Transcript: Remarks by Sen. Bob Casey on the use of independent contractors & payroll fraud – Nov. 12, 2013

Partial transcript of remarks by Sen. Bob Casey (D-Pennsylvania) on 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:

Payroll fraud is a problem that is cheating workers, employers, and taxpayers through the loss of worker protection, the loss of business due to an uneven playing field, and the loss of revenue.

When an employee is wrongly classified as an independent contractor, that worker loses vital rights like payroll protections, worker’s compensation, unemployment compensation, and other basic safeguards.

The vast majority of employers that follow the rules are placed at a significant disadvantage when competing against the businesses breaking the law and not paying employment taxes.

Lower cost for those breaking the rules means less business for those who follow the rules.

This also places downward pressure on wages paid to workers and leads to other problems as well.

Taxpayers are also shortchanged through the loss of revenue by federal and state governments.

Independent contractors serve a valuable role in our economy, and there’s no intent on my part nor any one advocating the legislation will talk about today to use an overly broad brush to point fingers at companies that are following the law or pointing fingers at law-abiding independent contractors.

While there are employers that might mistakenly identify an employee as an independent contractor, there’s no doubt that intentional misclassification is a widespread occurrence and a problem that must be addressed.

A June 2013 Treasury Department Inspector General for Tax Administration report stated in part: “The misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap.” So said the Inspector General for Treasury.

…Employees…wrongly classified as independent contractors do not enjoy the same worker protections.

A 2009 GAO report cites the example of “a construction worker who fell three stories, was severely injured, and incurred hospital expenses of over $10,000 related to the injury. Because the worker was misclassified as an independent contractor, his employer did not provide worker’s compensation coverage for the employee.” According to the GAO.

While some progress has been made at the federal and state level to combat payroll fraud, much more needs to be done. More tools and more enforcement are needed to stop the intentional misclassification of workers.

That’s why I intend to introduce legislation to hold accountable employers and to give greater scrutiny [sic] to employees and their families.

With my colleagues Chairman Tom Harkin (D-Iowa), Chairman of the Health, Education, Labor and Pensions Committee, and Senator Sherrod Brown of Ohio, I’ll be introducing the Payroll Fraud Prevention act of 2013, which will protect workers from being misclassified as independent contractors thereby ensuring access to safeguards like fair labor standards, health and safety protections, and unemployment and worker’s compensation benefits. The act would also prohibit employers from using misclassification to avoid paying their fair share of taxes.

This is not a new problem, as I mentioned before. In 1984, the Internal Revenue Service found that 3.4 million employees were misclassified as independent contractors. At that time, this cost taxpayers $1.6 billion in income taxes, unemployment taxes, Social Security taxes, and Medicare taxes. That’s 19 years ago. That report 19 years ago found that 15% of employers had misclassified employees.

A new review is being undertaken. Unfortunately, we will not see the results of that new review for some time.

A 2009 Treasury Inspector General report on misclassification acknowledged the lack of comprehensive new information while saying that the lost revenue would be “markedly higher than the $1.6 billion”, of course referring then to the 1984 IRS report.

Why would an unemployed intentionally commit payroll fraud? I think that’s an important question to ask.

A June report, again by the Inspector General at Treasury, summarizes the reasons as follows: “The IRS estimates that employers misclassify millions of workers as independent contractors instead of employees. The misclassifications allow employers to avoid paying a significant amount of money in employment taxes, which adversely affects employees and tax administration. On average, an employer can save approximately $3,710 per worker per year in employment taxes on an average annual salary of $43,007 in income paid per employee when the employer misclassifies a worker as an independent contractor.” That’s all quoted from the Inspector General.

There’s a clear financial incentive for bad actors – not all; we’re talking about bad actors here. But there’s an incentive for those actors to defraud taxpayers. This has a clear impact on federal and state taxpayers and obviously on the so-called “tax gap”.

I’m also a member, as Sen. [Johnny] Isakson is, of the Finance Committee, but we will not spend much time on the tax issue today. I’ll note that my friend and former Health, Education, Labor, and Pensions committee member Senator Brown intends to introduce legislation dealing with the tax issue that I will support and co-sponsor.

And finally, an aspect of the financial incentive for fraud that we’ll discuss is the impact on the overwhelming number of businesses that play by the rules and do the right thing.

Put simply, law-abiding businesses are put at a disadvantage when they bid against an unscrupulous operation that is paying $3,710 less per employee per year in employment taxes.

So, I look forward to a productive process here at the hearing to target the bad actors who are hurting workers and hurting businesses.

I’d also like to add for the record – I’ll introduce for the record a report entitled “Campaign for Quality Construction”. It’s a report dated today, and this statement will be admitted as part of the record…

…As you read through even a summary of this legislation, I think it’s in a word, not just necessary or essential but really in a word reasonable. If you break it down into kind of sections or subject areas, part of this – and in some ways I almost can’t believe we don’t have an existing prohibition on misclassifying workers. But there’s obviously aspects to this where if an employer were to misclassify a worker, that would be a violation of the Fair Labor Standards Act. If there’s any kind of…intimidation but really any efforts to discharge someone or to discriminate against someone based upon their opposition to any practice concerning their own classification, that would be a violation of the law. I wish that were in place now. It doesn’t seem to make sense that’s not a violation presently.

So, there are penalties for this kind of activity and sanctions, civil penalties and others, and that’s obvious, and I know that gives some people real concern but I think it’s essential and again reasonable.

But a lot of this as well, if you look at the legislation, is about basic fundamental record-keeping. You ought to have to tell the employee and others basic information about classification. It’s not asking too much to say someone is either an employee or an independent contractor, and the employer should have to provide that information.

I believe that one measure of accountability is not just that kind of disclosure and that kind of information to an employee or worker, but also to those kinds of actions should be subject to audit. Certainly audit at the state level or otherwise.

So, I think when you go through this, whether it’s by way of disclosure or providing basic information, or whether it’s the prohibitions and sanctions, which I believe should be in the law already…but I think it’s reasonable and in light of the problem here. And again whether it’s from the employees and the workers’ perspective, whether it’s from the perspective of most of the folks doing this work – the companies, the businesses, the employers – from their vantage point, they’re in need of this kind of help because they’re doing the right thing and they’re being underbid because someone else is cheating and violating the law.

And then last but not least, obviously, are taxpayers. They’re being ripped off everyday of the week. They’re paying their taxes, and someone else isn’t and we’re all the worse for it, especially at a time when we have such fiscal challenges and tight budgets.

So, whether it’s the employee, the employer or the taxpayer, I think it’s important that we pass legislation like the Payroll Fraud Prevention Act…


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2 Comments on “Transcript: Remarks by Sen. Bob Casey on the use of independent contractors & payroll fraud – Nov. 12, 2013

  1. Pingback: Transcript: Q&A w/ Sen. Al Franken on the use of independent contractors & payroll fraud – Nov. 12, 2013 | What The Folly?!

  2. Pingback: Transcript: Remarks by Sen. Johnny Isakson on the use of independent contractors & payroll fraud – Nov. 12, 2013 | What The Folly?!

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