Labor Dept. Official Urges Passage of Bill to Curb Potential Worker Misclassification

This story appears in the June 28 print edition of Transport Topics.

Catching employers who misclassify their employees as independent contractors would help ensure a “level playing field in the marketplace,” a top official with the U.S. Department of Labor told a Senate committee.

“During this fragile economic recovery, workers are too often exploited and caused to lose out on the benefits they rightfully earned, while employers who do right by their employees are placed at a competitive disadvantage that they cannot afford,” Seth Harris, deputy secretary of Labor, told the Senate Committee on Health, Education, Labor and Pensions on June 17.

Harris testified at a committee hearing a bill that would amend the Fair Labor Standards Act of 1938 to require employers to keep records on non-employees who are paid to perform services, and provide civil penalties for employers who misclassify employees as non-employees.

The bill, introduced in April, has not yet been approved by the committee. A companion bill has been introduced in the House.

The use of independent owner-operators in the trucking industry is commonplace and enables motor carriers to save on equipment and capital costs and provides flexibility to meet fluctuations in demand for trucking services, according to American Trucking Associations. ATA estimated there are about 300,000 independent contractors working in the trucking industry.

The Coalition to Preserve Independent Contractor Status, a group of individuals, businesses and industry trade associations, including ATA, opposes the legislation.

In written testimony to the committee, the coalition said the bill’s provisions would increase the regulatory risks of doing business with independent contractors to an excessively high level.

“The bill does not take into account the unique business models that individual companies rely on to remain competitive, and would be particularly detrimental in these challenging economic times,” the coalition’s June 17 statement said. “The bill would unnecessarily add confusion and uncertainty to the long-standing administration of the Fair Labor Standards Act and thus undermine economic growth.”

Harris, speaking at the hearing, testified that unscrupulous employers can hurt employees by not paying them minimum wage or paying for overtime, and by not providing them such benefits as health insurance, workers’ compensation, or unemployment insurance.

Misclassified contractors also reduce revenue that otherwise would flow into federal and state coffers because employers avoid paying unemployment taxes, workers’ compensation premiums and payroll taxes, Harris said.

Sen. Tom Harkin (D-Iowa), the committee’s chairman and a co-sponsor of the Employee Misclassification Prevention Act, said an estimated 10.3 million workers in the United States are treated as independent contractors.

“That’s roughly 7.3% of the workforce,” Harkin said. “And a Department of Labor study found that as many as 30% of businesses misclassified employees as independent contractors.”

Harkin added, “That means the construction worker who falls and breaks his leg is denied workers’ compensation and the truck driver who works 60 hours a week doesn’t receive the overtime pay his family deserves to help cover the rising costs of food and energy.”

Republicans at the hearing said the legislation is unneeded, would create a paperwork burden for small business and was an attempt to “demonize” the independent contractor model.

“This bill is a symbol of what’s wrong with Washington today,” said Sen. Mike Enzi (R-Wyo.). “This is a complete waste of time and money for small business.”

During the hearing, Frank Bat-taglino, owner of Metro Test & Balance Inc., a Capitol Heights, Md., firm that offers sheet metal fabrication, installation and service, told the committee that his business has difficulty competing against air-conditioning firms that use independent contractors who have been misclassified.

“A company that regularly uses this practice can be at least 20(%) to 30% below our bids,” Battaglino said. “So an honest company gets beat out by a company scamming the system and plain hard-working people are just being taken advantage of. Vague, complex and subjective rules, legal loopholes and lax enforcement all contribute to the growth of this problem.”

Colleen Gardner, commissioner of the New York State Department of Labor, said a special task force on employee misclassification in her state resulted in 67 enforcement sweeps in a dozen cities, documenting nearly 35,000 instances of employee misclassification and more than $457 million in unreported wages.

In addition, Gardner said, the task force identified more than $13.2 million in unemployment insurance taxes due and more than $14 million in unpaid wages.

“However, we have only scratched the surface of the problem in New York,” Gardner told the committee. “There is much more work to be done.”

Gardner said that a Cornell University study estimated that each year, about 10.3% of New York’s private sector workforce either has been misclassified or is being paid off the books.

“This means that, because of misclassification, 10% of our workforce may not get the wage-and-hour protections to which they are entitled, including overtime pay and meal breaks,” Gardner said.