The Effects of Misclassifying Workers As Independent Contractors
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THE EFFECTS OF MISCLASSIFYING WORKERS AS INDEPENDENT CONTRACTORS JOINT HEARING BEFORE THE SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT AND SUBCOMMITTEE ON SELECT REVENUE MEASURES OF THE COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION MAY 8, 2007 Serial No. 110–37 Printed for the use of the Committee on Ways and Means ( U.S. GOVERNMENT PRINTING OFFICE 43–758 WASHINGTON : 2008 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 VerDate Aug 31 2005 02:43 Sep 05, 2008 Jkt 043758 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 E:\HR\OC\A758A.XXX A758A wwoods2 on PRODPC68 with HEARING COMMITTEE ON WAYS AND MEANS CHARLES B. RANGEL, New York, Chairman FORTNEY PETE STARK, California JIM MCCRERY, Louisiana SANDER M. LEVIN, Michigan WALLY HERGER, California JIM MCDERMOTT, Washington DAVE CAMP, Michigan JOHN LEWIS, Georgia JIM RAMSTAD, Minnesota RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania JOHN S. TANNER, Tennessee JERRY WELLER, Illinois XAVIER BECERRA, California KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas RON LEWIS, Kentucky EARL POMEROY, North Dakota KEVIN BRADY, Texas STEPHANIE TUBBS JONES, Ohio THOMAS M. REYNOLDS, New York MIKE THOMPSON, California PAUL RYAN, Wisconsin JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia RAHM EMANUEL, Illinois JOHN LINDER, Georgia EARL BLUMENAUER, Oregon DEVIN NUNES, California RON KIND, Wisconsin PAT TIBERI, Ohio BILL PASCRELL, JR., New Jersey JON PORTER, Nevada SHELLEY BERKLEY, Nevada JOSEPH CROWLEY, New York CHRIS VAN HOLLEN, Maryland KENDRICK MEEK, Florida ALLYSON Y. SCHWARTZ, Pennsylvania ARTUR DAVIS, Alabama JANICE MAYS, Chief Counsel and Staff Director BRETT LOPER, Minority Staff Director SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT JIM MCDERMOTT, Washington, Chairman FORTNEY PETE STARK, California JERRY WELLER, Illinois ARTUR DAVIS, Alabama WALLY HERGER, California JOHN LEWIS, Georgia DAVE CAMP, Michigan MICHAEL R. MCNULTY, New York JON PORTER, Nevada SHELLEY BERKLEY, Nevada PHIL ENGLISH, Pennsylvania CHRIS VAN HOLLEN, Maryland KENDRICK MEEK, Florida SUBCOMMITTEE ON SELECT REVENUE MEASURES RICHARD E. NEAL, Massachusetts, Chairman LLOYD DOGGETT, Texas PHIL ENGLISH, Pennsylvania MIKE THOMPSON, California THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia ALLYSON Y. SCHWARTZ, Pennsylvania JOHN LINDER, Georgia JIM MCDERMOTT, Washington PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois EARL BLUMENAUER, Oregon Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occur- rences are inherent in the current publication process and should diminish as the process is further refined. ii VerDate Aug 31 2005 02:43 Sep 05, 2008 Jkt 043758 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 E:\HR\OC\A758A.XXX A758A wwoods2 on PRODPC68 with HEARING C O N T E N T S Page Advisory of May 1, 2007, announcing the hearing ............................................... 2 WITNESSES John Kendzierski, President, Professional Drywall Construction Inc., West Springfield, MA .................................................................................................... 6 Gonzalo Valencia, Covington, Washington ............................................................ 10 Sigurd Nilsen, Ph.D., Education, Workforce and Income Security Issues, Gov- ernment Accountability Office ............................................................................. 12 Rebecca Smith, Staff Attorney, National Employment Law Project ................... 29 Kelly D. Pinkham, Assistant Director, Center for Full Employment and Price 41 John S. Satagaj, President and General Counsel, Small Business Legislative Council .................................................................................................................. 45 SUBMISSIONS FOR THE RECORD Associated Builders and Contractors, letter .......................................................... 70 Contractor Management Services, statement ....................................................... 72 Direct Selling Association, statement .................................................................... 74 John J. Flynn, letter ................................................................................................ 76 Kathy Roman, Sequim, WA, statement ................................................................. 78 National Association of Home Builders, statement .............................................. 79 Richard A. Samp, statement ................................................................................... 81 iii VerDate Aug 31 2005 02:43 Sep 05, 2008 Jkt 043758 PO 00000 Frm 00003 Fmt 0486 Sfmt 0486 E:\HR\OC\A758A.XXX A758A wwoods2 on PRODPC68 with HEARING VerDate Aug 31 2005 02:43 Sep 05, 2008 Jkt 043758 PO 00000 Frm 00004 Fmt 0486 Sfmt 0486 E:\HR\OC\A758A.XXX A758A wwoods2 on PRODPC68 with HEARING THE EFFECTS OF MISCLASSIFYING WORKERS AS INDEPENDENT CONTRACTORS TUESDAY, MAY 8, 2007 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT, SUBCOMMITTEE ON SELECT REVENUE MEASURES, Washington, DC. The Subcommittee met, pursuant to notice, at 9:30 a.m., in room 1100, Longworth House Office Building, Hon. Jim McDermott (Chairman of the Subcommittee on Income Security and Family Support), presiding. [The advisory announcing the hearing follows:] (1) VerDate Aug 31 2005 02:43 Sep 05, 2008 Jkt 043758 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HR\OC\A758A.XXX A758A wwoods2 on PRODPC68 with HEARING 2 ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS SUBCOMMITTEE ON INCOME SECURITY AND FAMILY SUPPORT FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 May 01, 2007 ISFS–6 Congressman Jim McDermott (D–WA), Chairman of the Subcommittee on Income Security and Family Support, and Congressman Richard Neal (D–MA), Chairman of the Subcommittee on Select Revenue Measures, Announce a Joint Hearing on the Effects of Misclassifying Workers as Independent Contractors Congressman Jim McDermott (D–WA), Chairman of the Subcommittee on Income Security and Family Support, and Congressman Richard Neal (D–MA), Chairman of the Subcommittee on Select Revenue Measures, today announced a joint hearing on the effects of misclassifying workers as independent contractors. The hearing will take place on Tuesday, May 8, 2007, at 9:30 a.m. in room 1100, Long- worth House Office Building. In view of the limited time available to hear witnesses, oral testimony at this hearing will be from invited witnesses only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consider- ation by the Committee and for inclusion in the printed record of the hearing. BACKGROUND: Employers must generally take certain actions on behalf of their employees, in- cluding withholding income taxes, paying Social Security and Medicare taxes, pay- ing unemployment taxes, providing workers’ compensation insurance, paying at least the minimum wage, and permitting inclusion in qualified pension plans and other employer-provided benefits. In addition, employers must abide by certain workplace requirements that offer protections to employees. Employers are not re- quired to provide these benefits or protections to workers who are classified as inde- pendent contractors. The status of worker as an employee or an independent contractor is made under a facts and circumstances test that determines if a worker is subject to the control of the service recipient. The issue of control relates not only to nature of the work performed, but the circumstances under which it is performed. In its last comprehensive estimate, the Internal Revenue Service (IRS) found that 15% of employers misclassified 3.4 million workers as independent contractors in 1984, resulting in $1.6 billion in lost Social Security, unemployment and income taxes (or $2.7 billion in inflation-adjusted dollars). Studies suggest some employers misclassify workers as independent contractors in order to cut business costs. This gives these employers an unfair competitive ad- vantage over employers who properly classify their workers as employees. These studies find that the problem of misclassification of workers has grown in recent VerDate Aug 31 2005 02:43 Sep 05, 2008 Jkt 043758 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 E:\HR\OC\A758A.XXX A758A wwoods2 on PRODPC68 with HEARING 3 years. For example, one study found that the percentage of all workers misclassified in Illinois grew from 5.5% to 8.5% (a 55% increase) between 2001 to 2005. Another report found the percentage of employers misclassifying workers in Massachusetts (according to the most conservative estimates) grew from 8% between 1995–1997 to 13% between 2001–2003. In announcing the hearing, Chairman McDermott stated, ‘‘When workers are wrongly classified as independent contractors, they lose access to vital ben- efits, employers who play by the rules are unfairly disadvantaged, and State and Federal programs are starved