33

You know, this country was great because people tended to be 

able to do better as time went on. Now, there are people who are 

doing better, believe me. I mean, these funds on Wall Street are 

going through the roof. 

However, the typical, average, hardworking person that lives in 

my city of Newark, New Jersey, is doing worse every year. The cost 

of fuel goes up. Cost of housing goes through the roof. And they are 

taken out of jobs that is reducing their benefit. 

How in the world can we continue to do this? 

We have got some serious external problems with terrorism and 

people hating us around the world and all that. Internally, we are 

turning our backs on our own people right here, which just complicates the situation. 

So let me just ask you, since my time is probably expiring, what 

has been the effect of your outreach efforts? What effect have they 

had on misclassification of workers? Because it appears that the 

number of misclassified workers have increased pretty steadily 

since 2000, so what is going on? 

Mr. DECAMP. Well, I don’t think that we have data that would 

quantify the effects of outreach. But it is important to keep in mind 

that outreach is not all that we do in this area. We also devote 

about 60 percent of our enforcement resources to low-wage industries, including the custodial industry that you mentioned, and construction and landscaping and many of the other industries where 

this misdesignation issue is a concern. 

Mr. PAYNE. Just concluding, you know, on Wall Street, where a 

union, SEIU 32BJ, was attempting to organize the custodians and 

the doormen at these condos in the area. You know, the owners 

fought them tooth and nail to prevent the custodians from being organized because maybe they will take away from their profits. 

I mean, it is a sad day in this country when we continually see 

hardworking people being beaten down daily. 

Thank you, Mr. Chairman. 

Chairman ANDREWS. Thank you, Mr. Payne. 

The chair recognizes the gentleman from Oregon, Mr. Wu, for 5 

minutes. 

Mr. WU. Thank you, Mr. Chairman. 

I would like to ask the witness from the Department of Labor 

about the factors that are considered by the federal government in 

a determination of whether someone is an independent contractor. 

When I was practicing law in Oregon, I believe Oregon has 

roughly half the number of factors to be considered about whether 

someone is an independent contractor than the IRS. 

What factors does DOL look to to make the determination of 

whether someone is an independent contractor or not? And how 

much weight is given to each factor? 

Mr. DECAMP. Well, actually, this is set forth on page two of the 

written testimony, but I will be happy to address that. 

Mr. WU. So I understand. 

Mr. DECAMP. I will just read through them. One is the extent 

to——

Mr. WU. Why don’t you just tell me? 

34

Mr. DECAMP. All right. Well, I mean, the main concern is the extent to which the business is operating as a business versus operating as an employee would be. 

So we are looking at ability to gain profit and control the revenue 

stream. We are looking at the ability to assign one’s own work 

versus being directed as to what to do. We are looking at the permanency of the relationship. 

We are looking at the extent of investment by the individual in 

the supplies and tools and other costs of doing business, other materials for doing business, versus, you know, is another entity providing that kind of material. 

Those are really the main factors. 

Mr. WU. In terms of immediate factors that one might look to, 

for example, if someone is holding out their business to others, they 

would have business cards. Are those things that you look at? 

Mr. DECAMP. That would be part of the mix, yes, sir. 

Mr. WU. Okay. And if someone were to mischaracterize someone 

as an independent contractor as opposed to an employee, how large 

is the discrepancy in costs to the employer and the costs to the employee? 

Mr. DECAMP. I don’t think that is an issue that the department 

has described. I know that some other witnesses, in the previous 

hearing, have weighed in on that issue. 

Mr. WU. Do you have any knowledge of this? 

Mr. DECAMP. Not in my capacity, no. 

Mr. WU. So you have no idea how much tax savings or tax costs 

is incurred by an employer or incurred by the independent contractor/employee. 

Mr. DECAMP. All I know is what was attested to at the previous 

hearing, sir. 

Mr. WU. Which is what? 

Mr. DECAMP. I think they were saying on the order of 15 to 20 

percent. 

Mr. WU. That seems a little low. 

Mr. DECAMP. I think that is what was said. I am not disputing 

the numbers or vouching for the numbers. I am just saying that 

is my understanding of what was said. 

Mr. WU. When the marginal tax rate is in the what, mid-to low30s, and then there are taxes for FICA and FUTA and all the other 

things that come off the paycheck? 

Mr. DECAMP. Sir, I am agreeing with your premise that there are 

economic incentives to——

Mr. WU. I am just trying to get my arms around it. And you are 

from the Department of Labor, so I sort of thought you might 

know. 

Mr. DECAMP. It is not an issue that the Wage and Hour Division 

studies. It is not relevant to our enforcement mission. 

Mr. WU. The gross savings isn’t relevant to your enforcement 

mission? 

Mr. DECAMP. In other words, we are looking at: Is this a worker 

who is an employee under the statute? And, if so, were the worker’s rights under the statute protected? 

35

That is our concern, not why did the employer do it, necessarily, 

unless it was willful. And then there are added penalties that 

would come into play, if we are talking about a willful violation. 

Mr. WU. So you don’t care about the size of the motivation, if you 

will? 

Mr. DECAMP. That would bear on whether the violation was willful. In which case, for example, a longer statute of limitations could 

apply. 

Mr. WU. Well, it would also bear on the size of the problem that 

you have. Don’t you think? 

Mr. DECAMP. When we are looking at remedies for the worker, 

we are looking at whatever minimum wage or overtime the worker 

was denied. In terms of the employer’s motivation for doing so, if 

we conclude that the violation was willful, we could pursue back 

wages for 3 years instead of 2. We would be more likely to pursue 

liquidated damages in a case like that——

Mr. WU. I am just trying to understand the scope of the problem. 

And if an employer saves 10 percent, that doesn’t seem like that 

is much motivation, but if an employer saves 50 percent or 100 percent, you know, that is a different scale of problem. 

I am just trying to get my arms around this. And I thought you 

would have those kind of numbers right off the top of your head. 

Mr. DECAMP. Again, that doesn’t affect how we would carry out 

our enforcement mission. We are looking to protect the workers 

under the statutes and——

Mr. WU. How long have you been working in this arena? 

Mr. DECAMP. I have been involved in labor and employment law 

since about 1995. 

Mr. WU. Okay. So in 12 years, you have never had reason to inquire as to the scope of potential savings that employers or contractors would experience as a result of characterizing or 

mischaracterizing the relationship? 

Mr. DECAMP. That is correct, sir. 

Mr. WU. Thank you. 

Chairman ANDREWS. The gentleman’s time has expired. 

Thank you, Mr. DeCamp, for your testimony here this morning. 

I know the committee will be interacting with you as we go down 

the line on this issue. And I thank you very much for your attendance this morning. 

Mr. DECAMP. Thank you. 

Chairman ANDREWS. Thank you. 

I am going to ask if the witnesses from the second panel would 

approach the table and wait for their name tags to be set up. 

I am going to turn over the prerogative of the chair to my friend 

from California, Ms. Woolsey, and she will conduct the balance of 

the hearing. 

Ms. WOOLSEY [presiding]. As Chairman Andrews said, if you 

have not testified here before, you may note that we have a lighting system, 5-minute rule. And everyone, including members, is 

limited to 5 minutes of presentation and questioning. 

The green light is illuminated when you begin to speak. When 

you see the yellow light, it means you have 1 minute remaining. 

When you see the red light, it means your time is expired and you 

36

need to conclude your testimony. You don’t have to stop mid-sentence, believe me. 

Be certain, as you testify, to turn on your microphone. Otherwise, 

we will all be yapping after you from up here, and you will wonder 

what we are trying to tell you. So just turn it on, and then we can 

hear you. 

And now we would like to introduce our witnesses. And Chairman Andrews will introduce David Socolow. 

Chairman ANDREWS. I appreciate that privilege. 

David Socolow is the commissioner of labor for the state of New 

Jersey. He is a graduate of Harvard University. Again, someone 

else has overcome that liability to be with us today. [Laughter.] 

I am especially proud of David for several reasons. He and I had 

the privilege of working together here in Washington when he 

served first as my legislative director, then my chief of staff. 

He then went to work for Secretary of Labor-elect Herman. He 

worked for the state of New Jersey’s Unemployment Division and 

was the director of that division for a number of years, and became 

our commissioner of labor last summer. 

He is an outstanding public servant. He is an authority in this 

field. He has done a great job on this issue in the state of New Jersey. 

And I must confess some personal affection. He is fortunate 

enough to be married to my sister-in-law, Erin. [Laughter.] 

And they have two spectacular children, one of whom is my goddaughter. And we are just very proud of the work that he has done. 

I am delighted he is here with us today. 

David, welcome. Great to have you with us. 

Ms. WOOLSEY. We welcome you, too, David. 

Robert Williams is currently a transportation recruiting and operations consultant to numerous transport companies in New England. Between the year 2000 and the year 2005, he worked first as 

a temporary driver and then as a contracted driver for FedEx 

Home Delivery in Northborough, Massachusetts. Prior to that position, he worked for over 30 years in a number of senior management positions at UPS, Federal Express, Airborne Express, and 

United States Line. Mr. Williams served for 28 years in the U.S. 

Reserve and retired as a sergeant major in 1996. 

Sara Stafford is president of Stafford Construction located in 

Saugus, Massachusetts. In 1993, after working as manager for a 

supply company for 13 years, Ms. Stafford opened her own union 

drywall and plastering contracting firm. Her company’s portfolio involves about 50 percent public and 50 percent private work. Sara 

Stafford has been a resident of Raleigh, Massachusetts, for 15 

years. 

Christine Walters is an independent consultant in human resources and employment law at the FiveL Company in Glyndon, 

Maryland, and is testifying on behalf of the Society of Human Resources Management. Ms. Walters has over 20 years of combined 

experience in H.R. administration, management law and teaching. 

She has been gauged as an expert witness regularly, presenting at 

conferences across the country. And she is a columnist for national 

publications. Walters serves in a variety of volunteer leadership 

37

roles at the national, state and local levels for the society and is 

currently on its employee relations panel. 

Thank you all for being here. 

We will begin with you, Mr. Williams. 

STATEMENT OF ROBERT WILLIAMS, TRANSPORTATION RECRUITING AND OPERATIONS CONSULTANT, FORMER FEDEX 

EMPLOYEE 

Mr. WILLIAMS. Thank you, Chairman Andrews and Chairwoman 

Woolsey, for inviting me to testify today. Thanks also to the members of the subcommittees who are interested in the misclassification issue that is hurting so many FedEx Ground and Home Delivery drivers today. 

After retiring, I read an advertisement in the Worcester Telegram and Gazette in April of 2001 for independent contractors at 

the FedEx Home Delivery in Northborough, Mass. The ad basically 

stated, ‘‘Run your own business. Become a business owner with a 

national leader. Be your own boss.’’

When I applied for the position as an independent contractor, I 

was told there were none available at present. The manager offered 

to train me as a temporary driver before I could become a contractor and do any work at all at FedEx Home Delivery. I completed the mandatory training course and went to work as a temporary driver. 

I was paid by the hour as a temp for a firm called Adecco and 

eligible for overtime. I was furnished a uniform and rental van supplied by FedEx, but I was not a FedEx employee. I did not pay any 

expenses while a temp. State and federal withholding were taken 

out of my weekly check by Adecco. 

I continued working as a temporary driver until June 2002, when 

a route position became available. At that time, I signed a FedEx 

Home Delivery standard contractor operating agreement. I purchased a small commercial van that had to be white and inspected 

by FedEx for approval. 

After utilizing this van for a period of time, I was told it would 

no longer accommodate the number of packages for my area. I was 

told I would have to have a larger vehicle. 

So, through FedEx, I leased a larger vehicle called a P400. This 

vehicle was painted white and had all of the FedEx logos on permanent decals. This vehicle was also arranged for by FedEx, who 

took care of all of the paperwork. 

I worked with this new van until October 15, 2002, when I was 

involved in a serious accident and hospitalized. I did not return to 

work for 13 months. I did not pursue worker’s compensation. I was 

not able to work until early November 2003, and returned as a 

temporary driver. 

I worked on and off as a temporary driver, driving a rental van 

supplied by FedEx and being paid by the temp agency Adecco. I 

was offered a different route and soon became a so-called contractor again in June 2004. 

I was told I had to lease or buy a much larger truck than I had 

before. This new truck was called a P500 and was obtainable only 

through FedEx. It was white and colored with logos, numbered in 

a FedEx series, and showed USDOT markings on it. 

38

FedEx had a supply of these vehicles in their Manchester, New 

Hampshire, terminal. And FedEx arranged the financing through 

one of the leasing companies they offered. The whole transaction, 

leasing arrangements, and credit information, et cetera, all flowed 

through FedEx. 

This was the only type of vehicle that FedEx approved. There 

were no exceptions. 

As a contractor, I was responsible for the cost of the vehicle, for 

the fuel, for the tires, for the maintenance, and all of the operating 

costs, including breakdown and emergency expenditures. I paid a 

worker’s accident policy in lieu of workman’s comp weekly deductions. I also paid weekly for liability insurance for protective insurance. 

These expenses were taken out of my settlement by FedEx. 

There were no other insurance services or policies that were made 

available to us. We were told we could get our own insurance. But 

having personally checked with a number of insurers, I found the 

cost prohibitive. 

Additional expenses that were taken out from time to time were 

for uniforms, scanners, claims against me, mapping software, random drug-testing, annual DOT inspection, and truck-washing. 

No taxes or Social Security were ever deducted from my settlements. We were issued a 1099 form annually. I was responsible for 

reporting my federal and state tax to the federal and state tax authorities. 

In the holiday period of 2004, things began to change drastically. 

We were being monitored more and more by the use of the scanner. 

The scanner was a tracking device used to monitor our daily delivery areas. 

We are required each morning to report early to load our trucks. 

The number of packages and stops were the means by which were 

compensated. We were paid by the package, and not an hourly 

wage. 

FedEx Home Delivery controls the number of packages tended to 

the drivers and controls the amount a driver can make through 

their computer systems. This means of controlling a driver is ongoing today. 

There were many times when FedEx managers would not allow 

us to leave the building and go out on our routes until all the packages were accounted for. This could severely impact our earnings 

by reducing the time we would have to make deliveries. Packages 

were added or subtracted to our routes, affecting our earnings on 

a daily basis. 

I remain in contact with numerous drivers who are still with 

FedEx Home Delivery throughout the country. I contact many drivers in the New England area on a regular basis, especially 

Northborough, Mass. The same issues, treatment and procedures I 

experienced still go on today. 

Due to my many years of working in the transportation industry, 

I understand clearly the differences between an employee and an 

independent contractor. The control that FedEx Home Delivery had 

over me and over the drivers it has today shows these drivers are 

controlled like employees but called contractors. 

39

FedEx Home Delivery drivers must pay for uniforms worn to 

FedEx standards with a black belt, proper shoes, no sneakers. 

They must purchase or lease a FedEx truck, purchased by 

FedEx, prescribed by FedEx for size, color and logos, numbering, 

et cetera. 

To purchase or lease a FedEx scanner—this is a mandatory item. 

The daily package deliveries cannot be performed without it. It is 

monitored by FedEx. 

Drivers must pay for all maintenance prescribed by FedEx and 

USDOT. Drivers must furnish all fuel, tires and other costs related 

to the operation of their vehicle. 

Drivers must pay for a weekly worker’s accident policy and liability policy deducted by FedEx to protective insurance. 

Drivers who cannot work on a given day and cannot find a 

FedEx-approved temp driver are regularly threatened with contract 

terminations. 

To me, the biggest personal issue I had was the time-off program. Drivers—can I continue? 

Ms. WOOLSEY. You need to sum up now, Mr. Williams. And then 

you will bring some of that into your questions and answers. 

Mr. WILLIAMS. All right. 

I could now just finish up and say I was terminated by FedEx 

in December 2005. The National Labor Relations had ordered an 

election before the company fired me and a number of other people 

who were attempting to support the union. The board filed a complaint against FedEx for illegally terminating me for protected 

union activities. 

There are more charges pending against the company for unfair 

labor practices in the Northborough location. A hearing is set for 

August. 

After I was terminated, I filed for unemployment benefits in 

Massachusetts, and I did receive those benefits. I was the first one 

to do so under the FedEx Ground or Home Delivery. 

Many present FedEx Ground or Home Delivery drivers would be 

too scared of the company’s reaction if they testified. I am here to 

state my professional opinion with over 45 years of experience in 

the industry. The FedEx Ground model rests clearly on the misclassification of its drivers as so-called contractors. 

Thank you. 

[The statement of Mr. Williams follows:]

Prepared Statement of Robert V. Williams, Transportation Recruiting and 

Operations Consultant, Former FedEx Employee 

Thank you Chairman Andrews and Chairwoman Woolsey for inviting me to testify 

today. Thanks also to the members of the Subcommittees who are interested in the 

misclassification issue that is hurting so many FedEx Ground and Home Delivery 

drivers today. 

After retiring, I read an advertisement in the Worcester Telegram and Gazette 

in April 2001 for Independent Contractors at FedEx Home Delivery in Northboro, 

MA. The ad basically stated: ‘‘Run your own business, Become a business owner 

with a national leader, Be your own boss’’. When I applied for a position as an 

‘‘Independent Contractor’’ I was told that there were none available at present. The 

manager offered to train me as a temporary driver before I could become a ‘‘contractor’’ and do any driving work at FedEx Home Delivery. 

I completed the mandatory training course and went to work as a temporary driver. I was paid by the hour by a temp firm named ADECCO and eligible for overtime. 

I was furnished a uniform and rental van supplied by FedEx but was not a FedEx 

40

employee. I did not pay for any expenses while a temp. State and federal withholding were taken out of my weekly check by ADECCO. 

I continued working as a temporary driver until June of 2002, when a route position became available. At that time, I signed a FedEx Home Delivery standard contractor operating agreement. I purchased a small commercial van that had to be 

white and inspected by FedEx for approval. 

After utilizing this van for a period of time, I was told it no longer could accommodate the number of packages for my area. I was told I had to have a larger vehicle, 

so through FedEx I leased a larger vehicle called a P400. This vehicle was painted 

white and had all of the FedEx logos on permanent decals. This vehicle was also 

arranged for by FedEx who took care of all the paperwork. I worked with this new 

van until October 15, 2002, when I was involved in a serious accident, and hospitalized. 

I did not return to work for 13 months. I did not pursue workers compensation. 

I was not able to work until early November of 2003, and returned as a temporary 

driver. I worked on and off as a temporary driver, driving a rental van supplied by 

FedEx and being paid by the temp agency ADECCO. 

I was offered a different route and became a so-called ‘‘contractor’’ again in June 

2004. I was told I had to lease or buy a much larger truck called a P500. This vehicle, only attainable through FedEx, was white in color with logos, numbered in a 

FedEx series and showed USDOT markings on it. FedEx had a supply of vehicles 

at their Manchester, NH terminal, and FedEx arranged financing with one of the 

leasing companies it offered. The whole transaction, leasing arrangements, the credit information, etc., all flowed through FedEx. This was the only type of vehicle that 

FedEx approved. There were no exceptions. 

As a ‘‘contractor’’ for FedEx, I was responsible for the cost of the vehicle, for the 

fuel, for the tires, for the maintenance, and all operating costs, including breakdown 

and emergency expenditures. I paid for a worker’s accident policy, in lieu of Workmen’s Comp weekly deductions and I also paid weekly for liability insurance from 

Protective Insurance. These expenses were taken out of my settlement by FedEx. 

There were no other insurance services or policies that were made available to us. 

We were told we could get our own insurance, but having personally checked a 

number of insurers, I found it to be cost prohibitive. Additional expenses taken from 

my settlement were for uniforms, scanners, claims against me, mapping software, 

random drug testing, annual DOT inspection and truck washing. 

No taxes or Social Security were ever deducted from our settlements. We were 

issued a 1099 form annually. I was responsible for reporting my income to federal 

and state tax authorities. 

In the Holiday period of 2004, things started to change drastically. We were being 

monitored more and more by the use of the scanner. The scanner was used as a 

tracking device to monitor our daily delivery areas. We were required each morning 

to report early to load our trucks. The number of packages and stops were the 

means by which we were compensated. We were paid by the package and not an 

hourly wage. FedEx Home Delivery controls the number of packages tendered to 

drivers and controls the amount a driver can make through their computer systems. 

This means of controlling drivers is on going today. There were many times when 

FedEx managers would not allow us to leave and go out on our routes until all packages were accounted for. This could severely impact our earnings by reducing the 

time we would be able to make deliveries. Packages were added or subtracted to 

our routes, affecting our earnings on a daily basis. 

I remain in contact with numerous drivers who are still with FedEx Home Delivery throughout the country. I contact many drivers in the New England area on a 

regular basis especially Northboro, MA. The same issues, treatment and procedures 

I experienced still go on today. 

Due to my many years of working in the transportation industry, I understand 

clearly the differences between an employee and independent contractor. The control 

that FedEx Home Delivery had over me and has over the drivers today shows that 

the drivers are controlled like employees but called ‘‘contractors.’’

• FedEx Home delivery drivers must pay for uniforms worn to FedEx standard, 

with a black belt, proper shoes, no sneakers. 

• Purchase or lease a FedEx truck; prescribed by FedEx for size, color, logos, 

numbering, etc. 

• Purchase or lease a FedEx scanner; this is a mandatory item. The daily package 

delivery duties cannot be performed without it and it is monitored by FedEx. 

• Drivers must pay for all maintenance prescribed by FedEx and USDOT. Drivers 

must furnish all fuel, tires, and any other costs related to the operation of the vehicle. 

41

• Drivers must pay for a workers accident policy, and liability policies, deducted 

by FedEx to Protective Insurance Company. 

• Drivers who cannot work on any given day and cannot find a FedEx approved 

temp driver are regularly threatened with contract termination. 

To me the biggest personal issue I had was the Time Off program. Drivers participate at the rate of $17.50 per week to join into the ‘‘Drivers Time off’’ program. Time 

off requests are made in May of each year according to ‘‘contractor’’ seniority. Any 

holiday falling in the week off would be included as part of the week off with no 

compensation. A ‘‘contractor’’ who signs up for the time off program, must remain 

in the program for the entire year. All selected weeks must be honored by ‘‘contractors’’ and managers. So we were paying FedEx to book two weeks away from delivering with no return to us. No interest was paid on this account. We don’t know 

where this money went. No one in management could explain how the program really worked. 

In August 2005, FedEx terminated the Senior Manager who had been there approximately 3 years. He was replaced by a number of additional roving managers, 

until a new manager was appointed, in September. At this point, nearly all drivers 

signed authorization cards to join Teamster Local Union 170. From the time that 

FedEx was notified of these actions by the drivers there was a drastic change in 

management. This continued through November 2005 when a hearing was held by 

the NLRB. I testified at that hearing as I am testifying today. We were found to 

be employees. 

I was terminated by FedEx in December 2005. The National Labor Relations 

Board ordered an election but after the company fired me and a number of other 

union supporters the election was postponed. The Board filed a complaint that 

charged FedEx for illegally terminating me for protected union activities. There are 

more charges pending against the company for unfair labor practices at the 

Northboro location. A hearing is set for August. 

After I was terminated, I filed for unemployment benefits in Massachusetts. The 

state investigated my work conditions. The company argued that I was a so-called 

‘‘contractor’’ and not eligible for benefits. The state concluded that FedEx controlled 

me as an employee and I was awarded unemployment. Since that ruling, other 

FedEx Ground and Home Delivery drivers have also been found eligible for Massachusetts unemployment coverage. With the Chairman’s permission, I ask that the 

Massachusetts ruling in my unemployment case be submitted with my statement 

for the record. 

Many present FedEx Ground or Home Delivery drivers would be too scared of the 

company’s reaction if they testified. I am here to state my professional opinion. With 

over 45 years of experience in the industry, the FedEx Ground model rests clearly 

on the misclassification of its drivers as so-called ‘‘contractors.’’ Thank you. 

Ms. WOOLSEY. Thank you, Mr. Williams. 

Ms. Stafford? Turn on your microphone. 

STATEMENT OF SARA STAFFORD, PRESIDENT, STAFFORD 

CONSTRUCTION SERVICES, INC. 

Ms. STAFFORD. Thank you, Chairwoman Woolsey and Chairman 

Andrews and the members of the subcommittees. It is a pleasure 

to address you here today on this important issue. 

I have been in the construction industry for about 30 years. I am 

the president and sole owner of the Stafford Construction Services 

Incorporated. Primarily, we are a subcontractor working in the 

union arena. And we do drywall plastering, metal framing, that 

type of thing, in the metropolitan Boston area. I do both public and 

private work. 

I am a union company. I have been since the day I opened my 

business 14 years ago. And I have agreements with the New England Regional Council of Carpenters, as well as three other unions. 

The construction industry is particularly prone to illegal practices. And the industry is very competitive, with jobs frequently 

being awarded to the lowest bidder. Under those circumstances, it 

42

is difficult to compete against others that misclassify workers as 

independent contractors. 

We at Stafford play by the rules. And for the 50 to 70 employees 

that work for me that means regular audits of my employment 

records are shown to the union. They are shown to my workers’ 

compensation company. They are shown to my bank. My bonding 

company has access to them. It is an open book. 

We have common interests in having a market of high standards 

and fair competition as a rule. The basic rule is abiding by the law. 

And my company’s employees are all on the payroll. 

They get overtime pay and workers’ compensation. We pay federal and state unemployment taxes, Social Security, Medicare, and 

we withhold state and federal from every dollar that we pay out 

in employment. And many of these funds, of course, go to the support of the health benefits for these underinsured people. 

That is okay because that is the law. But it becomes difficult 

when I have to compete against other companies that routinely 

misclassify their workforce and do none of those things. Automatically, they get at least a 30 percent advantage in labor costs and 

this all goes to profits. 

The bill for this gap in taxes paid and employee benefits comes 

due to every employer, like myself, that follows the rules. It is an 

unequal taxation through misclassification of employees. 

Another rule basic to many responsible companies, like mine, is 

to provide employees with good family medical and retirement 

plans, a foreign concept to most businesses that misclassify workers. 

The result of that kind of conduct is not difficult to fathom. 

More of the insurance and tax burden is put on responsible employers, such as myself, that play by the rules, because less people 

are paying into the system. Also, my company has lost work and 

my employees have lost income because the bids were won by employers that misclassify workers. 

There are whole market segments, such as residential construction, that are almost impossible for legitimate companies to enter 

into, especially in the interior trades. That is not fair and more 

concern needs to be shown to law-abiding companies. Otherwise, 

they will either have to go out of business or become one of the 

cheaters. 

And what about the workers? Misclassified workers don’t have 

the benefits of union protection. They do not have a cop on the 

beat, so to speak, that will make sure that the employer is playing 

by the rules. If they want union representation, their irresponsible 

employer will make them jump through hoops to prove that they 

are employees. 

That is the driving force behind the continuing misclassification 

problem in our industry. 

As I said earlier, I have a common interest with the union to provide high standards and to make sure the competition in the construction industry is fair. When union representation is made more 

difficult by misclassification, then misclassification becomes an 

even bigger problem, threatening the existence of employers like 

me who are paying into the system and hoping that the system will 

recognize the need for a level playing field. 

43

Thank you. 

[The statement of Ms. Stafford follows:]

Prepared Statement of Sara Stafford, President and Sole Owner, Stafford 

Construction Services, Inc. 

Chairwoman Woolsey, Chairman Andrews and members of the subcommittees it 

is a pleasure to address you today on an important subject adversely affecting the 

construction industry—the misclassification of workers as independent contractors. 

I have been in the construction industry for many years. I am the President and 

sole owner of Stafford Construction Services, Inc. Primarily, we do interior framing, 

drywall and plastering in metropolitan Boston. I am a union company—I have collective-bargaining agreements with local unions of the New England Regional Council of Carpenters as well as three other unions. 

The construction industry is particularly prone to illegal practices. The industry 

is very competitive, with jobs frequently awarded to the lowest bidder. Under those 

circumstances, it is difficult to compete against others that misclassify their workers’ as independent contractors. 

I play by the rules, and I work with a union that makes sure that is the case. 

Don’t be mistaken, I’m not complaining. We have a common interest in having a 

market where high standards and fair competition are the rule. And a basic rule 

is abiding by the law. My company’s employees are all on the payroll. They get overtime pay and workers’ compensation coverage and we pay federal and state unemployment, Social Security and Medicare taxes and we withhold state and federal income taxes. That is okay, because that is the law. But it becomes difficult when I 

have to compete against other companies that routinely misclassify their workforce 

and do none of those things. Automatically, they get a least a 30 percent advantage 

on labor costs. 

Another rule, basic to many responsible companies like mine, is to provide employees with a good family medical and retirement plans—a foreign concept to companies that misclassify workers. 

The results of that kind of conduct are not difficult to fathom. More of the insurance and tax burden is put on responsible employers (union and non-union) that 

play by the rules because less people are paying into the system. Also, my company 

has lost work, and my employees have lost income because bids were won by employers that misclassify workers. There are whole market segments, like residential 

construction, that are almost impossible for legitimate interior companies like mine 

to work in. That is not fair, and more concern needs to be shown to law-abiding 

companies. Otherwise; they will either go out of business or join the cheaters. 

And what about the workers? Misclassified workers don’t have the benefits of 

union protection. They do not have a cop-on-the beat, so to speak, that will make 

sure their employer plays by the rules. If they want union representation their irresponsible employer will make them jump through hoops to prove that they are employees. That is a driving force behind the continuing misclassification problem 

harming our industry. 

As I said earlier, I have a common interest with the union to promote high standards and to make sure competition in the construction industry is fair. When union 

representation is made more difficult by misclassification then misclassification becomes an ever bigger problem threatening the existence of employers like me who 

play by the rules. 

Ms. WOOLSEY. Thank you, Ms. Stafford. 

Ms. Walters? 

STATEMENT OF CHRISTINE WALTERS, CONSULTANT, FiveL 

COMPANY 

Ms. WALTERS. Thank you, Madam Chair, Chairman Andrews, 

Ranking Members Wilson and Kline, and distinguished members of 

the committee. Thank you for this opportunity to testify on the 

issue of misclassification of employees and independent contractors. 

And I do commend your two subcommittees for holding this joint 

hearing on this important issue. 

My name is Christine Walters, and by way of introduction, I 

would share with you that I have over 20 years of experience in 

44

human resources or H.R. administration, management law, and 

teaching. 

Today, I work as an independent human resources and employment law consultant with FiveL Company. And I served as an adjunct faculty member of the Johns Hopkins University teaching 

graduate, undergraduate and certification level courses from 1999 

through 2006. 

Today, I appear before you on behalf of the Society for Human 

Resource Management, or SHRM. 

Today, as organizations compete in an everchanging global marketplace, labor costs are never far from mind. In addition to managing these costs, many employers in a variety of industries are 

also facing a lack of talented, skilled people to compete in today’s 

economy. 

With this changing landscape come new challenges for human resource professionals and employers to reach out and find new employment relationships that may not mirror the traditional models, 

including part-time employment, flex-time, and telecommuting 

schedules. Employers may also use leased employees, direct hire 

temps, per diem workers, as well as independent contractors to 

meet a particular workforce need. 

While these types of working relationships are of value to employers, they help meet the individual employees’ and workers’ 

needs, as well. 

Sandwich-generation workers—those caring for their own children, as well as their parents—seek working hours that meet their 

demanding personal needs. Entrepreneurs seek a work situation 

that gives them mobility and an opportunity to engage in multiple 

working relationships. And some workers just like the flexibility 

that the independent contractor status provides. 

With the increased interest in these various working relationships, more employers are faced with making the sometimes complicated classification analysis. In my experience, employers do, on 

occasion, unwittingly misclassify employees as independent contractors. 

Much of the difficulty in making an accurate determination lies 

with the fact that there is not a single definition of an employee. 

Rather, there are numerous definitions and statutes which apply, 

depending upon the context in which you are asking the questions, 

including the IRS’s 1099 rule, or 20-factor test, National Labor Relations Act, Americans with Disabilities Act, in addition to federal 

court interpretations under the Fair Labor Standards Act, Title VII 

of the Civil Rights Act of 1964, the Family Medical Leave Act, and 

the Age Discrimination in Employment Act. 

The problem with much of the above, however, is that the tests 

applied come after the working relationship has been established. 

There is little guidance for employers to use, other than the IRS 

guidance, to apply when the working relationship is first formed. 

So the dilemma arises when an employer properly uses the IRS 

guidance, but is later challenged, and when a different test is used, 

is held to have misclassified a worker. 

Finally, add to the above state definitions, such as in each state’s 

unemployment insurance code, where you will likely find yet another definition of employee. 

45

The use of independent contractors is a common practice in some 

industries. Health care, particularly hospitals, often uses per diem 

or contract nurses to supplement emergent unforeseen staffing 

shortages, such as in the case of an external disaster. 

Or consider a small business owner with 10 employees that provides audio-visual support services to clients. Of its 10 employees, 

the organization employs just one sound engineer, who is a highly 

skilled and valued employee. 

One day, that employee tells the business owner that he wants 

to start his own business. The employee offers that, ‘‘In lieu of resigning, I will continue to work for you on an as-needed, part-time 

basis, as an independent contractor.’’

The parties agree, and both are delighted, until that business 

owner is advised by legal counsel of the possible pitfalls of proceeding with this type of relationship. And the relationship does 

not proceed. 

While my experience demonstrates that the vast majority of employers are trying to comply with the law, I recognize that there 

may be some employers and perhaps some industries in which 

there are deliberate attempts to skirt the law. I do not think, however, that additional legislation attempting to clarify the law would 

provide the intended benefit. 

Additional law in this area is likely to only add to the existing 

confusion. And I think we need to focus on clarification, education 

and enforcement. 

Thank you. 

[The statement of Ms. Walters follows:]

Prepared Statement of Christine V. Walters, MAS, JD, SPHR, Independent 

Consultant, FiveL Company, On Behalf of the Society for Human Resource Management 

Introduction 

Chairpersons Woolsey and Andrews, Ranking Members Wilson and Kline, distinguished members of the committee. Thank you for this opportunity to testify on the 

issue of misclassification of employees as independent contractors (IC). I commend 

your two subcommittees for holding this joint hearing on this important topic. My 

comments today will focus on my experience with employers who have faced challenges during or after this classification process 

My name is Christine Walters. By way of introduction, I have over 20 years combined experience in HR administration, management, law and teaching. Today I 

work as an independent human resources and employment law consultant with the 

FiveL Company and served as an adjunct faculty member of the Johns Hopkins 

University teaching a variety of courses in graduate, undergraduate and certification level programs from 1999 to 2006. 

I appear today on behalf of the Society for Human Resource Management 

(SHRM). SHRM is the world’s largest association devoted to human resource management. Representing more than 225,000 individual members, the Society’s mission is to serve the needs of HR professionals by providing the most essential and 

comprehensive resources available. As an influential voice, the Society’s mission is 

also to advance the human resource profession to ensure that HR is recognized as 

an essential partner in developing and executing organizational strategy. Founded 

in 1948, SHRM currently has more than 550 affiliated chapters within the United 

States and members in more than 100 countries. 

SHRM is well positioned to provide insight on how employers classify individuals 

as employees or ICs. HR professionals are responsible for applying the law to the 

situation in their workplace and properly determining, through a mix of factors, 

whether a person should be classified as an employee or an IC. 

46

The Workplace of the 21st Century 

As organizations compete in today’s ever changing global marketplace, labor costs 

are never far from mind. In addition to managing these costs, many employers in 

a variety of industries are also facing a lack of talented, skilled, people to compete 

in today’s economy. With this changing landscape come new challenges for human 

resources professionals and employers to reach out and find new employment relationships that may not mirror the traditional models. Depending on the needs of 

employers and employees, these working arrangements may include part-time employment, or flex-time and telecommuting schedules. In some instances, employers 

may also use leased employees, direct-hire temps, agency temps, per diem workers, 

as well as IC’s to meet a particular workforce need. Employers may hire contingent 

workers for a variety of reasons including filling temporary absences, dealing with 

workload fluctuations, meeting employee requests for part-time work, and continuing to utilize the skills of an employee who has left employment. 

While these types of working relationships are of value to employers, they help 

to meet individual employees and workers needs as well. Sandwich generation workers, those caring for this own children as well as their parents, seek working hours 

that meet their demanding personal needs; entrepreneurs seek a work situation 

that gives them mobility and opportunity to engage in multiple working relationships; and some workers just like the flexibility that the IC status provides. Regardless of the motivations, however, every new working relationship brings with it the 

challenge of asking the right questions to ensure the working relationship is being 

properly classified as an employee or non-employee worker. 

Classification Challenges 

With the increased interest in these various working relationships, more employers are faced with making the sometimes complicated classification analysis. In my 

experience, employers do on occasion unwittingly, misclassify employees as independent contractors. 

Much of the difficulty in making an accurate determination lies with the fact that 

there is not a single definition of an employee; rather, there are numerous definitions and statutes which apply depending on the context in which you are asking 

the question. Section 825.105 of the federal Family and Medical Leave Act (FMLA) 

regulations provide, ‘‘The courts have said that there is no definition that solves all 

problems as to the limitations of the employer-employee relationship under the Act; 

and that determination of the relation cannot be based on ‘‘isolated factors’’ or upon 

a single characteristic or ‘‘technical concepts’’, but depends ‘‘upon the circumstances 

of the whole activity’’ including the underlying ‘‘economic reality.’’

In 1992, the U.S. Supreme Court reiterated its position that, where a statute contains the term ‘‘employee’’ and does not ‘‘helpfully define it, this Court presumes 

that Congress means an agency law definition unless it clearly indicates otherwise.’’ 

The Court then reiterated the following factors, ‘‘In determining whether a hired 

party is an employee under the general common law of agency * * *’’

1. the hiring party’s right to control the manner and means by which the product 

is accomplished. Among the other factors relevant to this inquiry are the; 

2. skill required; 

3. the source of the instrumentalities and tools; 

4. the location of the work; 

5. the duration of the relationship between the parties; 

6. whether the hiring party has the right to assign additional projects to the hired 

party; 

7. the extent of the hired party’s discretion over when and how long to work; 

8. the method of payment; 

9. the hired party’s role in hiring and paying assistants; 

10. whether the work is part of the regular business of the hiring party; 

11. whether the hiring party is in business; 

12. the provision of employee benefits; and 

13. the tax treatment of the hired party. Nationwide Mutual Ins. Co. v. Darden, 

503 U.S. 318 (1992) 

Then in 2003, the U.S. Supreme Court, in a separate decision, citing guidance 

from the U.S. Equal Employment Opportunity Commission, used a different test 

when trying to assess whether a managing partner of a firm (physician practice) 

should be counted as an employee for purposes of the Americans with Disabilities 

Act These factors include whether: 

1. The organization can hire/fire the individual or set the rules and regulations 

of the individual’s work 

2. And, if so, to what extent organization supervises the individual’s work; 

3. The individual reports to someone higher in the organization; 

47

4. And, if so, to what extent the individual is able to influence the organization; 

5. The parties intended that the individual be an employee, as expressed in written agreements or contracts; 

6. The individual shares in the profits, losses, and liabilities of the organization 

(Clackamas Gastroenterology Associates, P.C. v. Wells (April 22, 2003).) 

The Internal Revenue Service (IRS) historically has used another test, the s 1099-

Rule or 20 factor test to ensure the working relationship is being properly classified 

as an employee or non-employee worker. Those 20 factors include: 

1. Is the individual, who is providing services, required to comply with instructions concerning when, where and how the work is to be done? 

2. Is the individual provided with training to enable him or her to perform a job 

in a particular manner? 

3. Are the services that are performed by the individual integrated into your business’ operations? 

4. Must the services be rendered personally by the individual? 

5. Does your business hire, supervise or pay assistants to help the individual performing the services under contract? 

6. Is the relationship between the individual and the person for whom he or she 

performs services a continuing relationship? 

7. Does the employer/company set the hours of work for the individual? 

8. Is the individual required to devote full time to the person for whom he or she 

performs services? 

9. Does the individual perform work on your business premises? 

10. Does the employer/company direct the order or sequence in which the work 

must be done? 

11. Are regular oral or written reports required? 

12. Is the method of payment at set intervals of regular amounts? 

13. Are business or traveling expenses of the individual reimbursed? 

14. Does the employer/company furnish tools and materials necessary for the provision of services? 

15. Does the individual performing services lack a significant investment in resources used to perform services? 

16. Is the individual providing the services without realizing a profit or loss from 

his services? 

17. Is the individual restricted from providing services for a number of firms at 

the same time? 

18. Has the individual not made his/her services available to the general public? 

19. Is the individual who is providing services, subject to dismissal for reasons 

other than non-performance of contract specifications? 

20. Can the individual providing services terminate his or her relationship at any 

time without incurring a liability for failure to complete a job? 

Still other situations may require review under the National Labor Relations Act. 

Then you have the federal courts. When assessing a working relationship under 

the federal Fair Labor Standards Act the ‘‘Right to Control’’ or ‘‘Manner and Means’’ 

tests are usually applied. When assessing a working relationship under Title VII of 

the Civil Rights Act of 1964, the FMLA or the Age Discrimination in Employment 

Act, the ‘‘Economic Realities’’ test is usually applied. While slightly different, all 

three of the tests have four common factors: 

• Who had power to hire and fire? 

• Who supervised and controlled employees’ work schedules and conditions of employment? 

• Who determined rate and method of payment? 

• Who maintained employee records? 

The problem with much of the above, however, is that the tests applied come after 

the working relationship has been established. There is little guidance for employers 

to use, other than the IRS guidance to apply when the working relationship is first 

formed. So the dilemma arises when an employer properly uses the IRS guidance 

but is later challenged and, when a different test is used, is held to have 

misclassified a worker. 

Finally, add to the above, state definitions such as in each state’s unemployment 

insurance code. There you will likely find yet another definition of employee. 

The use of independent contractors is a common practice in some industries. 

Health care, particularly hospitals often use per diem or contractors nurses to supplement emergent, unforeseen staffing shortages, such as in the case of an external 

disaster. These health care workers often work two, three or more different jobs, 

choosing their preferred shifts and work schedules at each health care institution. 

Consider a small business owner with ten employees that provides audio-visual 

support services to clients. Of its ten employees, the organization employs just one 

48

sound engineer. The engineer is highly skilled, quick and remarkably adept at assessing a problem and fixing it. He is a highly valued employee. One day that employee tells the business owner that he wants to start his own business specializing 

in sound engineering only. They agree this would not be direct competition. The employee needs significant periods of time off from work to begin marketing and setting up his new business. The employer’s policies do not provide for the kind of time 

off that this employee wants. The employee then offers that in lieu of his resigning, 

his willingness to be available to work on an independent contactor on an as-needed 

basis. The employer is delighted to be able retain access to this worker’s skills and 

agrees to the relationship. They then agree to a part-time on-call work schedule, 

agree the (former) employee may continue to use and have access to company equipment, will be paid on the same basis but as an independent contractor. Both parties 

are delighted to have worked out an arrangement that is amenable to both. That 

is, until the business owners is advised by legal counsel of the possible pitfalls of 

proceeding with this type of relationship. The business owner now has to decide, 

does he risk a possible determination that he may have misclassified this worker 

in order to keep this highly skilled worker or does he take no risk but keep the 

worker and both are happy? 

There are many other similar stories to share: workers who want or need income 

while they are between jobs; mothers returning to the workforce after a number of 

years and seeking a flexible or occasional opportunity to gain working experience 

before returning to full time status; and more. 

SHRM and FiveL Educational Efforts on the Issue 

As the largest association for human resource professionals, SHRM provides extensive resources and educational opportunities to help our members comply with 

workplace laws. Understanding how to properly classify workers is an issue in constant demand by SHRM members. Last year, our knowledge center received approximately 1, 485 calls about independent contractors—questions ranging from ‘‘I 

have a former employee that I would like to keep on in an independent contractor 

status, how do I do it?’’ to ‘‘What forms do I need to file with the IRS and DOL?’’ 

.SHRM hosts several educational conferences a year and we offer educational sessions on the topic of worker classification. In addition, our online products are constantly updated and include our ‘‘Independent Contractor Toolkit’’ containing articles, frequently asked questions, links to IRS and DOL resources, checklists and 

sample agreements. In my experience and that of SHRM, employers are sincere in 

their attempts to comply with the law. Similarly, in my capacity as a consultant, 

I have given numerous educational presentations to audiences comprised from industry groups, local chambers of commerce and professional associations, like 

SHRM, on this topic. I have also posted IRS publications 1779 and 15-A on my 

website and direct new clients and other to these for guidance, and in some cases 

IRS Form SS-8. 

Possible Solutions to Problem of Misclassification: Unintentional and Intentional 

While my experience demonstrates that the vast majority of employers are honestly trying to comply with the law, I recognize that there are some employers and 

perhaps some industries in which there are deliberate attempts to skirt the law. I 

do not think, however, that additional legislation attempting to clarify the law 

would provide the intended benefit. Instead, additional law in this area is likely to 

only add to the existing confusion. Instead, solutions need to focus on the education 

and the enforcement aspects of the problem. 

In many ways, the confusion created by the multiple agency and statutory jurisdiction over the issue of who qualifies as an independent contractor is similar to 

confusion and overlap created by requirements under the Health Insurance Portability and Accountability Act. In this situation, the Departments of Labor, Health 

and Human Services and the Internal Revenue Service were faced with issuing 

guidance on this new, and complex law. The agencies working together, issued joint 

guidance to the regulated community on the various requirements of the law. The 

same needs to be done with worker classification. Joint guidance from the various 

agencies on the classification of employees would greatly assist employers in complying with the law. 

Secondly, increased and targeted education should be combined with increased 

and targeted enforcement. I concur with the general consensus that emerged from 

the March 27 Workforce Protection Subcommittee hearing that additional legislation 

is not needed and the focus should be on improved enforcement, clarification and 

information-sharing. Enforcement of existing law should not only be increased, it 

should be coordinated among the relevant federal agencies. 

49

Employers need a one-stop shop for guidance on employee classification. This combined with enhanced and targeted enforcement would go a long way toward addressing current problems with misclassification. 

Again, I thank the subcommittees for listening to our perspective on the issue of 

misclassification of employees and SHRM looks forward to working with you on this 

issue. I will be happy to answer any questions you may have. 

Ms. WOOLSEY. Mr. Socolow? 

STATEMENT OF DAVID SOCOLOW, NEW JERSEY 

COMMISSIONER OF LABOR 

Mr. SOCOLOW. Thank you, Chairwoman Woolsey, Chairman Andrews, honorable members of the subcommittees. Good morning. It 

is my honor to appear before you to discuss this problem of independent contractors. 

And before I begin, I want to recognize some of the other wonderful New Jerseyans here. Not only Congressman Andrews, Congressman Payne, Congressman Holt who was here before, and even 

the minority counsel, Mr. Paretti. 

So I wanted just to send greetings to all of you——

Chairman ANDREWS. We should strike the rest of his testimony. 

[Laughter.] 

Mr. SOCOLOW [continuing]. Send greetings to all of you, from 

New Jersey and from Governor Corzine. 

Companies that misclassify workers as independent contractors 

in order to lower their labor costs hurt their workers, hurt the public, and unfairly gain an advantage in the marketplace. 

And much has been said already. I will not reiterate all that is 

in my written testimony on how workers are, in fact, harmed by 

misclassification. 

Governor Corzine of New Jersey has led our state in an important initiative to protect workers by fighting independent contractor misclassification and rooting out the abuses of the underground economy. 

Our governor has recognized that the misclassification of employees as independent contractors, in addition to putting workers at 

risk and unfairly disadvantaging honest employers, costs the state 

millions of dollars in foregone tax revenue. And my full testimony 

does lay out the prevalence of this problem. 

Let me just say briefly that, even in our random audits of this 

problem, 38 percent of employers were found to be misclassifying 

their workers and much, much higher rates of misclassification 

found in certain industries. And so our auditors will tell you, and 

I will testify today, that this cannot possibly all be merely unwitting or inadvertent misclassification. 

And also, by and large, this is not the request of the employee 

coming to their employer asking to be treated as a 1099 contractor 

or misclassified. This is something done to workers by their employers. 

We are addressing the challenge, as I said. 

The governor directed me, when I took office in January of 2006, 

to form a task force, which included our Unemployment Insurance 

Tax group, our Wage and Hour Division in the Department of 

Labor, Workers’ Compensation, and also our State Division of Taxation, which is in the Treasury Department, to identify the comVerDate 0ct 09 2002 17:03 Feb 26, 2008 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-56\36728.TXT HBUD1 PsN: DICK
50

mon areas of concern and develop a process to jointly refer cases 

and share information. By leveraging the resources and findings of 

each agency, one agency’s findings can be used by the other without the need to duplicate the entire investigative process. 

And following up on Governor Corzine’s initiative, a new law now 

provides that New Jersey’s gross income tax law, wage and hour 

laws, unemployment insurance law, temporary disability insurance 

law, all use the same legal test to distinguish between an independent contractor and an employee: the ABC test. And, again, 

therefore, by using the same legal definition, Division of Taxation 

staff can use the audit findings of our labor unemployment insurance tax auditors without the unnecessary duplication of effort. 

We have also begun cross-matching audit data with workers’ 

compensation data to identify employers who are not properly providing workers’ compensation coverage for their employees. 

And, most recently, just on July 13, 2007, Governor Corzine 

signed into law the Construction Industry Independent Contractor 

Act, which provides even stronger enforcement tools and, for the 

first time in our state, criminal penalties for employers who cheat 

their employees, the government, and their competitors by 

misclassifying workers as independent contractors in the construction industry. 

I have included in my testimony five recommendations for action 

by the Congress and for your consideration to reduce the misclassification of workers as independent contractors. 

The first one is, as I mentioned, we recently amended our statutes to have a unified ABC test, a strong test to determine the employer-employee relationship and whether or not an employee is, in 

fact, an employee or an independent contractor. We recommend 

that the federal law should also use that test. 

The second recommendation that I made is to enhance collaboration. And I want to say, particularly, we heard the testimony earlier of the federal Department of Labor Wage and Hour Division 

that they are still thinking about whether or not to implement the 

GAO’s recommendation that they refer potential cases of misclassification to their sister agencies. 

In this regard, I want to urge that they stop thinking and start 

actually referring those cases in all cases. If not to the IRS—and 

they made some points about whether there might be a chilling effect of referring to the IRS—then, at a minimum, to their sister 

agency within the Department of Labor, which is the Employment 

and Training Administration, which has jurisdiction over unemployment insurance. 

Because we certainly in the state U.I. agencies could use those 

referrals to collect unpaid tax contributions to the U.I. trust funds, 

and certainly then in states like New Jersey where we are sharing 

all those referrals, we could use them to collect state income tax. 

We could use them to insure that Wage and Hour Division rules 

were followed. 

By increased data sharing, joint enforcement efforts, unified definition of the employer-employee relationship, and a collaborative 

approach, you really can bring a broad array of resources to bear 

on this problem. 

51

Another comment that I had made related to the safe harbor provision, we certainly think that it is well past time to reform that 

provision, which really, in the IRS test, lets a lot of employers get 

away with misclassifying their workers. 

And I also want to just say about the comment that was made 

by the U.S. Department of Labor Wage and Hour Division mentioned something——

Ms. WOOLSEY. Mr. Socolow? 

Mr. SOCOLOW. Yes. 

Ms. WOOLSEY. Somebody will ask you that question. 

Mr. SOCOLOW. Sure. Absolutely. And then——

Ms. WOOLSEY. We are actually going to have votes in a few minutes, so even if you are Mr. Andrews’s brother-in-law——

[Laughter.] 

Mr. SOCOLOW. Then let me just quickly finish my final point, 

Madam Chairwoman, with your indulgence, is that we do believe 

that if the USDOL expanded the types of unemployment insurance 

tax audits that could count toward the statistics, that would provide an incentive to state U.I. tax agencies to increase their enforcement. 

Thank you very much. 

[The statement of Mr. Socolow follows:]

Prepared Statement of David J. Socolow, Commissioner, New Jersey 

Department of Labor and Workforce Development 

Chairman Andrews, Chairwoman Woolsey, honorable Members of the Subcommittees: good morning. I am David J. Socolow, New Jersey’s Commissioner of the Department of Labor and Workforce Development. I am honored to have the opportunity to appear before you today to discuss the problem of misclassification of 

workers as independent contractors. 

Our state and national labor laws are designed to protect all of the nation’s workers. Unfortunately, it has become all too common for unscrupulous employers to find 

loopholes in order to unfairly reduce their tax burden and increase their profits, 

while risking their workers’ future health, safety, and security. Companies that 

misclassify workers as independent contractors to lower their labor costs hurt their 

workers, hurt the public, and unfairly gain an advantage in the marketplace. 

New Jersey Governor Jon S. Corzine has led our state in an important initiative 

to protect workers by fighting independent contractor misclassification and rooting 

out the abuses of the underground economy. Our Governor recognizes that the misclassification of employees as independent contractors, in addition to putting workers at risk and unfairly disadvantaging honest employers, costs the state millions 

of dollars in foregone tax revenue. 

Employer Avoidance of the Obligations of the Employer-Employee Relationship 

There are two related employee practices by which employees are improperly classified: (1) those workers who should get a W-2 form from their employer but instead 

are given a 1099 form and treated as if they were self-employed: and (2) those workers paid in cash ‘‘off the books.’’ In both of these situations, workers are denied their 

rights as employees, including the right to organized representation, safety and 

health protections on the job, family and medical leave, whistleblower protections, 

vital social insurance benefits and health insurance and retirement benefits offered 

to employees. 

When employers misclassify their employees, those workers and their families are 

left vulnerable when they are in greatest need of the benefits routinely accrued 

through employment. The practice not only threatens the ability of honest businesses to effectively compete, but it also leads to reduced tax revenue and less funding for benefit programs. 

In our experience in New Jersey, employee-employer relationships are being deliberately severed by employers driven by the quest to improve their bottom line. Many 

employers are intentionally, and illegally, cutting their legitimate business costs by 

choosing to treat bona-fide employees as if they were self-employed contractors. In 

so doing, these employers leave it to their employees to pay for social insurance proVerDate 0ct 09 2002 17:03 Feb 26, 2008 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\HELP\110-56\36728.TXT HBUD1 PsN: DICK
52

grams and take on their own tax withholding liabilities. While some misclassification may be due to legitimate misunderstanding of the law, the primary reason that 

most employers choose to misclassify employees is a desire to avoid the employer 

costs of payroll taxes for social security, unemployment and disability insurance as 

well as worker’s compensation insurance premiums. 

Deliberate misclassification of employees as independent contractors is not the benign issue that offenders engaging in this practice would have us believe. Even if, 

as several have argued, some workers voluntarily participate and find this practice 

advantageous, it still does not remove any of the injuriousness of misclassification. 

Many employees who find themselves misclassified are ill-prepared and undereducated as to the responsibilities of self-employment. 

A report released by Cornell University in April of this year indicated that ‘‘[w]ith 

less tax revenues flowing into government coffers, public resources are strained. 

State unemployment insurance systems, for example, are forced to compensate by 

raising contribution rates for employers who comply with the regulations. According 

to the Government Accountability Office, underpayment of Social Security, unemployment insurance, and income taxes in 2006 due to misclassification amounted to 

an estimated $2.72 billion; the researchers here argue that the real cost is substantially higher, particularly when losses at the state level are factored in.’’

Employers who pay workers in cash ‘‘off the books’’ create additional difficulties. 

When an employer issues a 1099 form to an individual, enforcement agencies at 

least have a paper trail to follow. Individuals who work ‘‘off the books’’ for cash payment are hidden still further in the underground economy. Sometimes these workers are exploited because they are undocumented residents. Other times employers 

hire a worker for a short time without keeping proper records, paying insurance premiums, or arranging for withholding. 

How prevalent is the problem? 

In the New Jersey Department of Labor and Workforce Development’s recent 

yearly audits of 2.2 percent of employers—around 6,000 annually—we have found 

either independent contractor misclassification or workers being paid in cash ‘‘off 

the books’’ in 42 percent of cases. Even among the more than 750 employers selected 

totally at random for an audit, 38 percent of these firms violated the law by 

misclassifying their employees. The Department also conducts approximately 1,500 

targeted investigations annually. Some of these investigations are triggered when 

misclassified workers apply for unemployment insurance, temporary disability, or 

workers’ compensation benefits that they assumed their employers were paying on 

their behalf. When these workers attempt to file for benefits, their claims are often 

initially denied because they are not recorded in the system as an employee. In most 

cases, subsequent investigations show that the individual was misclassified and 

should have been treated as an employee. 

Overall, in 2006, our audits found nearly 25,000 workers misclassified and uncovered more than half-a-billion dollars in misclassified or unreported wages ($565 million). In 2005, New Jersey’s audits found 28,286 misclassified workers, with 

misclassified or unreported wages of $644 million. In calendar year 2004, these audits turned up more than 26,000 workers whose employers misclassified their employment and failed to provide these workers with New Jersey unemployment and 

disability insurance coverage. 

We find an even greater level of non-compliance when we target our investigations to industries known to have widespread abuses. This practice first attracted 

our attention as a result of audit patterns and complaints about building contractors 

filed with the Division of Wage and Hour Compliance, which led the Department 

to uncover a significant number of misclassification violations in the construction industry. In 2006, out of 871 audits and investigations in the construction industry, 

41 percent found misclassification of employees, identifying nearly 3,000 

misclassified construction workers, $78.2 million in under-reported gross wages and 

$2.1 million in under-reported contributions. However, the misclassification of employees is no longer primarily limited to the construction industry. We have also 

found significant patterns of violation in food processing plants, courier services, 

dental assistants, waitresses, nail salons, nurses, secretaries and landscaping. 

For example, the New Jersey Department of Labor and Workforce Development 

recently conducted a program of unannounced investigations of nail salons and 

found workers not properly classified as employees in more than two-thirds of all 

establishments examined (350 investigations, 240 assessments). Field investigations 

of several hundred landscapers disclosed failure to classify worker as employees in 

nearly 62 percent of all businesses examined. Our investigations of dentists found 

that 53 percent of the employers improperly treated their dental assistants as independent contractors and not employees. The Department has also greatly benefited 

53

from data-sharing with the Internal Revenue Service (IRS). Investigations initiated 

as the result of analysis of 1099 information provided by the IRS since 2003 resulted 

in findings of non-compliance in 75 percent of cases (111 cases, 84 assessments). 

In another example, for unemployment insurance tax purposes, New Jersey law 

treats an employee leasing company as the employer of the workers of its various 

clients. The tax accounts of the client companies are then recorded as inactive accounts while the leasing company reports the payroll for the workers. Our examination of inactive client company records, however, has disclosed that many of these 

companies continue making payments for services, generally to ‘‘independent contractors’’ or other temporary workers not included on the new payroll reports from 

the employee leasing company. Our recent investigations have found this type of 

non-compliance in 61.5 percent of all these investigations (367 investigations, 226 

assessments). 

The New Jersey Department of Labor and Workforce Development also has uncovered significant patterns of employers’ misclassification of workers through 

monthly enforcement sweeps by our State Division of Wage and Hour Compliance. 

These enforcement efforts are targeted in the residential and commercial construction sectors, the garment and apparel industry and large-scale farming operations. 

Employers who refuse to provide timesheets or payroll records are issued subpoenas. 

Employers who ignore the subpoenas are subject to prosecution as disorderly persons for a first offense and even more serious criminal penalties for subsequent or 

egregious violations. During the first six months of 2007, the Wage and Hour Compliance Task Force has made 158 referrals to the New Jersey Division of Workers’ 

Compensation and 228 referrals to the Unemployment Insurance Division of Employer Accounts for suspected misclassification of workers. 

We find that employees who are misclassified rarely feel that they are in a position to demand that they be correctly classified as an employee. By contrast, true 

independent contractors choose to be self-employed. They not only receive a 1099 

form that they use to declare their income for taxes but also must assume much 

of the tax and insurance liabilities normally paid by employers, including paying 

both the employer and employee portions of Social Security taxes, contributing to 

unemployment insurance, and providing their own workers’ compensation insurance. True independent contractors set their compensation at levels high enough to 

cover payroll taxes, insurance and other expenses for which they are responsible. 

This is not possible for employees who are expected to work for their employer as 

independent contractors while receiving relatively the same pay as an hourly worker. 

How we are addressing the challenge 

In April 2006, soon after taking office, New Jersey Governor Corzine directed the 

Treasury Department’s Division of Taxation and the Department of Labor and 

Workforce Development to work together to combat the practice of misclassification 

of employees. We formed a task force that included the Divisions of Employer Accounts, Wage and Hour Compliance, Workers’ Compensation, and Taxation to identify common areas of concern and develop a process to exchange information. By 

leveraging the resources and findings of each agency, findings from one department 

could be used by the other without the need to duplicate the entire investigative 

process. The sharing of information among agencies and programs is an important 

part of this initiative, which aims to break down ‘‘silos’’ within government and have 

the various agencies of government cooperate on tips, leads, and investigations. 

Following up on the Governor’s initiative, last summer the Legislature sent a bill 

to the Governor’s desk to support our efforts. This law, P.L. 2006, Chapter 85, now 

provides that New Jersey’s Gross Income Tax law, wage and hour laws, Unemployment Insurance law, and Temporary Disability Insurance law use the identical legal 

test to decide whether an individual is an employee or an independent contractor—

the ‘‘ABC test.’’

Under the ‘‘ABC test,’’ an individual paid for services is presumed to be an employee unless he or she meets all three characteristics of a self-employed, independent contractor. These are: (A) that the individual has been and will continue 

to be free from control or direction over the performance of such service, both under 

his contract of service and in fact; (B) The service provided is either outside the 

usual course of the business for which service is performed, or that the service is 

performed outside of all the places of business of the enterprise for which such service is performed; and 

(C) The individual is customarily engaged in an independently established trade, 

occupation, profession or business, so that the individual would not routinely become unemployed when his or her relationship with this particular employer ended. 

54

Because these sister state agencies use the same legal definition of a true independent contractor, Division of Taxation staff, for example, can use the Labor Department’s findings to enforce the income tax law without the unnecessary duplication of effort. The Division of Taxation is also able to use the findings of compliance 

audits by Labor Department auditors to pursue income taxes owed to the state. The 

Labor Department also can follow up on audits by the Division of Taxation to ensure that employees are properly paid and covered for Unemployment Insurance 

and Temporary Disability Insurance benefits. 

Additionally, we have recently begun a cross match of audit data with Workers’ 

Compensation data to identify employers who are not properly providing Workers’ 

Compensation coverage for their employees. This innovative data-sharing procedure 

has led to more than 75 investigations of employers involving more than 1,300 

workers. Investigators from both Wage and Hour and Employer Accounts now check 

for Workers’ Compensation Insurance coverage. In addition, by sharing tax-audit information with the Compensation Rating and Inspection Bureau that oversees 

Workers’ Compensation insurance premiums, the State can better identify employers who are underpaying Workers’ Compensation premiums. 

New Jersey was also an original volunteer, one of four states, to join a partnership with the Internal Revenue Service in dealing with Questionable Employer Tax 

Practices, or QETP. This federal-state partnership is developing and implementing 

a federal/state approach to addressing worker misclassification and other attempts 

to avoid employment taxes. Our State has gained positive results from previous exchanges of information from the IRS. As mentioned above, 75% of the leads from 

these IRS 1099 data have found non-compliance. We anticipate similar results 

under the QETP federal-state partnership, which has been designed to enhance enforcement of tax laws, protect accurate worker classifications and discover and address tax avoidance schemes through the sharing of information and by leveraging 

federal and individual state resources. 

Most recently, on July 13, 2007, Governor Corzine signed into law the Construction Industry Independent Contractor Act (P.L. 2007, c. 114). This law provides even 

stronger enforcement tools and more effective penalties, including criminal penalties 

for the first time, for employers who cheat their employees, their government and 

competitors by misclassifying workers as independent contractors. Under this law, 

a contractor that has knowingly misclassified workers can be guilty of a crime of 

the second degree. Such a contractor can be held liable to make up any loss to the 

employees if they were underpaid in connection with the misclassification. The law 

also authorizes the Commissioner of Labor and Workforce Development to assess 

and collect administrative penalties, up to $2,500 for a first violation and up to 

$5,000 for each subsequent violation. Contractors that engage in this practice can 

be made ineligible to receive public contracts. 

Recommendations for Federal Action 

The Congress should address five areas that can be improved to reduce the misclassification of workers as independent contractors: 

1. Establish a strong, universal federal definition of employee: As I mentioned, 

New Jersey recently amended its statutes to have enforcement agencies use the 

strong ‘‘ABC test’’ to determine the employee-employer relationship. Similarly, federal laws should adopt the ‘‘ABC test,’’ as used in New Jersey, to distinguish an employee from an independent contractor. A strong, consistent test for independent 

contract status would enhance federal enforcement of such laws as the National 

Labor Relations Act, the Civil Rights Act, the Internal Revenue Code, the Fair 

Labor Standards Act, the Occupational Safety and Health Act, and the Employee 

Retirement Income Security Act. 

2. Enhance collaboration: New Jersey’s aggressive multi-agency approach to addressing the problem of employee misclassification provides a model for improved 

coordination among federal enforcement agencies. New Jersey’s increased data sharing, joint enforcement efforts, unified definition of the employee-employer relationship, and our collaborative approach bring a broad array of resources to bear on this 

problem. Similarly, federal agencies should adopt universal standards for all investigators that clarify the procedures for referring misclassification cases to the other 

appropriate federal and state agencies charged with enforcement. This recommendation was also made in May 2007 by the GAO in its testimony on employee misclassification to the Subcommittees on Income Security and Family Support and on Select 

Revenue Measures, which referenced GAO’s finding that USDOL district offices 

have varying referral procedures and inconsistently referred misclassification cases. 

3. Amend Section 530 of the Revenue Act of 1978: Section 530, commonly referred 

to as the ‘‘safe harbor’’ provision, prevents the IRS from reclassifying workers prospectively as employees, contains deficient reporting requirements on employers who 

55

make payments to independent contractors, and establishes insufficient penalties for 

employers who pay their workers under the table and fail to file 1099’s. Section 530 

also allows employers to misclassify workers as independent contractors in certain 

industries, regardless of the employment relationship, if, in a particular industry, 

there is a ‘‘long-standing recognized practice’’ of classifying the workers as independent contractors or if the employer underwent an IRS audit anytime in the past. 

Reforms to Section 530 are long overdue and both the GAO and the IRS are on 

record urging reforms that would increase the effectiveness of compliance programs 

and increase collection of tax revenue by the US Treasury. 

4. Empower workers to assist in ensuring proper classification: Workers and their 

representatives should have the option of receiving an employee status determination from the IRS to ensure their proper classification. When requesting a determination, the workers should have their confidentiality maintained to the greatest 

extent possible, should be protected from retaliation by employers when requesting 

a determination, and should be afforded appeal rights. Also, the Fair Labor Standards Act workplace poster should be revised to include information that informs 

workers how and where to file complaints. 

5. Increase enforcement: The USDOL should expand the types of unemployment 

insurance tax audits that states may count in the statistics reported to USDOL, including those audits that fail to find a source document (such as a cancelled check 

or an original time sheet). This would provide state unemployment insurance agencies with an incentive to pursue audits in cases where employers fail to produce or 

maintain payroll records. Additionally, enforcement by USDOL’s Wage and Hour Division could be improved by establishing adequate administrative penalties for the 

knowing and willful misclassification of workers and for record-keeping violations. 

The New Jersey Division of Wage and Hour Compliance has enjoyed the statutory 

authority to assess and collect administrative penalties since 1991 and this has 

proven to be a useful compliance tool. Lastly, the USDOL should be urged to target 

enforcement in industry sectors known to have high rates of misclassification and 

to assist states in their enforcement efforts through supplemental funding. 

I thank you for the opportunity to testify and I would be happy to answer any 

questions you may have. 

Ms. WOOLSEY. Thank you very much. 

We are going to have votes soon. But we are going to have questions until we get down to the last minutes of having to run, and 

then we will come back. 

Ms. Walters, I, too, am a human resources manager for over 20 

years. Now, I have been here for 15, so I have been away from it 

for a while. But it was always clear to me—I mean, my company 

had 800 employees. We started with 12, and I grew up to 800 before I started my own independent consulting firm. And I could always tell when my clients knew the difference between an independent contractor and not. And I would guide them to do the right 

thing. 

It is complex. And it is more complex now when we have—just 

about any kid that has parents, if they are lucky to have two—are 

in the workforce. And we have to do things so that parents can 

bridge work and family. But we don’t have to, at the same time, 

take away the protections that these employees need and deserve. 

And they might be glad to have flex-time, absolutely. But if that 

means when they have an accident, they don’t have any kind of 

health protection, what good is that? 

So what we are trying to do here is ask you—I am going to ask 

you what your association is doing to—I mean, do you have a task 

force that would be working on how to help the federal government 

make clear what would be a part-time employee that is 

misclassified? How are you doing that? 

56

That is what your association needs to be working on. Not telling 

us we shouldn’t do it, that we should leave it just as complicated 

as it is. That is ridiculous. 

Have you looked at Mr. Socolow’s five actions? Those are great 

actions. I would love to have your association’s opinions on those. 

Ms. WALTERS. A flight of ideas in response. 

One, for example, the society absolutely doesn’t mean to just 

leave things the way they are. And I don’t want you to hear that 

as my testimony today. 

As an example, guidance on HIPAA compliance: The Department 

of Labor, Health and Human Services, and the Internal Revenue 

Service worked together to provide guidance to the regulated community on various aspects of HIPAA compliance. I think that was 

a great move. It was a multi-agency initiative to, again, provide 

clarification, education on how employers can best comply. 

That is, day to day, every day the commitment of the society is 

to serve the professional and advance the profession. And we do 

that when we provide education and information to help employers 

comply with the law, not skirt the law. 

It is trying to figure out with when there is, you know, economic 

realities test and a manner and means test, an IRS 1099 rule, how 

do I know, you know, it is difficult to comply. Which test do I use? 

Ms. WOOLSEY. But if you would yield to me just a little bit. I am 

asking you, are you looking at providing some information that 

would streamline this so that, indeed, you don’t have—I mean, like 

Mr. Socolow has? 

Ms. WALTERS. The society today—SHRM provides on its Web 

site—I think not dissimilar from what I heard perhaps the representative from the Department of Labor describe provides—we 

actually have an independent contractor toolkit that our members 

can go to the Web site and receive guidance and information. We 

post the IRS Publication 1779, Publication 15-A. 

So, again, trying to be proactive to provide as much education 

and information as we can on this topic. 

Ms. WOOLSEY. So, Mr. Socolow, would you like to finish that one 

thought I cut off before I pass the microphone? 

Mr. SOCOLOW. Yes, Chairwoman Woolsey. Thank you very much. 

The final point I had wanted to make was about this point, 

which was made repeatedly, by the U.S. Department of Labor 

Wage and Hour Division that misclassifying an employee is not, in 

and of itself, a violation of any of the 70-plus laws that they enforce. 

In New Jersey, we have a statutory authority under our wage 

and hour laws to assess administrative penalties for essentially 

failing to keep records. And if you are not counting somebody on 

your payroll books as an employee, you are not keeping records on 

them. That, in and of itself, is a violation of wage and hour laws. 

And if the Congress sees fit, it seems that that would be an area 

to give the Wage and Hour Division, which is going to be probably 

the first line of defense against these problems, a new tool—a tool 

we enjoy in New Jersey and have since 1991—to go after the employers that are willfully and wrongly doing this. 

Ms. WOOLSEY. Thank you so much. 

Mr. Wilson? 

57

Mr. WILSON. Thank you, Madam Chairman. 

And, again, thank you for being here today. 

In particular, before I was selected, I served as a real estate attorney. I worked with the construction industry, Ms. Stafford, very 

closely. And in our region, construction is just the basis, I believe, 

of the sound economy we have, the booming economy we have. It 

is the tax base for the schools. Just everything comes together. 

And so I want to make sure that what we are doing is beneficial 

to the people working and to the economy—and again, that is why 

I appreciate drywall—everything that you do. 

And so keeping that in mind, Ms. Walters, what would be the 

impact on the construction industry if Congress were to get it 

wrong or legislate a solution that threatens the viability of bona 

fide independent contractor status? 

Ms. WALTERS. I think I wouldn’t want to respond to a particular 

industry. But I think there is a potential for multiple industries 

that if there is legislation, as you put it, that doesn’t quite get it 

right, the impact could be then for those that are today properly 

classified as independent contractors may lose that status, may 

walk away from the status not wanting to do so, for fear of, I guess, 

being reclassified as an employee and not wanting that relationship 

either. 

Mr. WILSON. And, again, I want your input on that because construction, hospitality, landscaping, all of these are extraordinary 

opportunities for people at ground level. And then they can, as Ms. 

Stafford, own their own business. So that is great. 

At our last hearing, we heard from one representative of a trade 

association that those efforts of his association were made to assist 

its members in compliance with the wage and hour classification 

laws. 

Can you expand, in your testimony, Ms. Walters, as to the activities of the Society for Human Resources Management in helping its 

members ensure that the laws are being followed correctly? 

Ms. WALTERS. Sure, yes. Again, as I mentioned, on the society’s 

Web site there is actually an independent contractor toolkit. That 

toolkit provides a variety of resources, including links to governmental agencies, government publications. 

The society also sponsors conferences every year, throughout the 

year, multiple conferences. I have had the honor, as have others, 

in presenting and providing educational programs and information 

on managing your contingent workforce, the different types of 

working relationships, how to determine whether a working relationship is or is not an employment relationship—some of the factors to consider there. 

Mr. WILSON. And, Ms. Walters, the question was asked at our 

first panel and now I am going to ask you, and that is that at a 

Workforce Protections Subcommittee hearing earlier this year, one 

person noted that the question of whether an individual worker is 

a contractor or an employee isn’t that complex. Based on your 20 

years of experience as a human resources professional, do you 

agree? 

Ms. WALTERS. I think it is nice we have heard consensus here 

this afternoon—or at least I have heard consensus—that it can be 

58

simple and it can be complex. And it is always a case-by-case analysis. 

And what can appear today to be a very straightforward, appropriate independent contractor relationship may in 4 months, 6 

months evolve into something that looks very different than what 

we intended today. Some are clearcut, and some are not. 

So I think it can be very complex. 

Mr. WILSON. Thank you very much. 

Ms. WALTERS. Thanks. 

Ms. WOOLSEY. Mr. Andrews? 

Chairman ANDREWS. Thank you very much. I appreciate that. 

Thank you, first of all, everyone, for their testimony. 

Ms. Walters, early in your statement, you talk about the problem 

of a lot of the complexity coming from the fact that there is not one 

definition of what an employer is; many different statutes, many 

different definitions. 

Then on page nine of your statement, you say that you do not 

think that additional legislation attempting to clarify the law 

would provide the intended benefit. 

I have trouble reconciling those two points. What is wrong with 

Mr. Socolow’s suggestion that there be a single, strong, clear, unitary definition of what an employer is? Why shouldn’t we do that? 

Ms. WALTERS. I think part of the concern would be one, I think 

it would be a fascinating process to watch for Congress—I guess 

the question is, what would supersede what? 

If we were to abolish—and I am not sure that is what I am hearing today is a suggestion to take ERISA and ADA and FMLA and 

all the different federal statutes, abolish every definition federal 

and then state also, and have one definition that would apply to 

everything. 

Chairman ANDREWS. I am going to let him speak to it himself. 

I don’t think that is the proposal. I think that the idea was to have 

a uniform definition without abolishing something. 

Mr. Socolow, what exactly are you proposing? 

Mr. SOCOLOW. I think that the difference is between a definition 

of an employee versus a definition of independent contractor, right? 

The ABC test that we have in New Jersey, that a number of 

other states use as well, and that, as I said, we now use for taxation and for unemployment and a number of other things, the 

ABC test is just about distinguishing whether or not someone is an 

independent contractor. 

There are plenty of other definitions you can have about what is 

covered by FMLA and what isn’t. But it seems to me that for the 

purposes of defining an independent contractor, the ABC test is 

clear. It has got lots and lots of case law that now is behind it. And 

it works. 

Chairman ANDREWS. I think under the ABC test Mr. Williams 

probably wouldn’t be sitting here today. I think that his facts were 

crystal-clear that he would have been treated as an employee. 

Mr. SOCOLOW. As is evidenced by the fact that he received unemployment compensation, which was determined, I am almost certain, by the ABC test. 

59

Chairman ANDREWS. So I think, as a practical matter, for Mr. 

Williams’s case, it would have given him more justice more quickly, 

which, I think, is what we want to accomplish. 

And, Ms. Stafford, if I can ask you, would a single definition of 

employer under these various statutes be easier for you to deal 

with as a businesswoman? 

Ms. STAFFORD. Absolutely. I think that it seems to me that it 

centers so much around the 1099. If I were this committee, I would 

be looking hard at the 1099 and what employers really use that as 

a tool for. 

It seems to me that that is the disconnect between people that 

pay taxes and make sure that they withhold taxes from employees 

to people that hand out 1099s like they are irrelevant pieces of 

paper that people never pay taxes on. And it is not followed up, apparently not, not at 38 percent, as Mr. Socolow——

Chairman ANDREWS. Mr. Williams, you were about to say something. What I wanted to ask you was, did you ever doubt in your 

ordeal that your employer intended to misclassify you, or do you 

think the employer was just mistaken in interpreting what the law 

was? 

Mr. WILLIAMS. No, I think the whole intent of the operating 

agreement was to classify us as independent contractors and to 

keep us as independent contractors, thereby shifting all the costs 

to us and making us pay, you know, having to pay for the entire 

situation. 

In Massachusetts, there are three simple situations: the 123 test 

they call it in Massachusetts, which is if you control the employee, 

or if the employee is not allowed to work for others, or if the employee is in a different business or if the employee is in the same 

business, then you can’t classify him as an independent contractor. 

All three of those tests, very clearly in the FedEx model, have 

proven to be employees. 

Chairman ANDREWS. And, Commissioner Socolow, if you had to 

just take an educated guess at the percentage of enforcement actions your department has engaged in that are intentional misclassifications versus confused or inadvertent ones, what is your estimate of that breakdown? 

Mr. SOCOLOW. Congressman, it is hard to put an exact number 

on that. But I will say that when you see the industries in which 

60, 70 percent of the employers are routinely and continually engaging in this practice, when you see, furthermore, unfortunately 

that when we do follow-up audits of those who we have found violating it and go back and look at them 2 and 3 years later, that 

60 and 70 percent continue to misclassify their workers, I would 

say that a very substantial share of employers are doing this intentionally. 

Chairman ANDREWS. Do you have any reason—I see my time is 

up. Thank you very much. 

Ms. WOOLSEY. Mr. Kline? 

Mr. KLINE. Thank you, Madam Chair. 

I want to thank the panel for being here with us today, for their 

testimony and for answering the questions. I have a couple of different directions I want to go, because I am finding this to be still 

fairly complex. 

60

Just for the record, Mr. Williams, I want to make sure that I understand the status of your cases. You have a hearing scheduled 

before the National Labor Relations Board later this fall, is that 

correct? 

Mr. WILLIAMS. That is correct, sir. 

Mr. KLINE. And you have some action in state court with a lawsuit, is that correct? 

Mr. WILLIAMS. That is also correct. 

Mr. KLINE. And neither of those have been resolved yet, is that 

correct? 

Mr. WILLIAMS. No, sir. 

Mr. KLINE. So those are pending. All right. Thank you. 

Ms. Walters, I want to go back to this issue of definition. We 

have, in the previous hearing and in this hearing today in the discussion with the administrator on the first panel, recognized that 

there is a lot of confusion over this definition. And it does seem 

that it would be helpful if we didn’t have so many definitions, if 

we could make it simpler. 

And yet, as you said in your testimony and your discussion with 

Mr. Andrews, that you don’t think that we should try to change the 

statutes, and, as I understand your answer, that is because, as Mr. 

Andrews said, there are various statutes. There are many statutes, 

and just the process—knowing how we work or don’t work here in 

Congress—that could be pretty problematic as we went in and tried 

to fix these definitions for all the statutes. 

But you discuss something in your testimony called joint guidance. Can you tell us how that might help this problem? 

Ms. WALTERS. Sure, I would be happy to. 

Just giving consideration to, again, multiple agencies that have 

purview in administering and enforcing some of the laws where 

this issue comes up—again, Title VII, ADA, Family Medical 

Leave—so perhaps the Department of Labor, the EEOC, the IRS 

coming together, as they did in the example we gave with regard 

to HIPAA compliance, coming together to try and develop guidance 

for employers in how to, you know, clarify applying the different 

tests, is there guidance that would be and it is the society’s position 

that could be extremely helpful to employers to move toward some 

consistency in the application of the different interpretations. 

Mr. KLINE. So this guidance, then, would not require a statute 

change? But it would do a couple things. It would make it easier 

for employers, presumably, to understand. But it also would make 

it easier for employees and others to understand if there was a 

willful misclassification. Is that correct? 

Ms. WALTERS. That is correct. That is what we believe. 

Mr. KLINE. And so it would achieve, presumably, both goals: 

make it less likely that there would inadvertent misclassification, 

and certainly make it easier for other members of the panel and 

employees across the country to understand if they are being taken 

advantage of. 

Ms. WALTERS. I believe so, yes. 

Mr. KLINE. Okay. Thank you. 

I yield back. 

Ms. WOOLSEY. Mr. Kildee? 

Mr. KILDEE. Thank you, Madam Chair. 

61

Mr. Williams, when you were injured in 2002, you did not file for 

workman’s compensation benefits. Why not? And who paid for your 

medical bills at that time? 

Mr. WILLIAMS. Eventually, the medical bills were paid by the 

person that caused the accident, by that particular company’s—

that person is insured, as he was found to be at fault and be at 

fault in a major situation. 

The only income I had at the time was for the worker’s accident 

policy, which was provided in the contract in FedEx, which I paid 

for every week. But that is the only thing I had to live on at that 

time. I had no other income coming in. 

I was ineligible for workman’s compensation. FedEx would not—

did not—contribute to workman’s compensation. Therefore, I was 

ineligible. The only thing I had was this worker’s accident policy, 

for which I paid. 

Mr. KILDEE. And that was a private worker’s accident policy? 

Mr. WILLIAMS. Yes, provided through FedEx through an insurance company. 

Mr. KILDEE. But you did not qualify for the regular workman’s 

compensation benefits? 

Mr. WILLIAMS. No. I was told I could not qualify. 

Mr. KILDEE. So eventually, because the other party was at fault, 

you eventually collected from——

Mr. WILLIAMS. Recouped for the hospital expenses, et cetera, yes. 

Mr. KILDEE. Were you told you that you could not file for workman’s compensation? 

Mr. WILLIAMS. Yes. It is very specific in the FedEx operating 

agreement and also in the policy that the protective insurance company provides for you. It says, ‘‘You are not, under any circumstances, covered by workman’s compensation.’’

Mr. KILDEE. Thank you very much. 

Thank you, Madam Chair. 

Ms. WOOLSEY. Thank you. 

Mr. Hare? 

Mr. HARE. Thank you, Madam Chair. 

Mr. Williams, just a few other questions about it. I am assuming 

your van was damaged in the accident? 

Mr. WILLIAMS. Yes, sir. 

Mr. HARE. And who paid for that? 

Mr. WILLIAMS. Well, it was my van. It was totaled in the accident. And it was paid for by the other party’s insurance company. 

My insurance company paid for it first. 

Mr. HARE. And then at some point you went back to work and 

you were required to replace your P400 vehicle——

Mr. WILLIAMS. Yes. 

Mr. HARE [continuing]. With another one selected. And what 

happened to that vehicle? 

Mr. WILLIAMS. Well, when I was terminated in December of 

2005, I was on the hook for that vehicle, if you will. I was liable 

for the payments. It was a leased vehicle that was set up through 

FedEx. And when they terminated me, I had to get rid of the vehicle. 

I was one of the few fortunate ones to be able to get rid of the 

vehicle through the leasing company. I called them the day after 

62

I was terminated, told them what had happened. They told me to 

take it to a certain location. I took it to that location and turned 

it in. And then approximately 6 months later, my vehicle was sold. 

In the meantime, I had to make all those monthly payments. I 

did not make them because I told them I didn’t have the income 

to make them. But they did eventually sell the vehicle. 

Mr. HARE. Ms. Stafford, just a couple of questions for you. You 

said that in residential construction it is impossible for companies 

like yours to compete. Is misclassification rampant in that industry? And, if so, why do you suppose that is the case? 

Ms. STAFFORD. It certainly—it is rampant. 

And the difficulty we have is the market supporting our prices 

to do the work because we are paying—when you talk about the 

difference in percentage from one company to another, my federal, 

state, Medicare and all the employee contributions run about 16.2 

percent to my company. 

But if you are misclassifying an employee, and you are also skirting a workman’s compensation payment that should be made, that 

is another 10 to 15 percent, depending on what the classification 

that you are using, if you have an insurance policy. 

If you don’t have either of those two things, you are talking 

about somewhere in the neighborhood of a 30 percent price advantage. 

Mr. HARE. Well, in your experience, what happens to the workers 

when they are misclassified as independent contractors? In other 

words, you know, how do they cope when they are injured, and how 

do they handle the cost of being an independent contractor? 

Ms. STAFFORD. There have been a lot of documented cases of 

what happens in the housing industry. And basically, there have 

been cases when there has been a major accident and the person 

goes on the payroll that day. And all of a sudden shows up under 

the employer’s workers’ compensation policy. However, prior to 

that, he was never on the employer’s records and was being paid 

cash under the table. 

Mr. HARE. Chairman Andrews, I would like to yield to you. You 

had a question that you didn’t get to finish. 

Chairman ANDREWS. Thank you. 

I did want to ask Mr. Socolow if the experience he has had in 

New Jersey, if he has seen any evidence that it is atypical of states 

across the country; in other words, this prevalence of intentional 

misclassification. 

Mr. SOCOLOW. Yes, Chairman Andrews. The colleagues in the 

other U.I. tax agencies in the other wage and hour divisions of 

state governments collaborate. There are conferences. And this 

topic is topic number one at both of those conferences. All the 

states are seeing the same patterns. 

Chairman ANDREWS. I thank my friend for yielding. 

And I thank the commissioner. 

Ms. WOOLSEY. Mr. Bishop? 

Mr. BISHOP. Thank you, Madam Chair. 

Ms. Walters, you have indicated that you don’t believe that this 

is an issue that suggests new law ought to be passed on the part 

of the federal government, but that you do believe that the way to 

63

approach this problem is through improved enforcement and clarification of existing law and information-sharing. 

That is essentially the position of your organization? 

Ms. WALTERS. It is. Just the one point of clarification is adding 

a new federal law to those that already exist I think would not be 

the best approach to enhancing clarification. 

Mr. BISHOP. But would enforcement and clarification be enhanced if there were this automatic referral notion that has been 

recommended by the GAO? How would you feel about that? 

Ms. WALTERS. My first impression in response to that is I think 

that would not help with clarification because it is still going to 

come after the fact. 

Mr. BISHOP. Would it not help with enforcement? 

Ms. WALTERS. It could help with enforcement. But I am not sure 

how it would help with the initial appropriate——

Mr. BISHOP. Would not enforcement ultimately yield clarification? I mean, wouldn’t people, in effect, get the message? 

Ms. WALTERS. They would. But, again, I would think everyone’s 

goal here is to what can we do to prevent this from happening in 

the first place, proactively to get clarification, education so that 

there is—rather than needing the increased need for enforcement 

because there is more misclassifications than there used to be—

what can we do proactively to prevent the misclassifications in the 

first place? 

That is the society’s goal is to try and, you know, get this, nip 

it in the bud, if you will and——

Mr. BISHOP. And in an ideal world, I would agree with you. I 

think you would also agree that none of us live in that ideal world. 

I mean, if I were to follow that logic, the IRS’s function would be 

to simply provide information to help people fill out the forms. 

[Laughter.] 

Ms. WALTERS. You know, I would go back to, with regard to the 

multi-agency guidance that was given out before, I don’t know if 

there is statistics to measure the number of alleged violations before and after that, but, you know, it is an effort that I think is 

well worth consideration. 

Mr. BISHOP. I guess the point I am trying to make is—what I am 

struggling to understand is, in the absence of a unitary definition, 

which I think I would support a unitary definition, but it seems as 

if you do not—but in the absence of a unitary definition, and in the 

absence of mandated or automatic referral, I don’t see how we can 

be effective in terms of targeted enforcement. I just fail to understand how we would have sufficient tools to target enforcement if 

we didn’t have those two tools. 

Ms. WALTERS. SHRM supports the idea of enforcement. Absolutely. Absolutely. 

And I think the other question on the table is—and, again, I 

think a point of clarification is I don’t know the answer to the question, but what comes to my mind, what the society is considering 

is if there is consideration of one definition, how is that applied 

when a claim comes up under ERISA, when a claim comes up—I 

don’t know the——

Mr. BISHOP. I am not suggesting for a moment that to divine a 

definition would be easy. It wouldn’t be. But we step up to the 

64

plate on lots of complex issues. And I think simply because this is 

complex, we ought not to allow that to deter us. 

Mr. Socolow, if I may? In New Jersey, it is considered a violation 

of the law to misclassify an employee, correct? 

Mr. SOCOLOW. Yes, Congressman. 

Mr. BISHOP. And have you found that to be a deterrent? 

Mr. SOCOLOW. Yes, we have. We have been doing a lot of education and information and clarification. And we have found over 

time that having a strong enforcement process, in fact, does complement those compliance assistance efforts, as well. 

Mr. BISHOP. Thank you very much. 

Thank you, Madam Chair. 

Ms. WOOLSEY. Mr. Payne? 

Mr. PAYNE. Thank you very much. 

Mr. Socolow, you mentioned that in your testimony you highlighted New Jersey’s new law, known as the ABC test. 

Although the law has not been in effect for long, do you believe 

it has been effective in determining whether an individual is an 

employee or an independent contractor? And do you know if other 

states use the same test? And if so, what states? And do you believe that it is effective, as well, with them? 

Mr. SOCOLOW. Congressman Payne, thank you. 

The chief thing that happened a year ago last summer was that 

our taxation division adopted—or the statute was changed so that 

the taxation division has the same ABC test that we have had for 

many, many years in unemployment insurance. 

And what that has been effective over the last 12 months—or 7 

months, because it took effect in January of this year—it has given 

us the opportunity now that, when one agency does an audit or an 

investigation, those findings can be used by the other agency to 

double up on the enforcement without having to double up on the 

work. 

So that is the chief—from an enforcement perspective, it just 

streamlines and breaks down those silos between agencies of state 

government. 

As to the ABC test, it is widely used by unemployment insurance 

programs—you know, prong C, the third prong of the test, which 

goes to whether or not the worker would be able to survive the loss 

of that client as an independent contractor or whether they would 

be unemployed, obviously comes from the question of whether 

somebody should get unemployment benefits. 

And, yes, I would advocate that every state use it for their income tax, as well. 

Mr. PAYNE. Let me ask another question in regard—and you may 

not have the answer at hand. But, as you know, FedEx and UPS 

are the big competitors in the whole delivery system. Actually, you 

know, FedEx used to keep up with UPS’s benefits to, I guess, show 

that unionization is not necessarily necessary to get benefits and 

so forth and so on. 

However, there is a new guy on the block—not so new—but they 

are DHL. And I don’t know if you have taken a look at that operation. One, as you know, it is part of the Federal Republic of Germany’s subsidized mail system. Therefore, indirectly, they have unVerDate 0ct 09 2002 17:03 Feb 26, 2008 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\HELP\110-56\36728.TXT HBUD1 PsN: DICK
65

fair advantage. But secondly, they make it, I believe, mandatory 

that every driver is an independent contractor. 

And I wondered, do you know of that situation? 

Mr. SOCOLOW. Congressman Payne, I guess I would have to get 

back to you specifically about that situation. 

I do know that we found in that industry certain instances where 

drivers were misclassified as independent contractors. We have one 

of them here today on the panel. And we have found that, as well, 

in New Jersey. And we are enforcing to make sure that that is corrected. 

Mr. PAYNE. It is probably even a little more difficult one at this 

time. 

Our federal post office—I should have asked our federal witness—had begun in the last year or so to hire independent contractors, can you believe it? They are hiring people to—if you have got 

a pickup truck, you can just go and we will contract with you to 

pick up mail and, you know, deliver it to a sub-post office. 

And it seems to me like the federal government is violating the 

law. It would appear to me that they are overreaching. It appears 

to me that they are trying to break the union—postal workers 

union—by this contracting out. As a matter of fact, even in the post 

office delivery system, there is the same kind of situation happening. 

And so I would really like to get together with your department 

and see whether we need to sue the federal government about the 

state of New Jersey. [Laughter.] 

But I am serious about these practices, once again, of the federal 

government coming in, as they did in our——

Mr. SOCOLOW. Rodino Building. 

Mr. PAYNE. Right. And now it is in the new federal building 

where I moved next door when the new building was built. 

But I would certainly like to talk about and see whether there 

is some serious violations by the federal government. 

Mr. SOCOLOW. I look forward to following up with you on that, 

Congressman. Thank you. 

Mr. PAYNE. Thank you very much. 

Ms. WOOLSEY. Mr. Holt? 

Mr. HOLT. Just as the bells ring. 

Thank you, Madam Chair. 

And I welcome the witnesses, particularly Commissioner 

Socolow, whose career has shown that intelligence, competence and 

skill can be rewarded. 

I think New Jerseyans can take pride on this subject, as Mr. Andrews and Mr. Payne have pointed out. I think this is one area 

where we have shown ourselves, our state, to be progressive. 

Let me follow up on two subjects. One is the declaration that this 

is unlawful behavior: misclassification. What do you say in response or do in response to those employers who say, ‘‘Well, this 

is really by mutual agreement,’’ or, ‘‘This is what the employee 

wanted?’’

Mr. SOCOLOW. Like with any labor standard, you often have that 

thrown back at you. People say, you know, the worker agreed and 

didn’t want to be paid overtime for working more than 40 hours in 

66

a work week. People say that the worker didn’t want to be paid the 

minimum wage. 

Well, that is really not relevant. I mean, you cannot contract, you 

cannot voluntarily, even in a mutual agreement, give up the rights 

that are there for workers. And that is because it is arguable that 

such an agreement really would be voluntary. It would almost certainly have elements of coercion. 

And so, that is really not a matter. The law is very clear as to 

whose call that is. That is the call of the enforcement agency and, 

if we are challenged, up ultimately to the courts. But it isn’t between the employer and the employee to go ahead and break the 

law. 

Mr. HOLT. And that is not difficult to uphold in the courts. 

Mr. SOCOLOW. No, not at all. Again, there is lot of case law on 

that test. 

Mr. HOLT. Now, to the definition, Ms. Walters and others have 

suggested that it might be very hard to come up with a definition. 

As I understand it, you are proposing, or you would propose, a definition that is similar to the ABC test that is applied in New Jersey. 

Mr. SOCOLOW. Yes. 

Mr. HOLT. That test, you say, has been used in various agencies, 

is now used uniformly across agencies. When you adopted it for 

these new applications, was there wrangling over the wording? 

Mr. SOCOLOW. No, Congressman, not at all. 

And I just want to point one thing out. Just because you use this 

test to define an independent contractor doesn’t mean that other 

tests can’t be elsewhere in those laws. 

It was mentioned on page three of the U.S. Department of Labor’s testimony that in certain of their statutes individuals performing work are covered even if they are classified as an independent contractor. 

So you can do that. You can have all different definitions of who 

is covered, but still say, nonetheless, covered or not, this is what 

an independent contractor is. And, again, what that does is it provides ease of training of the auditors and investigators because 

they all know they are using the same test. 

Mr. HOLT. Do you happen to know how close your language is 

to the language of other states? You mentioned that a number of 

states—I don’t think you gave the number, and maybe you don’t 

know the number—use a uniform test. 

Mr. SOCOLOW. Well, Congressman, I don’t know how many use 

the ABC test. I do know that many of the state unemployment insurance programs—I believe it is the vast majority of them—use 

the ABC test, with all three prongs being required, to distinguish 

whether someone is or is not an independent contractor. 

Again, whether that has been adopted beyond unemployment insurance by those states, I don’t know. I know that we have now 

done it beyond that. 

Mr. HOLT. And the commonality of the language that you are familiar with, how close is that? 

Mr. SOCOLOW. It is identical. That ABC test, you know, has essentially been codified almost identically in many, many state unemployment compensation programs. 

67

Mr. HOLT. Well, I think you have made our decision here on a 

couple of these issues easier. Thank you. 

Chairman ANDREWS [presiding]. Does the gentleman yield back 

his time? 

Mr. HOLT. Yes. 

Chairman ANDREWS. I want to thank all the witnesses today. 

Mr. DeCamp, thank you for your contribution and for staying for 

the second panel. So we appreciate very much the fact that you 

stayed and listened. And we look forward to working with you further. 

Mr. Williams, your story was compelling and well-told. And I 

think we have a shared consensus to prevent this from happening 

to other people in the future. 

Ms. Stafford, it was refreshing to hear from someone who is actually running a business every day and dealing with these issues. 

And your contribution was quite notable. 

Ms. Walters, your association has been a valued advisor to this 

committee for a long time. And we hope that continues to be the 

case. 

And, Commissioner Socolow, we very much appreciate the fact 

that you brought some specific ideas as to how to fix this problem, 

as well as simply a description of it. 

So we are very grateful to everyone who participated today. 

As previously ordered, members will have 14 days to submit additional materials for the hearing record, without objection. And 

any member who wishes to submit follow-up questions in writing 

to the witnesses should coordinate with the majority staff within 

14 days. 

Without objection, the hearing is adjourned. 

[The prepared statement of LIUNA, submitted by Mr. Andrews, 

follows:]

Prepared Statement of the Laborers’ International Union of North America 

(LIUNA) 

The Laborers’ International Union of North America (LIUNA) is submitting this 

statement on behalf of the 520,000 workers it represents who are employed in many 

of the industries which are particularly impacted by the misclassification of workers 

as independent contractors, including the construction industry. 

LIUNA commends the Subcommittee for seeking solutions to the severe and 

‘‘growing problem for the public and private sector’’ of worker misclassification 

which has now been conclusively established to have ‘‘direct and significant impacts 

on workers, employers, insurers, and tax revenue basis’’ 1. 

The Growing Problem of Worker Misclassification 

Worker misclassification is an important public policy issue with broad implications. Employers who play by the rules are put at a competitive disadvantage with 

companies that misclassify their employees. In cases of misclassification, employees 

are unable to access basic worker protections, such as unemployment insurance, social security benefits, overtime payments, and workplace injury benefits. Insurance 

companies are deprived of workers compensation premiums requiring legitimate employers to bear those costs. Law-abiding citizens bear the taxes of others as they 

are forced to make up for unscrupulous companies that evade their legal responsibilities. 

The practice of worker misclassification occurs when employers label workers on 

their payrolls as independent contractors in order to illegally lower labor costs. An 

employer who misclassifies a worker as an independent contractor evades his obligation to withhold any pay to the federal government for income tax Social Security, 

Medicare and unemployment (FUTA) tax on behalf of that worker. In addition, the 

employer is evading similar requirements under state law, including the failure to 

pay workers compensation premiums on behalf of that worker and fringe benefits 

68

to which the worker might be entitled if he or she were properly classified. Moreover, misclassification deprives workers of a wide variety of labor and employment 

protections, most particularly the right to receive minimum wages and overtime 

payments. The practice not only seriously harms workers, many of whom are lowwage and minority workers, but it constitutes tax and insurance fraud. 

These and previous hearings have established the scope of severity of the problem.2 The testimony presented thus far confirms the conclusions of a growing number of studies which establish the impact of independent contractor/worker 

misclassification abuse.3 Misclassification negatively impacts both the federal and 

state governments and all of our citizens in the following ways: 

• Impact upon workers 

Workers who are incorrectly classified as independent contractors lose the protection of a wide variety of labor and employment laws, including the overtime provisions of the Fair Labor Standards Act, Social Security, Unemployment Insurance 

and Workers Compensation.4

If misclassified workers need to apply for workers compensation or unemployment 

insurance benefits, they are denied those benefits. Workers who are misclassified 

rarely receive pensions. It is also well established that workers who are 

misclassified do not receive health insurance benefits at the same rate as properly 

classified workers. GAO Report at p. 14. The Illinois Study found that the ‘‘lack of 

health insurance coverage exacts a large toll on the uninsured—avoidable deaths, 

poorly managed chronic conditions, and underutilizes life-savings medical procedures.’’ Illinois Study at p. 11. 

In addition, when workers are deprived of employer—provided health insurance 

or workers’ compensation coverage, taxpayers bear the economic costs of the uninsured and under-insured. Federal, state, and local governments support care of the 

uninsured through public clinics, and payments to health care facilities that care 

for the uninsured. 

• Impact upon fair, law-abiding employers 

The conditions for a fair and competitive marketplace are undermined because 

firms that misclassify workers illegally lower their labor costs as much as 30%. This 

places employers who play by the rules and properly classify their employees at a 

competitive disadvantage by shifting costs to them from the violating employers. Recent studies have documented the harm done to responsible honest employers by 

worker misclassification: 

‘‘[T]he conditions for a fair and competitive are sabotaged [by misclassification]. 

Firms that misclassify can bid for work without having to account for many normal 

payroll-related costs. This illegal practice can decrease payroll costs by as much as 

15 to 30%. This places employers who correctly classify their employees at a distinct 

competitive disadvantage * * * [T]he violating employer will have been able to gain 

business illegally by exploiting their competitive advantage during the bidding process and they will have profited by avoiding other payroll related expenses * * * Employers can avoid the high cost of paying workers’ compensation premiums by mandating that persons who work for them have an exemption. This allows employers 

who misclassify to underbid the legitimate employers who provide coverage for their 

employees. In the construction sector, the workers’ compensation effect from 

misclassification further destroys the fairness and legitimacy of the bidding process.’’ The Economic Cost of Employee Misclassification in the State of Illinois, supra 

at note 1 at pp. 2-3. 

• Impact upon Federal and State Revenue 

Studies at the federal income level have established that ‘‘misclassification can reduce tax payments, Medicare payments, and Social Security payments. At the state 

level, misclassification can affect payments into state tax, workers’ compensation 

and unemployment insurance programs.’’ GAO Report at p. 8. 

According to published data, income is reported on Form 1099’s at a 31% lower 

rate than that of income reported on Form W-2’s; as a result, both the federal and 

state governments suffer a loss of income tax revenue when employers misclassify 

workers, thereby pushing them out of wage-earner tax status. Illinois Study at p. 

6. The studies have estimated that millions in federal and state income taxes are 

lost annually due to misclassification. For example, in Massachusetts, lost state tax 

revenues due to misclassification for all industries in 2001-2003 was $91 to $125 

million. 

• Impact upon State Unemployment and Workers Compensation Systems 

State workers’ compensation and unemployment insurance systems are adversely 

affected as well. Businesses that misclassify employees as independent contractors 

69

pay no unemployment insurance nor do they obtain workers’ compensation coverage 

on those workers. Employers who correctly classify workers pay both federal tax 

under FUTA and state UI tax. In 2000, a federal DOL study found that nearly $200 

million in Unemployment Insurance tax revenue was lost per year through the 

1990’s due to misclassification of workers as independent contractors. In Illinois, for 

example, it is estimated ‘‘that the unemployment insurance system has lost an average of $39.2 million annually from 2001-2005 in unemployment insurance taxes that 

are not levied on the payroll of misclassified workers as they should be. For 2005, 

[it is] estimate[d] that the unemployment insurance system in Illinois lost $53.7 million in unemployment insurance taxes.’’ Illinois Study at p. 6. 

Misclassification is Endemic in the Construction Industry 

Recent studies have confirmed that ‘‘the moderate rate of misclassification [of 

workers in all industries] was from 13-23%.’’ In certain industries such as the construction industry, the rate of misclassification of workers is at the high end of the 

spectrum and it is safe to say that misclassification has become all but endemic in 

the construction industry: ‘‘In two states, Massachusetts and Maine, the incidence 

of misclassification in the construction industry is higher than all other industries 

in their states. For Massachusetts, the moderate statewide rate is 19%, while the 

rate of misclassification in the construction sector is 24%; * * * In a report by the 

General Accounting Office (1996), it was reported that the percentage of 

misclassified workers * * * in the construction sector was 20%. Illinois Report at 

p. 3. 

Because the misclassification problem is especially severe in the construction industry, a growing number of states are using targeted industry enforcement as a 

way to most effectively utilize scarce governmental resources to focus on sectors 

where the practice is widespread. 

For example, Illinois has recently enacted the Illinois Employee Classification Act 

of 2007 (HB 1735) which provides new remedies and penalties to address construction contractors who misclassify their workers. It gives new enforcement authority 

to the state Department of Labor and creates an Employee Classification Fund from 

penalties collected under the new law to provide for additional investigators. Important anti-retaliation procedures are included to protect workers who utilize the law’s 

new remedies to file a complaint. The law specifically directs cooperative information sharing among Illinois’ Labor, Employment Security, Workers Compensation 

and Revenue Agencies. Most important, the new law ‘‘presumes’’ employee status 

for an individual performing service for a construction contractor. 

In his recent testimony before this Subcommittee, New Jersey’s Labor Commissioner described targeted audits and investigations in 2006 in the construction industry which revealed that there were instances of misclassification in 41% of construction audits and investigations revealing $78.2 million in under-reported wages 

in one year alone. Statement of New Jersey Commissioner of Labor David J. 

Socolow at p. 3. 

Other states have focused their resources in the construction industry as well. For 

example, California’s Labor Code 2819 creates a presumption of employee status in 

several industries including construction. New Mexico creates a presumption of employee status for workers in the construction industry as well. New Mexico Stat. 60-

13-3.1. 

The public construction contracting system is particularly undermined by independent contractor abuse because misclassification allows unfair contractors to sabotage the competitive bidding process by underbidding contractors who comply with 

the law. As a result, several states have specifically included misclassification violations as a basis for debarment from state construction contracts, including Massachusetts (Massachusetts Gen. Laws Ch. 149, section 14B (d); Illinois (Illinois Employee Classification Act of 2007, HB 1735) and New Jersey (PL 2007, chapter 114). 

New Policies and Practices to Address the Growing Problem of Worker 

Misclassification 

New Policies and practices to address the growing problem of misclassification of 

workers as independent contractors should be considered in the following areas: 

• Close the Section 530 ‘‘Safe Harbor’’ Loophole 

Closing the so-called ‘‘safe harbor’’ loophole will allow the IRS to collect employment taxes from violating employers and to require the proper reclassification of 

workers in the future. Without closing this loophole, the impact of misclassification 

cannot be effectively addressed at the federal level and there is simply no credible 

justification for retaining this tax loophole. 

70

• Reevaluate Federal Law Regarding Presumptive Employee Status 

Impediments to joint agency enforcement which has worked successfully in many 

states will be removed if employee status is presumptively established under the 

IRC. This will allow scarce investigatory resources to be leveraged when relevant 

investigatory agencies begin at the same starting point of presumptive employee 

status. See GAO Report at pp. 25 & 33. For example, the New Jersey Commissioner 

of Labor identified the importance to his state’s new enforcement measures of having ‘‘an individual paid for services [to be] presumed to be an employee.’’ Statement 

of New Jersey Labor Commissioner at p. 5. 

• Strengthen Current Federal Enforcement Mechanisms and Penalties for Violators 

Additional penalties and remedies to deter employers who engage in 

misclassification should be considered. In this connection, innovative approaches in 

several states can provide guidance. For example, Illinois amended its code to make 

the classification of workers as independent contractors a separate statutory violation. Other states have separate reporting, licensing and registration requirements 

for independent contractors, including: 

California http://www.edd.ca.gov/taxrep/txicr.htm; 

Kansas http://kdor.org/misclass/mcfaq.htm; 

And Montana http://erd.dli.mt.gov/wcregs/iccu.asp. 

The Subcommittee should consider whether the Department of Labor requires increased authority to investigate and remedy misclassification in addition to addressing its need for increased resources to initiate routine and targeted audits; an increased number of investigators to conduct field and job-site inspections and audits 

designed to uncover the misclassification of workers. 

• Promote Information Sharing Among Federal and State Agencies 

Procedures can be established to coordinate and promote federal agency sharing 

of information regarding the misclassification as well as procedures to strengthen 

and coordinate federal and state agency enforcement efforts. These efforts should include establishing interagency collaboration on worker misclassification enforcement 

among the Department of Labor, IRS and state workers compensation, unemployment security, labor and revenue agencies. See GAO Report at p. 33-34. 

• New Procedures for Targeted Investigations in Construction 

New procedures for targeted investigations, increased audit capacity and field inspections in industries such as construction should be established. This approach 

conserves resources and focuses limited staff on investigations which will expose endemic problems. 

Conclusion 

Worker misclassification reform will not only benefit workers, but also fair employers, insurers, taxpayers, and federal and state tax authorities. It will ensure fair 

and competitive markets and it will protect the integrity of the public works bidding 

process. LIUNA urges the Subcommittee to strongly consider new practices and policies as set forth above and presented by many witnesses which not only protect 

workers, but also promote the ‘‘administration of many federal and state programs, 

such as payment of federal taxes and pension benefits’’ harmed misclassification.5

ENDNOTES

1The Economic Costs of Employee Misclassification in the State of Illinois, Michael P. Kelsay, 

PhD; James I. Sturgeon, Ph.D.; Kelly D. Pinkham, M.S.; Department of Economics, University 

of Missouri—Kansas City (December 6, 2006) (Illinois Study at p. 9 & 1′′; see also The Cost of 

Worker Misclassification in New York State, Linda H. Donahue, James R. Lamare and Fred B. 

Kotler, Cornell University ILR School (February 2007); The Social and Economic Costs of Employee Misclassification in Construction, Elaine Bernard, PhD Robert Herrick, ScD, Francoise 

Carre, Ph.D.; Randall Wilson, University of Massachusetts, Boston; Construction Policy Research Center Labor & Work Life Program, Harvard Law School and Harvard School of Public 

Health, (December 17, 2004); The Social and Economic Costs of Employee Misclassification in 

the Maine Construction Industry, Elaine Bernard Ph.D., Robert Herrick, ScD, Francoise Carre, 

Ph.D. and Randall Wilson, University of Massachusetts, Boston Construction Policy Research 

Center Labor & Work Life Program, Harvard Law School and Harvard School of Public Health 

(April 25, 2005). 2Statement of Kelly D. Pinkham, University of Missouri-Kansas City, Assistant Director, Center for Full Employment, House Subcommittee on Income Security and Family Support, Hearing 

on the Effects of Misclassifying Workers as Independent Contractors, (May 8, 2007); see also 

House Workforce Protections Subcommittee Hearing on Providing Fairness to Workers Who 

Have Been Misclassified as Independent Contractors, (March 27, 2007). 3Supra at note 1. 

71

4 Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification, US Government Accountability Office No. 06656 (July 11, 2006) (‘‘GAO Report at pp. 

21-22 ’’). 5GAO Report at p. 7. 

[Additional statements submitted by Mr. Kline follow:] 

[Statement of the Associated Builders and Contractors, Inc., follows:]


klm-1.eps
72

[Statement of Travis Boardman follows:]


klm-2.eps
73


klm-3.eps
74

[Statement of Randy Eystad follows:]


klm-4.eps
75


klm-5.eps
76

[Statement of Michael P. Mannion follows:]


klm-6.eps
77


klm-7.eps
78


klm-8.eps
79

[Statement of the National Association of Home Builders follows:]


klm-9.eps
80


klm-10.eps
81


klm-11.eps
82


klm-12.eps
83


klm-13.eps
84

[Statement of William Vazquez follows:]


klm-14.eps
85


klm-15.eps
86

[Whereupon, at 12:56 p.m., the subcommittees were adjourned.]

Æ


klm-16.eps