Transcript: Testimony by Cathy Ruckelshaus on the use of independent contractors & payroll fraud – Nov. 12, 2013

Partial transcript of the verbal testimony given by Cathy Ruckelshaus, General Counsel at the National Employment Law Project (NELP), 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:

Thank you, Chairman Casey, Ranking Member Isakson, and members of the subcommittee. I appreciate the opportunity to testify today on the important subject of payroll fraud.

I’m Cathy Ruckelshaus, and I’m general counsel at the National Employment Law Project – NELP. We’re a non-profit that promotes good jobs and access and opportunities for work.

It’s been a little over three years since I appeared before the HELP committee to talk about independent contractor misclassification.

And I’m disheartened to say that the problems have exacerbated despite some state activity to combat the problems, and the problems call for federal leadership and activity.

At NELP and in my practice, we see low-wage workers in our economy’s growth sectors being forced to sign contracts saying they’re an independent contractor as a condition of getting a job.

We also see employers changing the status of their workers from employee into independent contractor without any change in the underlying relationships at work.

We also see employers call their workers “franchisees” of one in janitorial industry, and we see workers being paid off-the-books.

All of these practices, unfortunately, have been on the rise, especially in periods of high unemployment when workers are willing to take a job under almost any circumstance.

These janitors, home care workers, construction workers, cable installers, even restaurant servers are not running their own business by any definition. They want to work and they too often accept whatever arrangement gets them a job.

And these same occupations with high payroll fraud suffer from high violations of other workplace laws. So it means these jobs are not paying well, and they suffer high rates of health and safety violations among other things.

As Sen. Casey mentioned, this hurts not only the workers but it also hurts law-abiding employers, and it hurts our government’s coffers and I’ll talk about that in a little bit.

Today, I’m just going to briefly describe payroll fraud and its impacts – it’s the impact on federal and state government coffers and on law-abiding employers – and then I’ll talk a little bit in the end about why I think the Payroll Fraud Protection Act is an important first step to combat this problem.

As Sen. Isakson mentioned, every day employers legitimately contract with other independent businesses typically to perform jobs that the contractor performs for a variety of customers. These routine practices are not the subject of payroll fraud reforms.

Genuine independent contractors constitute a small proportion of the American workforce because by definition, an independent contractor is a business for him or herself.

What’s happening today is that companies have become increasingly emboldened in the ways they seek to skirt basic labor standards, insurance, and tax laws that apply to employers. We’ve heard about some of the practices today.

The problem of workers being required to sign boilerplate contracts attesting to their independent contractor’s status is especially galling even when the functional relationships do not reflect true independence.

These practices are called payroll fraud because they are intentional and they’re aimed at evading the law.

Legitimate business to business transactions are not payroll fraud because true independent contractors bring a specialized skill, they typically invest a capital in their business against which they can earn a profit, and they can pass on increased costs to their customers as any business does, like higher gas prices or an increase in the cost of safety equipment.

So, companies orchestrate these relationships to avoid labor and employment protections and because they can underbid competitors as we’ve heard.

So, how prevalent is this? In my testimony, I detail that it’s quite prevalent.

The 2000 U.S. Department of Labor study that is being updated found that up to 30% of employers misclassify their workers. State studies have shown percentages as high as 47% of employers. It rises during periods of high unemployment.

The costs to the state and federal government are literally in the billions of dollars. They’re staggering and it’s typically unemployment insurance, worker’s comp, income tax, and payroll taxes.

There has been state activity across a wide variety of states. Delaware, Maryland, Minnesota, Nebraska, New Mexico, New York, Pennsylvania, and Wisconsin – have construction-specific laws. Over 20 states have established task forces to study the problem.

And the last – the interesting thing is that these state task forces and the U.S. Department of Labor report that most of the complaints that come into them come from competitors, not from workers but from competitors like Mr. Odom’s business.

So, we need federal leadership and reform. The Department of Labor’s task force has established some important steps. The Payroll Fraud Prevention Act that Sen. Casey mentioned would provide important transparency for workers and employers about the status of workers and would enable workers to question that status if they think it’s incorrect.

In addition, there is a Fair Playing Field Act that was introduced by Sen. Kerry that would fix the tax code. I realize that’s not the topic of this panel, but that would have a huge impact on narrowing the safe harbor that’s currently enabling hundreds of thousands of businesses to take advantage of misclassifying their workers and then never having to repair or correct the mistake. This is causing, again, billions of dollars of unpaid revenues for the government.

I appreciate the opportunity to testify today. I’m happy to answer your questions in the intervening period. Thank you.


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One Comment on “Transcript: Testimony by Cathy Ruckelshaus on the use of independent contractors & payroll fraud – Nov. 12, 2013

  1. Pingback: Transcript: Testimony by Matt Anderson on the use of independent contractors & payroll fraud – Nov. 12, 2013 | What The Folly?!

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