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

Partial transcript of the Q&A with Sen. Johnny Isakson (R-Georgia) 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. Johnny Isakson (R-Georgia):
Thank you, Mr. Chairman, and thanks to all the witnesses.

Ms. Ruckelshaus, you made a reference in your closing statement to the safe harbor in the IRS code. Is that the 10-point test to establish whether or not an independent contractor is truly independent or not?

Cathy Ruckelshaus, Legal Co-Director, National Employment Law Project:
No, I was referring, Senator, to the safe harbor at section 530 of the Internal Revenue Act. It’s at 26 USC 7436. And that describes what under the internal revenue code, which again it is a 20 factor test – that may be what you were referring to. But it prohibits – that safe harbor prohibits the IRS from issuing any guidance on this subject at all for payroll fraud. It also permits employers to evade any kind of liability for any back problem. So, if the IRS says “You’re misclassifying your employees. You need to change it”, there’s no ability to collect penalties or any damages there. And the employer can get the safe harbor if it says that most of the other employers in my business do this, have this practice.

Sen. Johnny Isakson (R-Georgia):
Excuse me for cutting you off, but time will be short. The reason I mentioned this is my recollection the company I ran was covered by that safe harbor, and it defined the definition of the parameters by what you could comply with the federal law. And IRS was the enforcement agent in terms of that, and that is true today that a company can be challenged by anybody to be in violation of that safety and be tested under the IRS code, is that not correct?

Cathy Ruckelshaus, Legal Co-Director, National Employment Law Project:
That’s correct, sir.

Sen. Johnny Isakson (R-Georgia):
How often does that happen?

Cathy Ruckelshaus, Legal Co-Director, National Employment Law Project:
That’s a good question. There’s very little data on how often that happens. It is typically competitors who come and complain because workers aren’t protected if they come to complain to the IRS. So I don’t have data on how often that happens.

Sen. Johnny Isakson (R-Georgia):
My point is when you referred to doing away with the safe harbor or amending the safe harbor, you’re talking about the provisions that allow people to operate as independent contractors legitimately.

Cathy Ruckelshaus, Legal Co-Director, National Employment Law Project:
No, that’s not what would happen. The proposed law that Sen. Kerry had introduced would have narrowed the ability for employers to claim the safe harbor and would have permitted the IRS to issue guidance – to give guidance to employers around the country.

Sen. Johnny Isakson (R-Georgia):
Which is my point – we’ve got to tread very carefully on going from where we are with a very clear definition to a narrowing of that definition, which might by intent or the unintentional consequence of depriving a lot of people of work that is legitimate…That’s the reason I want to bring that up.

Mr. MacKrell, thank you very much for being here. You talked about workers enjoying the flexibility that comes from an independent contractor status. Can you expand on that, particularly what would happen to these workers if that flexibility went away?

Chris MacKrell, Custom Courier Solutions, Rochester, NY:
In our situation and like many people who work in our industry, the independent contractors that work for us have chosen this style of way to earn a living because they need a flexible, variable schedule. They want to work when they want to work. They don’t want to be told when to come to work, what time they need to be at work, whether they work, what rates they need to charge.

So, if we’re forced to move into an employee type of basis, I believe that we would probably lose probably 60% to 70% of our workforce. They would move on to other things. By the very nature of the services they provide to us, they are looking for flexibility and the ability to operate their own business.

Sen. Johnny Isakson (R-Georgia):
Do you know, out of curiosity, how many of your contractors might actually be multiple contractors for different businesses? I mean, not just in the delivery business but in other types of professions?

Chris MacKrell, Custom Courier Solutions, Rochester, NY:
All I can really speak about is obviously in our delivery business. I would say about 35% to 40% of our ICs provide services to other similar transportation companies.

Sen. Johnny Isakson (R-Georgia):
Any other second career type businesses other than transportation?

Chris MacKrell, Custom Courier Solutions, Rochester, NY:
Not that I can comment on.

Sen. Johnny Isakson (R-Georgia):
Mr. Odom, I’m sorry you had difficulty with a Georgia company. I was paying close attention in your testimony. I would only suggest they passed a pretty strong law in Georgia with regard to labor brokers, verification of employment, and legality in the United States and in Georgia, so I would urge you to take a look at that. Those violations probably took place in the state of Tennessee so Georgia law might not be applicable. But Georgia’s really tried to address that problem in terms of labor brokers and that type of labor. But I’m sorry you had the problem with Georgia coming across the line and into Tennessee and competing with you.

And Mr. Anderson, thank you for your willingness to come and testify. Incidents like what happened to you are important to all of us. It’s very important we provide a way to see to it that people’s rights are protected and when somebody’s injured unduly like you are because somebody made a voluntary shift for convenience for their sake but certainly inconvenient for yours that we pay close attention there. So, thank you for your testimony and for being here today.

Thank you, Mr. Chairman.

Sen. Johnny Isakson (R-Georgia):
Mr. Odom, everybody at your construction company is an employee of the company?

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

Sen. Johnny Isakson (R-Georgia):
When you bid a job of, say, a dormitory project or a multi-family project, everybody that contributes to the construction of that project is an employee?

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
Yes, for our scope of work, yes, sir.

Sen. Johnny Isakson (R-Georgia):
Say what that means.

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
When we’re pricing a dormitory, we’re pricing the framing, the drywall, acoustical ceiling, plastering, scopes that pertain to our company. We don’t do plumbing, electrical work, other scope of work that would be bid by other subcontractors. But everything in our scope of work to perform is performed by an employee.

Sen. Johnny Isakson (R-Georgia):
Well, that beefs up my point. Most of those subcontractors were more likely to be independent contractors rather than employees, correct?

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
I’m not sure. Of the other subcontractors?

Sen. Johnny Isakson (R-Georgia):
Yes, ones you referred to that you don’t cover their scope of business.

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
Umm…

Sen. Johnny Isakson (R-Georgia):
In my point – that’s not a trick question. I’m not trying to pose a trick question. But my point is there are an awful lot of people who are in independent contractor status like Mr. MacKrell who may deliver a specialized fixture to one of those projects that an electrician that you hired to put in there is going to install. He’s an independent contractor delivering the specialized fixture, and the electrician is an independent contractor who bid the part of the job that you don’t do. That’s my point I’m making.

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
Yes, sir. That would be true.

Sen. Johnny Isakson (R-Georgia):
‘Cause there are an awful lot of small – you know, the National Association of Home Builders said 85% of home builders built 25 or fewer homes and 75% built 10 or fewer homes. So there are a lot of small operators that operate as contractors that contract with independent contractors and put them together to end up building their end products, is that not correct?

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

Sen. Johnny Isakson (R-Georgia):
And that would be – you wouldn’t want to do away with that, would you?

Danny Odom, Odom Construction Systems, Inc., Knoxville, TN:
No.

Sen. Johnny Isakson (R-Georgia):
What you want to make sure is that the master contractor that perform the services you provide, which is the main structural service in terms of construction, is competing with you on a level playing field, is that right?

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

Sen. Johnny Isakson (R-Georgia):
Mr. MacKrell, tell me a little bit more about your typical independent contractor. Do you have a typical one or are they across-the-board?

Chris MacKrell, Custom Courier Solutions, Rochester, NY:
Our typical independent contractor would be somebody who has come to us either through word of mouth, advertisements that we have, or just because they’ve been working in the industry. They offer services to us. We give them a scope of work that they review. They submit pricing to us. We come to an agreement. We sign a contract. We exchange, obviously, insurance and other information, and they begin to provide services to us.

Sen. Johnny Isakson (R-Georgia):
Could you tell me approximately – and I realize this will be an estimate – what percentage of truckers in the United States of America are operating as independent contractors?

Chris MacKrell, Custom Courier Solutions, Rochester, NY:
I really wouldn’t have the ability – in our industry, there’s an estimated 5,000 courier companies in the U.S. Our industry surveys show that 85% of those companies use some form of independent contractors to operate their business.

Sen. Johnny Isakson (R-Georgia):
And that’s primarily the last mile –

Chris MacKrell, Custom Courier Solutions, Rochester, NY:
Last mile delivery services.

Sen. Johnny Isakson (R-Georgia):
Which big companies really can’t meet with the same standards that they have to meet, is that correct?

Chris MacKrell, Custom Courier Solutions, Rochester, NY:
Correct.

Sen. Johnny Isakson (R-Georgia):
Then that’s an important – very important – thing to understand…because the fact that I ran a company that had independent contractors doesn’t mean that I’m on the other side of this issue, Bob, but I do think we have to have a balanced advocacy on behalf of America’s needs. One of the things we’ve acknowledged is that some of the unintended consequences of government regulation or of the economy – one of the two or both in some cases – have forced people to do things we’d rather they not do like go to an independent contractor status or go to a 30-hour work week or something like that. So, we have to be conscious what we’re talking about when we’re talking about these very critical issues because nobody wants to sanction illegal or unintentional or just plain wrong practices on the part of workers and on the part of companies on their workers but we also want to make sure we protect the opportunities for workers to have jobs in America in a very challenging time.

Thank you, Mr. Chairman.

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