Testimony of Stephen Herzenberg, Executive Director, Keystone Research Center
House Labor & Industry Committee, 523 Irvis Office Building, June 11, 2024
DOWNLOAD THE TESTIMONY HERE (PDF)
Good morning. My name is Stephen Herzenberg, I am the executive director of Keystone Research Center (https://keystoneresearch.org/) and hold a PhD in economics from the Massachusetts Institute of Technology. Thank you for the opportunity to provide testimony to this informational meeting on worker misclassification.
My remarks today make two main points. First, worker misclassification is a widespread problem in today’s U.S. economy, not just in the construction industry. Second, a number of states and localities across the country have sought in the past decade to rein in worker misclassification and deploy innovative enforcement approaches. Both these points lead to straightforward conclusions. Pennsylvania should enact legislation that reduces worker misclassification throughout the economy. Pennsylvania should also seek to adopt best enforcement practices through a mix of legislative and administrative reforms.
The Broad Reach and High Costs of Worker Misclassification
A 2023 Economic Policy Institute (EPI) study identifies and cities research showing widespread misclassification of workers among construction workers and 10 other occupations: truck drivers, janitors and cleaners, home health aides, retail workers, housekeepers, landscapers, customer service reps/call center workers, security guards, delivery drivers, and manicurists and pedicurists.[1] EPI then uses a conservative methodology to estimate the cost to workers of being misclassified.[2] For each occupation, EPI provides a range of potential costs, with the high cost applying if misclassified workers receive no additional pay in lieu of their ineligibility for employee benefits, and also have to pay the employee share of Social Security and Medicare and paperwork costs associated with independent contractor status. The low cost assumes misclassified workers receive additional pay in lieu of benefits but still have to pay the employee share of Social Security and Medicare and paperwork costs.
Across the 11 occupations, the midpoint of the range of the cost to workers goes from a low of just over $5,500 for manicurists and pedicurists to a high of over $14,500 for truck drivers. As a percent of compensation for employees (i.e., workers in the same occupation who are not misclassified), the cost to workers (again at the midpoint of the EPI range) goes from 20% of compensations to 27.5%, the highest cost again incurred by truck drivers.
A study released last month on two types of gig workers, passenger drivers (e.g., Uber and Lyft drivers) and delivery workers, provides hard data on the poor pay of (misclassified) independent contractors.[3] The study sought to evaluate the consistency of driver pay with a promise made California Proposition 22 (a gig company-sponsored 2020 California ballot measure) that drivers would earn at least 120 percent of local minimum wages.[4] The new study analyzed data on 52,370 trips by 1,088 drivers who worked on six passenger and delivery platforms in five major metro areas (Boston, Chicago, Los Angeles, San Francisco, and Seattle). It found that in jurisdiction did drivers make the local minimum wage. In California, net pay for ride-share drivers, taking into account costs incurred by drivers, equaled $7.63 with tips, less than half the $16 per hour minimum wage. For delivery workers outside California, net pay equaled $8.36 per hour.
EPI also estimates the cost to social insurance programs of worker misclassification as independent contractors. Its low estimate suggests a decline in total per-worker revenue received by social insurance programs between $585 per year (security guards) and $1,781 per year (construction workers). Its high estimate puts the range of annual revenue losses between $1,101 (security guards) and $3,031 (truck drivers).
Pennsylvania’s own Joint Task Force on Misclassification of Employees estimated that Pennsylvania had 259,000 misclassified employees from 2020Q3 to 2021Q2 and that this cost the UC Trust Fund $91 million in contributions; and the General Fund $6.4 million to $124.5 million.[5] Estimated losses to misclassified employees who suffered injury or illness at work in 2021 without workers’ compensation insurance equaled $153 million.
Innovative Enforcement Practices
Across the country over the past decade, gig companies with deep pockets have deployed three main tactics to ensure they are not required to classify their drivers or other gig workers as employees: state pre-emption legislation to prohibit local governments from setting labor standards platform based companies; carve-outs, exemptions, and redefinition of platform-based workers as nonemployees; and weakening legal tests and definitions of employee status for all workers.[6] In a countertrend, several states have sought to strengthen laws designed to make it harder for companies with workers that work largely or exclusively for a single main company (or “client”) to claim those “dedicated” workers are independent contractors. One main approach has been to adopt a three-factor (or “ABC”) test for independent contractor status.
- The work is done without the direction and control of the employer.
- The work is performed outside the usual course of the employer’s business.
- The work is done by someone who has their own, independent business or trade doing that kind of work.
The EPI brief cited above highlights California and Massachusetts and also has a table that lists 17 states that have adopted an ABC test for purposes of unemployment compensation law (and two others that have done so for construction); and six that have adopted an ABC test for purposes of wage/hour or other regulations (with three additional having done so for construction). (Pennsylvania is not in either category.) The EPI brief then cites four states that have used an ABC test and/or other enforcement measures to reduce misclassification. New Jersey, for example, has empowered its state commissioner of labor to issue stop-work orders to work sites of employers found illegally misclassifying workers; created a state Office of Strategic Enforcement and Compliance responsible for interagency coordination of enforcement of wage payment, benefit, and tax laws; made misclassification of employees for the purpose of evading payment of insurance premiums a violation of state fraud prevention laws that is subject to fines starting at $5,000 for a first violation, $10,000 for a second violation, and $15,000 for each subsequent violation; and requiring creation of a statewide, publicly accessible database of certified payroll information for public works projects.
Other states with (Vermont, Nevada) and without (Colorado, Virginia) ABC tests have also increased penalties and many states have established multiagency task forces on worker misclassification.
States and localities have adopted four other intertwined trends in innovative enforcement, to reduce worker misclassification and other labor standards violations.
First, many localities and state Attorney General Offices have established their own enforcement offices. Pennsylvania’s Office of the Attorney General did that when Governor Shapiro was Attorney General, led by now Secretary of Labor & Industry, Nancy Walker. Philadelphia also established its own enforcement office. Allegheny County is in the process of setting up an enforcement office.
Second, learning in part from federal USDOL enforcement innovations, states have adopted more strategic, industry specific approaches, including pro-active targeting of some investigations (as opposed to simply responding to complaints) and using publicity to bring attention within an industry to sanctions imposed on violators.
Third, localities (e.g., San Francisco and Seattle) have funded worker centers and other community organizations embedded in neighborhoods from which exploited workers come. These can become the “eyes and ears” of state and local enforcement entities, substituting for labor unions in industries or industry segments with low union density.
Fourth, there has been a gradual effort, in conjunction with interagency misclassification task forces, to expand “data sharing” and formal data sharing “MOUs” (memoranda of understanding), both within states and localities and between federal agencies such as the Internal Revenue Service (IRS)) and states/localities.
A recent New York Times op ed both documents the spread of worker misclassification to more industries and shows how effective enforcement can help prevent it.[7]
To increase their effectiveness, these new approaches, including pro-active industry specific enforcement, interagency task forces, partnering with community organizations, and efforts to promote increased data sharing require funding and staff support.
Thanks to the Joint Task Force on Worker Misclassification, the good follow up work of this committee, and the reform efforts begun at the Department of Labor & Industry, Pennsylvania is well positioned to join the ranks of leading states when it comes to routing out worker misclassification and enforcing labor standards in general. Congratulations and keep it up!
[1] John Schmitt, Heidi Shierholz, Margaret Poydock, and Samantha Sanders, “The economic costs of worker
misclassification,” January 25, 2023; https://www.epi.org/publication/cost-of-misclassification/. Footnote 3 includes references to research documenting misclassification in the 11 occupations/occupational groups.
[2] For the details of the EPI methodology, see Heidi Shierholz, John Schmitt, and Margaret Poydock, “EPI comments on DOL’s proposed rulemaking on employee or independent contractor classification under the Fair Labor Standards Act: Public Comments,” December 13, 2022; https://www.epi.org/publication/epi-comments-on-dols-proposed-rulemaking-on-employee-or-independent-contractor-classification-under-the-fair-labor-standards-act/.
[3] Ken Jacobs, Michael Reich, Tynan Challenor, and Aida Farman, “Gig Passenger and Delivery Driver Pay in Five Metro Areas,” May 2024; https://laborcenter.berkeley.edu/wp-content/uploads/2024/05/Gig-Passenger-and-Delivery-Driver-Pay-in-Five-Metro-Areas.pdf.
[4] The California Supreme Court is considering the constitutionality of Proposition 22. Just yesterday in a related case, an 11-judge federal appeals court ruled in favor of California Assembly Bill 5 (AB5), the state law that precipitated the Proposition 22 ballot initiative. AB5 codified an ABC test for determining if workers in California are independent contractors and required ride-haul and delivery companies, in particular, to treat drivers as employees. See Levi Sumagaysay, “California gig worker law withstands challenge from Uber at federal appeals court,” June 10, 2024; https://calmatters.org/economy/2024/06/ab-5-california-uber/.
[5] See Joint Task Force on Worker Misclassification of Employees, “Act 85 of 2020: Joint Task Force on Worker Misclassification of Employees Final Report,” December 1, 2022; https://www.dli.pa.gov/Individuals/Labor-Management-Relations/llc/Documents/Act-85-Final-Report.pdf. Earlier studies in other states of the cost of worker misclassification in construction alone, when adjusted based on Pennsylvania construction employment compared to the states of the studies, put the cost of misclassification to the PA UC system at as much as $11 million; the cost to state income taxes as much as $47 million; and the cost in workers’ compensation premiums at as much as $83.4 million. See Stephen Herzenberg and Russell Ormiston, “Illegal Labor Practices in the Philadelphia Regional Construction Industry,” January 2019, Table 1; https://keystoneresearch.org/wp-content/uploads/KRC-Illegal-Labor-Con.-Final-01-08-1995-2.pdf.
[6] This paragraph is based on Jennifer Sherer and Margaret Poydock, “Flexible work without exploitation,” Economic Policy Institute, February 23, 2023; https://www.epi.org/publication/state-misclassification-of-workers/,
[7] Terri Gerstein, “More People Are Being Classified as Gig Workers. That’s Bad for Everyone,” The New York Times, Jan. 28, 2024; https://www.nytimes.com/2024/01/28/opinion/rights-workers-economy-gig.html.