<br>Chairmen McDermott and Neal Opening Statements on Misclassification of Workers</br><i>Misclassification denies workers critical, basic benefits</i>

May 8, 2007
Press Release

WASHINGTON, D.C. – The House Committee on Ways and Means Subcommittees Income Security and Family Support and Select Revenue Measures held a joint hearing today on the effects of misclassifying workers as independent contractors. Subcommittee Chairmen Jim McDermott (D-WA) and Richard Neal (D-MA) issued the following opening statements:

For more information on this hearing and background on misclassification of workers, please click here: here

Statement of Chairman Jim McDermott
Income Security/Select Revenue Measures Subcommittees Hearing on Worker Misclassification
Tuesday, May 8, 2007

“I am pleased to join Chairman Neal in convening this joint hearing of the Subcommittee on Income Security and Family Support and the Subcommittee on Select Revenue Measures. We are here today to examine the effects of workers being misclassified as independent contractors.

“For workers in America, one word can make all the difference in their well-being. That word is “employee.”

“Without such a designation, a worker is excluded from most of the basic benefits and protections provided in the workplace. Millions of workers now find themselves in that precarious position.

“When a worker is classified as an independent contractor, instead of an employee, he or she might be subject to huge back taxes because their employer did not withhold income taxes.

“They may be denied Social Security and Medicare when they retire because taxes were not paid on their behalf.

“If they are injured on the job, they may not have access to workers compensation.

“And of great concern to my subcommittee, they may be denied unemployment insurance if they are laid-off. In fact, a study commissioned by the Department of Labor in 2000 estimated that 80,000 workers are improperly denied unemployment benefits every year because they are misclassified as independent contractors.

“There are certainly times when the term independent contractor is justifiably applied, such as when an individual is in business for himself. But there are other occasions when a worker is under the control of an employer and should be designated an employee.

“Misclassification may occur because of definitional uncertainties, but it likely happens at least as frequently because some employers are looking for an easy way to cut costs. Misclassifying a worker as an independent contractor lets a business off the hook for various payroll taxes and employee benefits.

“When unscrupulous employers commit this type of fraud, it hurts more than workers. Responsible businesses who play by the rules are placed at an unfair competitive disadvantage.

“Just envision two construction companies bidding on the same contract, and then consider what would happen if one of them paid taxes and provided benefits for its workers, while the other did not.

“As a tax avoidance scheme, misclassification also robs both the States and the federal government of revenue. Prior estimates from the Internal Revenue Service (IRS) indicate billions of dollars of taxes go unpaid every year because of misclassification.

“The misclassification of workers is not a new problem. However, the pressures of globalization and the rising cost of health and other benefits as a portion of total payroll costs suggest it will become a growing concern. Indeed, some of the recent State-level studies find an increasing amount of misclassification over the last few years.

“For all of these reasons, I hope we will consider sensible solutions to prevent workers from being wrongly classified as independent contractors.

“I now yield to the Chairman of Subcommittee on Select Revenue Measures, Mr. Neal.”

Statement of Chairman Richard Neal
Income Security/Select Revenue Measures Subcommittees hearing
On Worker Misclassification
Tuesday, May 8, 2007

“Thank you, Chairman McDermott. Author and publisher Elbert Hubbard wrote that, “We work to become, not to acquire.” For many of us that is true -- our work is much more than a paycheck. From it, we derive satisfaction and a sense of responsibility.

“I remember very well one of my first jobs, when I was just 17 years old. I worked in the hardware department of Two Guys department store in Springfield, Massachusetts. Two Guys was a great place to work. Not only was it a discount store, but it also had a bowling area in the back where kids loved to hang out.

“Despite the fun of working there, I recognized that my job was a tremendous opportunity and responsibility. And I think most workers treat such opportunities the same – eager to get to their tasks and perform well.

“But as we will hear today, some fall victim to misclassification. Some are so eager to work, they simply do not hear that they are not employees. Some are disadvantaged or may have language barriers, and do not understand the implications. Many do not understand the law in this area.

“Even Treasury and the GAO have acknowledged that the law is confusing and conflicting.

“And, according to the testimony we will hear today, some have stepped into this gray area to take advantage of that uncertainty.

“It also seems clear, though, that we must do something to reverse the trend. The GAO estimated that misclassification results in federal income tax losses of $4.7 billion in one year. Other experts have found that my home state of Massachusetts loses hundreds of millions in tax revenue each year from this problem.

“Legitimate businesses that play by the rules are also hurt here. We are fortunate to have with us today one of my constituents from Springfield, Mr. John Kendzierski, a drywall contractor for almost three decades.

“John will tell us he is at a disadvantage when competing against contractors who treat all of their workers as independent contractors. Thank you for sharing your story with us today, John.

“I look forward to all of the testimony today. In addition to suggestions about refining the law, we will also hear recommendations that additional reporting and perhaps additional withholding may help address some of the tax gap and non-compliance issues surrounding independent contractors.

“It is my hope that the testimony today will help us find some reasonable solutions to deal with this problem.”