Transcript: Q&A w/ Sen. Bob Casey on the use of independent contractors & payroll fraud – Nov. 12, 2013

Partial transcript of the Q&A with Sen. Bob Casey (D-Pennsylvania) on the impacts of misclassifying employees as independent contractors and payroll fraud. The Senate Health, Education, Labor & Pensions subcommittee on employment and work place safety hearing was held on Nov. 12, 2013:

Sen. Bob Casey (D-Pennsylvania):
I wanted to start, Mr. Odom, with a couple of questions for you.

But just by way of preface, this is a place and this is an institution – the Senate, the House, the Congress overall – where you often have conflict by way of policy or otherwise between employers and employees on issues. Sometimes, taxpayers feel that their concerns aren’t being heard. I have to say that there are very few areas of policy or maybe in this case a problem that we’re trying to rectify or deal with where if we get this right we will have benefitted all three. Right? Employees, workers would be better off, companies and employers will be better off, and certainly taxpayers will. So, that’s pretty rare, and I just mentioned that by way of preface.

Mr. Odom, I want to ask you about the – when you’re competing against firms that are engaged in misclassification – and again, I’ll say for the record these are the ones who are violating the rules, violating the law, not all employers – in fact, not even most. But we have to recognize that there’s a problem here. But when you’re competing against those that aren’t playing by the rules, those competitors – it’s almost hard to call them competitors when they have a 20% head start or whatever the exact percentage is if we could ascertain that – what types of projects are you talking about? What’s the common scenario in your work?

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
We primarily focus our efforts in the commercial industry, so we do a lot of assisted living type facilities, multi-family housing. We do a lot of public work so new buildings on school campuses, university campuses, hospitals as well. We do that kind of work. So, your larger-scale commercial is where we focus most of our efforts.

Sen. Bob Casey (D-Pennsylvania):
Can you walk us through the process? I mean, I know everyone in the room by now understands the basic problem. Can you walk us through kind of – either a specific experience or a common set of facts in terms of how you confront this problem?

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
Where we see it is on the results on bid day. It’s where it’s first obvious. Oftentimes, you’ll have a group of prices of people such as ourselves that are on a level playing field that are trying to do things the right way. We’ll be a percentage or two apart from each other on bid day. And then you’ll have a second group of pricing down below that – 10%, 15%, 20% – also grouped together. It’s pretty obvious if you’re looking in our scopes of work that we price. That’s where we see it.

And then we get onto projects as well. We’re performing a certain scope of work and then additional scopes of work are being performed by companies that are handling their business in that way. And so we see it on the ground level as well.

Sen. Bob Casey (D-Pennsylvania):
And in terms of your direct experience, the differentials between the bids – between you and, say, a firm that isn’t playing by the rules – can be in that range of 10% to 30%? Is that accurate?

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
Yes.

Sen. Bob Casey (D-Pennsylvania):
I’d also ask you as well about – Sen. Isakson mentioned this concept of labor brokerage. Can you tell us what you know about that? What that means?

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
The labor broker is sort of an intermediary an offending contractor would use to go and seek out a collection of guys that can be brought in under the 1099. So, if I’m a contractor wanting to operate in that way, I would approach XYZ Labor, which operates as a business, and say I need 25 carpenters next Monday, and then he assembles those carpenters and sends them to the job site.

Sen. Bob Casey (D-Pennsylvania):
And that’s a rather new player in this or is that been part of the dynamic for a while?

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
It’s been part of the dynamic for a while. It just seems to be more prevalent because there are fewer opportunities. In the past, you know, when the economy was really hopping in construction, you miss one or you lose one to these types of operators on bid day, you go and bid the next 25 that are on your bid schedule because there are so many opportunities. Now, the opportunities are much fewer so it’s a lot more noticeable. Whether it’s more prevalent, I’m not sure. It’s always been there. It’s been there since I’ve been in the office, which would be mid-90’s in our neck of the woods.

Sen. Bob Casey (D-Pennsylvania):
I’ll come back to you on a couple of other things. But Ms. Ruckelshaus, I want to ask you about the state efforts here. Obviously, I know often in this town when there’s a problem some people think the solution is always a federal law, and I understand the concerns about that…

But there are some problems that we have to deal with in more comprehensive way across the nation because as you described it, I think, a patchwork sometimes doesn’t work. And that will be an area of debate and we can debate that. I think there’s good intentions on both sides of that.

But to the extent that there is activity, there’s been substantial amount of activity at the state level. I guess now both Tennessee and Texas have enacted laws targeting misclassification. But I want to ask you is action at the state level sufficient, even if you have more?…

Cathy Ruckelshaus, Legal Co-Director, National Employment Law Project:
Yes, my office has been tracking the state legislations since it started to pick up around 2005, and there was an uptick and quite a bit of activity. Since last year, it’s begun to dwindle – 2011, 2012 – the activity has dipped. And there has been more defensive actions by business who want to cheat or who think the laws are not good, so we’ve actually been engaged in a lot of fight back. And some of the laws have been weakened. The new ones that were passed have been weakened. Most of them continue to only cover construction, and while that’s a big sector that has the problem, there’s a lot of other sectors like the ones I’ve mentioned that aren’t covered at all by these laws. So it’s very incomplete. And because the task forces and commissions often lack resources, the ebbs and flows of the enforcement are very striking.

So it’s my opinion that we do need federal leadership on this.

Sen. Bob Casey (D-Pennsylvania):
…I wanted, Ms. Ruckelshaus, get back to a question which I don’t know if you have any answer for…It’s a question of how many businesses we’re talking about here. And I was struck by what Mr. MacKrell said in part of his testimony. Towards the end he talked about the CDLA urging all of its members to use industry best practices in making determinations about independent contractor status and all that. That’s what we want to see more of obviously and we appreciate that they’re doing that.

But, you probably can’t answer the question about the number of businesses that are engaged in this or even maybe a ballpark figure. But you did in your testimony – I’m looking at your testimony on page 4 – you had it broken down under two sections of loss of revenue. You had a federal revenue section, and you had a state revenue section. If you could just walk through some of that, to the extent that we have data.

Even though I always believe data are important – numbers are relevant – but I think stories like Mr. Anderson’s and others are more compelling because they tell us about what happened to one person, one family, one employer, one community.

But can you walk through some of the more significant federal revenue losses here?

Cathy Ruckelshaus, Legal Co-Director, National Employment Law Project:
Yes, and as you mentioned earlier, Senator, the data is old and there is a U.S. Department of Labor survey that’s being undertaken which should update on at least, in terms of the magnitude of the problem.

The General Accountability Office in 2009 estimated that these independent contractor abuses cost federal revenues $2.72 billion in just one year, in ’06.

The Congressional Research Service estimated that a modification to the IRS safe harbor rule would save $8.7 billion from 2012 to 2021. So that’s mostly on the income tax side.

Sen. Bob Casey (D-Pennsylvania):
You’re talking about like a 9-year number roughly?

Cathy Ruckelshaus, Legal Co-Director, National Employment Law Project:
Right, that’s a 9-year number – $8.7 billion.

The state losses are typically – they’re calculated using unemployment insurance losses and workers’ comp. Those are the sources of data that the states use.

And California is the most recent one. In 2013, it estimated that there was a…$236 million loss just in one year in California to its unemployment revenues. New York found $1.4 billion in losses. Massachusetts found a combination of unemployment insurance $15.4 million in one year loss and $13 million in unreported earnings.

So, adding up, it’s quite a magnitude. The federal estimates vary a lot and depend on which dataset the agencies looking at.

Sen. Bob Casey (D-Pennsylvania):
Appreciate that. Mr. Anderson, I didn’t have a chance to ask you a question or two about your own situation. But I was struck by in your testimony the reference you made to – I picked up on that phrase – “tongue lashing” meaning – this is what I interpreted; see if this makes sense to you – that when you’re an employee there’s a – to use a term of art, so-to-speak – there’s a degree of control that an employer has over an employee and can direct them and can obviously give them a tongue lashing when they’re not doing good work. And whether it was that aspect of your relationship with your employer and then the…next entity that you were working with, whether it was tongue lashing or other aspects of your relationship, that didn’t change very much from one status to another. Is that correct?

Matt Anderson, Residential Construction trim installer, Michigan:
Correct. It didn’t change at all.

Sen. Bob Casey (D-Pennsylvania):
The only thing that really changed in your case – and I know this is kind of a leading question but it’s important to validate it – the only thing that has changed is you had a lot less protection and therefore later had to pay a very severe price for not having those protections. Is that fair to say?

Matt Anderson, Residential Construction trim installer, Michigan:
Yeah.

Sen. Bob Casey (D-Pennsylvania):
I want to ask you as well about from your own experience – now, I take it from your testimony, you didn’t ask to be an independent contractor. You felt almost compelled to because of your own circumstances because the employer in that circumstances kind of giving you not much of a choice, is that correct?

Matt Anderson, Residential Construction trim installer, Michigan:
Correct.

Sen. Bob Casey (D-Pennsylvania):
And I realize this isn’t the norm, but it does happen, and that’s why your story is so important.

And you felt you had to do that in order to keep your job and have income for your family.

Matt Anderson, Residential Construction trim installer, Michigan:
That’s the way they put it to us.

Sen. Bob Casey (D-Pennsylvania):
And I wanted to kind of project out from your own story. If you were – if you’ve obviously done all kinds of good work and carpentry being a big part of that, if someone came up to you today – a young person even younger than yourself came up to you today and said that, “I’m thinking about a similar career”, what advice would you give them in terms of this aspect of your work?

Matt Anderson, Residential Construction trim installer, Michigan:
I would tell them under no circumstances do something like that, put themselves in a vulnerable position like I had put myself and my family.

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