Workers on the Edge
April 7, 2014
By David Bensman
The American Prospect (April 7, 2014)
Payroll fraud and the shift to contingent employment are robbing workers of wages, benefits, and job security—and stealing revenues owed to government.
One of the most significant contributing causes of the widening inequality and insecurity in the American workforce is the accelerating shift to what economists call contingent employment. That means any form of employment that is not a standard payroll job with a regular paycheck. It can take the form of temps, contract workers, part time jobs, or jobs with irregular hours. A study by the GAO found that fully one-third of the U.S. workforce, or 42.6 million workers, was contingent, meaning in a work arrangement that is “not long-term, year-round, full-time employment with a single employer. “
It is a common myth that the shift to precarious, irregular employment reflects either the structure of the new, digital economy or the preferences of workers themselves. But in reality, most contingent work is the result of efforts by employers to undermine wages, job protections and worker bargaining power. Work that could be (and once was) standard payroll employment is turned into substandard jobs, because corporations prefer it that way. And much of this shift is illegal, even though the laws are weakly enforced.
A leading scholar of this phenomenon, Professor Arne Kalleberg of the University of North Carolina, says that the rise of contingent work has led to “Pervasive job insecurity, the growth of dual-earner families, and 24/7 work schedules for many workers….These changes in work have, in turn, magnified social problems such as poverty, work-family conflicts, political polarization, and disparities by race, ethnicity, and gender.”
At heart of contingent work is the misclassification of regular workers as independent contractors, a practices that deprives workers of income, benefits such as workers compensation, and rights to form bargaining units—and deprives government of tax revenues. While some contractors are truly independent high-paid professionals, working in Silicon Valley, Hollywood, and the New York financial industry while enjoying the flexibility of their various relationships with the companies that give them assignments, many more are low-paid workers who are misclassified. A Fiscal Policy Institute study of the New York state workforce in 2005 found that 10.6 percent of the private sector workforce was misclassified. Similarly, a study done for the U.S. Department of Labor in 2000 reported that as many as thirty percent of employers misclassified some of their employees.
Some of the employers who misclassify their employees as contractors do so in error, which is perhaps not surprising, given the vagueness of the statutes defining employment and the complexity of the case law. However, in Senate testimony in 2010, Deputy Secretary of Labor Seth Harris charged that “much worker misclassification is intentional.” Employers do this, he continued, in order to reduce labor costs (by about 30 percent), in part by not making required contributions to unemployment insurance and worker compensation funds. By doing so, lawbreakers gain an unfair competitive advantage over honest employers. Harris concluded:
Misclassification as independent contractors also increases the opportunities for tax evasion, and some take advantage of those opportunities, with a resulting loss of Federal and state revenue. Too many workers are being deprived of overtime premiums and minimum wages, forced to pay taxes their employers are legally obligated to pay and are left with no recourse if they are injured or discriminated against in the workplace. Misclassification is no mere technical violation. It is a serious threat to workers and the fair application of the laws Congress has enacted to assure workers have good, safe jobs.
Port trucking is rife with misclassification. Ironically, passage of the deregulation law that opened the way for independent contracting in the trucking industry, the Federal Motor Carrier Act of 1980, was hailed by liberals and the business community alike as a triumph of policy reform. Senator Edward Kennedy and Ralph Nader led the reformers who charged that trucking regulation produced high rates for consumers and monopoly profits for businesses. Large shippers lobbied Congress for an end to the rate setting and route planning which limited competition and drove up the cost of freight transport. Civil rights organizations argued that deregulation would lower the barriers that impeded African-Americans from gaining decent trucking jobs. Despite these high hopes, deregulation wrecked the drayage industry.
Before 1980, trucking companies had to get a license from the Interstate Commerce Commission to haul freight to and from the ports. The ICC limited the number of trucks to assure stability; the resulting rate structure was sufficient for companies to make stable profits while providing workers with decent incomes with benefits. The International Brotherhood of Teamsters organized and bargained for most of the port truckers, who received wage and benefit packages comparable to those of autoworkers, steelworkers, and over-the-road truckers.
Deregulation changed this. New companies entered the industry, hiring their drivers non-union. Established companies faltered; some went non-union, others out of business. The surviving firms adopted a new business model. They sold all or most of their trucks to the drivers, then contracted with them on a per-haul basis. The emerging model meant trucking companies had few fixed costs, had no responsibility for workers’ compensation or unemployment insurance fund contributions, paid no social security taxes, and were able to obtain drivers’ services without paying for health care costs or pension plans.
Thirty-four years after deregulation, ten surveys of drivers at seven ports reveal that 82 percent of workers in the industry which hauls containers from ports to warehouses are misclassified as independent contractors. According to National Employment Law Project’s report, “The Big Rig,”
Industry analysts identify independent contracting as the industry’s dominant business model which sets standards for all port drivers. Few other industries rely on anywhere near this proportion of independent contractors. Through independent contracting agreements, leases, and other employment arrangements, trucking companies make drivers responsible for all truck-related expenses including purchase, fuel, taxes, insurance, maintenance, and repair costs. Port truck drivers work long hours for poverty-level wages. Among surveyed drivers, the average work week was 59 hours.
Furthermore, my own survey of truckers at the ports of New York and New Jersey revealed that drivers were able to work for only one trucking company and were prohibited from making deliveries for other firms. In many cases, the drivers were assisted in leasing their trucks by the trucking companies, which then kept the leases in their own possession. The trucking companies obtained insurance for the drivers and billed them for it on their weekly pay checks, but in many cases, firm owners did not actually enroll the drivers in an insurance program until after they had an accident. In everything but name, these workers were regular employees, and should have been classified and paid as such.
In California, the courts have found five port trucking companies guilty of misclassification. In 2008, Attorney General Jerry Brown filed a lawsuit against Pacifica Truck, a port trucking company at the ports of Los Angeles and Long Beach, charging the firm with “unlawfully classifying its workers as 'independent contractors,' circumventing state employment taxes and ignoring labor laws that guarantee workers’ compensation and disability benefits.” In February 2010, Governor Brown announced, at a news conference celebrating the suit’s vindication in Federal court, that
We’re sending a clear message that if you cheat your workers, we’re coming after you. Pacifica Trucks claimed that its workers were independent contractors in order to avoid paying the Social Security, Medicare and workers’ compensation benefits to which they are entitled under state law. This judgment validates our continuing effort to ensure that all employees are protected.
The latest victory over misclassification in port trucking came on March 20, 2014, when the Teamsters union settled with a Los Angeles trucking company that had fired drivers working as independent contractors when they complained of low earnings and wage theft. Under the settlement, which was brokered by the regional office of the National Labor Relations Board, the company agreed to post signs in the workplace informing drivers that they have a right to form a union. This is significant because if the drivers were actually independent contractors, they would be barred from organizing a union.
Another industry where misclassification is a critical issue is package delivery where United Parcel Service treats its workers as employees, while its competitor, FedEx Ground, treats its 27,000 delivery drivers as independent contractors. Numerous lawsuits in various jurisdictions have found Fed Ex guilty, while others have exonerated the company. One result is that Fed Ex keeps changing its rules for deploying parcel delivery drivers to make them appear to conform to state regulations and laws. Despite these changes, the most recent court ruling in this series of cases, issued in Massachusetts in July, 2013 upheld the suit’s contention that
(n)otwithstanding their vital work and the fact that FedEx trained and supervised the deliverers and wrote the policies they had to follow, the company deemed them independent contractors and required them to purchase or lease their trucks as well as buy their own gasoline and uniform.”
The court issued a summary judgment that Fed Ex was guilty of misclassifying its delivery drivers as independent contractors.
The Construction Industry
Misclassification is most common in the construction industry. According to the Fiscal Policy Institute study, 14.8 percent of construction workers in New York were misclassified as independent contractors in the years 2002-5. In 2009, Patricia Smith, then New York State’s Commissioner of Labor, and now the federal Labor Department’s Solicitor of Labor, reported that
One of the most common violations we see, particularly on upstate construction sweeps, are multi-layered “subcontracting” in trades such as drywalling, roofing, masonry and painting. The prime contractor on a project will subcontract work to a company that is registered for UI and Workers’ Compensation. That company supervises and controls all of the work in a particular trade. However, the subcontractor will then hire crews of workers either on a permanent or a temporary basis and designate the foreman of the crew as a second-tier subcontractor. The subcontractors on these cases and the crews they hire are often from out-of-state which makes the process of recovering underpayments more difficult. The workers on these crews are rarely on the books for tax or benefit purposes. They are also subject to labor standards violations, such as unpaid wages, overtime violations, and deductions for items like food and hotel rooms.
A 2004 study of construction in Massachusetts, issued by Harvard’s Construction Policy Research Center, produced strikingly similar results as the New York investigation—both found about one in seven construction workers misclassified - but it added a historical dimension, namely that “(t)he prevalence of misclassification has increased over the years since 1995 and so has the severity of impact.” Furthermore, a federal Labor Department study, conducted in 2000, found that from 1984-2000, the percentage of misclassified construction workers had increased from 15 percent to 30 percent.
A recent article by Jim Efstathiou in Bloomberg News quoted George Perry, a 57 year-old construction worker in Dayton, Ohio, who accepted misclassification as an independent contractor while building a homeless shelter because “I felt my back was up against the wall. I have a family. My fiancée was in school. I’m the only bread winner.”
Cathy Ruckelshaus, of the National Employment Law Project, told a U.S. Senate Committee last November that misclassification occurs frequently in day labor, janitorial and building services, home health care, agriculture, poultry and meat processing, home-based work and the public sectors. The list of industries is probably even longer. When David Socolow, then New Jersey’s Commissioner of Labor and Workforce Development, testified on misclassification before the U.S. House of Representatives in 2007, he reported that there was a “significant pattern of violation in food processing plants, courier services, dental assistants, waitresses, nail salons, nurses, secretaries and landscaping.” .
Impacts on Workers
To be a misclassified independent contractor is to live in “precarity,” which means, Arne Kalleberg said in his presidential address to the American Sociological Association, “a life that is uncertain, unpredictable, and risky from the point of view of the worker.” In line with Kalleberg’s definition, misclassified workers earn low incomes and they experience economic insecurity. In addition, they are vulnerable to on-the-job injuries and employment-related health impacts. The International Labor Organization characterizes precarious workers as part of a “growing number of workers whose employment relationship is unclear and who are consequently outside the scope of the protection normally associated with the employment relationship.” The ILO also points to the fact that contingent workers tend to get far less training than regular workers, denying them opportunities for advancement and exposing them to greater risks of accidents.
Take the case of port truckers. According to a survey I did with a colleague, Yael Bromberg, in 2008, the median wage of misclassified independent contractors at the ports of New York and New Jersey was $28,000 per year, without health insurance or pension benefits. That amounts to a shade less than $10 per hour. If the median independent contractor’s household of three people tried to live on the driver’s income, the family would be living below what The Poverty Research Institute of Legal Services of New Jersey defines as the “true poverty threshold” for New Jersey, $32,484. Nearly three-quarters of the independent contractors’ families were without health insurance. One quarter of their families received no medical care at all because they could not afford it.
Many drivers (35 percent) reported that they are forced to drive with unsafe chassis, exposing their trucks and themselves to on-road accidents. Injured drivers are not entitled to workers’ compensation benefits, because as independent contractors they do not quality. Moreover, drivers reported receiving no compensation from their companies when they were injured. Drivers reported that they suffered from high levels of stress, high blood pressure and asthma, as well as work-related chronic health conditions and injuries. Many could afford to lease only old trucks that released high levels of pollutants into the truck cabs and the surrounding environment. The most dangerous element of diesel engine emissions is the fine particle measuring 2.5 microns or less in diameter. These fine particles are coated with over 40 dangerous substances, and when passed into the bloodstream through the lungs, cause asthma, lung cancer, and heart disease. Health studies indicate that the
truckers’ heart and lung conditions result in elevated mortality rates.
The Fiscal Policy Institute’s 2007 examination of the construction industry in New York City found that misclassified workers “are paid very low wages, are denied the protections of universal social insurance programs (workers’ compensation, unemployment insurance, disability), do not have health coverage or retirement benefits, are not able to join a union, and rarely are they entitled to paid sick leave, holidays or vacations. Working in the underground construction economy is like working in the 19th century when it comes to labor rights, protections and employment standards.” The study also found that misclassified building tradesmen working for small, non-union companies that provided little safety training suffered from very high rates of work-related fatalities.
Lost Government Revenues
In addition to harming millions of workers, misclassification also starves government treasuries of revenue in “unpaid and uncollectible income taxes, payroll taxes, and unemployment insurance and workers’ compensation premiums,“ according to Cathy Ruckelshaus of NELP. One study she cites, by the Government Accountability Office, estimated that the Federal Treasury lost $2.72 billion in 2006 alone. Studies on revenue loss by the states of Massachusetts, New York, and California revealed that each of these states suffered significant drains on their income tax receipts as well their unemployment insurance and workers’ compensation funds. For example, the New York State Joint Enforcement Task Force in 2012 “discovered over $282.5 million in unreported wages; and assessed over $9.7 million in unemployment insurance taxes,” Ruckelshaus testified.
Over the past fifteen years, state and federal agencies have tried to improve employment law enforcement, partly in response to unions which have mounted political and legal campaigns to enhance enforcement so as to raise work standards and enable misclassified workers to join unions. In Massachusetts, Mark Erlich, of United Brotherhood of Carpenters Local 40, played a key role in spurring legislative action. In California, it was the Teamsters Union, backed by Change to Win and a coalition of community, faith-based and environmental groups, that prodded Jerry Brown to investigate misclassification and to file charges against cheating employers.
In other states, enforcement efforts have been responses not to substandard work conditions but to government revenue shortfalls. State reforms fall into three categories. First, several states, most recently New York in January 2014, have passed laws that create the presumption that a worker is an employee rather than an independent contractor unless the employer can overcome that presumption by demonstrating that the worker is truly independent . Second, there are laws confined to the construction industry that codify uniform standards for employment. Third, there are laws creating a state commission or task force to coordinate enforcement by several agencies. The New York Joint Task Force, cited earlier, is a prominent example.
In addition to these legislative efforts, the Office of the Attorney General in California has been prominent in bringing lawsuits against companies that misclassify. Under Jerry Brown, the Office won five cases against port trucking companies. After Brown was elected Governor in 2010, California’s legislature enacted a statute designed to root out misclassification. Passage of this legislation stimulated a flurry of lawsuits claiming back wages and other remedies. More than 400 drivers have filed complaints with the California Division of Labor Standards and Enforcement. Of these, 19 have been resolved, resulting in payments averaging more than $66,000 per driver.
Prior to 2009, the Federal Department of Labor did not target cases of misclassification per se. Instead, the Department, pleading limited resources, attempted to identify workers who were denied their due wages. Nowhere in the Department’s records was the term “misclassification” used, and specific industries that misclassified were not categorized as such. At a Joint Hearing on The Misclassification of Workers as Independent Contractors, before two House of Representatives subcommittees, in 2007. Labor Department officials were grilled about the meager results of their enforcement efforts. Several Representatives demanded that the Department prioritize misclassification and coordinate enforcement activities with the IRS and other agencies.
In 2009, enforcement became a priority of the Vice President’s Department of Labor Misclassification Initiative, a program of his Task Force on the Middle Class. Under President Obama’s first Secretary of Labor, Hilda Solis, the Department signed a Memorandum of Understanding with the IRS. The agencies agreed to “work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.” The next step was for the Department’s agencies to sign Memoranda of Understanding with state Labor Commissioners. Fifteen states have signed such agreements.
At first, enforcement lagged for lack of resources. From 2011 to 2013, the DOL reported “the collection of 97 percent of back wages or over $18 million for almost 20 thousand misclassified employees.” However, the long-delayed Senate confirmation of Thomas Perez to be Secretary of Labor in the summer of 2013 suggested to most observers that the Department’s enforcement would intensify. This belief was based on Perez’ record as Secretary of Labor of Maryland, where he aggressively pursued employers who misclassified.
The business community opposed Perez, and its resistance caused Senate Republicans to hold up his confirmation for two years. After he was finally confirmed in July, 2013, Perez declared that misclassification constitutes workplace fraud, and he vowed to make combating the practice a priority. Two months later, when President Obama nominated David Weil, a pioneer in strategic labor law enforcement, to be administrator of the Department of Labor’s Wage and Hour Division, a post that had been vacant since Obama assumed the Presidency, Republicans once again mounted opposition. Weil, a Professor at Boston University and co-director of The Transparency Policy Project at Harvard University’s John F. Kennedy School of Government, has advised the Wage and Labor Division for years, and was a prime mover of Massachusetts’ campaign to enforce labor laws in the construction industry. He defended himself at his Senate confirmation hearings by asserting his commitment to creating a
level playing field for honest employers. Apparently, this did not impress business spokesmen who charged that Weil was biased against employers. A Wall Street Journal columnist characterized him as a “union lackey [who] dislikes certain industries, including retailers, homebuilders, janitorial services and fast-food outlets.” Republican Senators continue to block Weil’s confirmation.
Recently, the campaign against misclassification has renamed its target “payroll fraud.” When Senator Robert Casey ( D Pa.) introduced a bill on misclassification last November, he titled it “The Payroll Fraud Prevention Act.” The Senate has not taken up the bill, and it won’t any time soon.
Misclassification is not solely an American phenomenon. The International Labor Organization, a tri-partite body, has recognized it as a global problem, and has recommended that new regulations and enforcement regimes be established. Its efforts have been thwarted by business opposition.
The bottom line is that the standard employment relationship is being undermined. Throughout the world, labor laws and regulations have become outdated and inadequate. Workers find themselves in an ill-defined borderland, a grey zone, where confusion reigns, standards are shifting, decreasing or disappearing, and abuse is rampant. While the increasing flexibility of work is creating new opportunities for innovation and entrepreneurship, the result for most workers is a retreat to conditions prevailing before regulation began, a jungle of insecurity and exploitation. Meanwhile, efforts to redefine the employment relationship and to establish labor standards consistent with technological developments and emerging norms and values are in their infancy.
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