Testimony of Stephen Herzenberg, Executive Director, Keystone Research Center
House Labor & Industry Committee, 523 Irvis Office Building, June 11, 2024
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 our economy. Secondly, several states and localities have sought to reign in worker misclassification and deploy innovative enforcement methods. The conclusion one should draw is that Pennsylvania should enact similar legislation. Pennsylvania should also seek to adopt best enforcement practices through legislative and administrative reforms.
The Broad Reach and High Costs of Worker Misclassification
In 2023, EPI identified significant misclassification of workers in construction, and 10 other occupations. (LINK to article)
- Truck Drivers / Delivery Drivers
- Home Health Aides
- Retail Workers
- Housekeepers
- Landscapers
- Customer service reps
- Security guards
- Manicurists/Pedicurists
EPI then uses a conservative methodology (LINK) to determine the cost to the employees in each occupation. High cost if the worker receives no additional benefits from the misclassification, and low costs if they receive additional pay instead of benefits, even if they still must pay their share of social security and Medicare costs. Across the 11 occupations, the range of cost goes from $5,500 for mani/pedicurists to over $14,500 for truckers. That’s a range of 20%-27.5% of total compensation.
A study released recently by the UC Berkley Labor Center on rideshare and delivery drivers (LINK to article) sought to evaluate the consistency of driver pay with a promise made by California Prop 22, a gig-company sponsored 2020 Cali ballot measure. Prop 22 would see all drivers make 120% of the minimum wage. The study, based on 52,370 trips around 5 major metro areas, found that in California drivers’ net pay was $7.63/hour and outside of California net pay was $8.36/hour.
EPI also estimated the cost to social insurance programs of workers misclassified as independent contractors. The low-end estimate predicts a $585-$1,781/year decline in revenue for social insurance programs. The high-end estimate would be a $1,101-$3,031/year decline.
Pennsylvania’s own Joint Task Force on Misclassification of employees estimates 259,000 misclassified employees in PA from 2020Q3 to 2021Q2. This would have cost the UC Trust Fund $91M in contributions, and the General Fund up to $124.5M. The estimated losses to misclassified employees who were without workers’ compensation insurance in 2021 equaled $153M (LINK).
Innovative Enforcement Practices
Over the past decade, gig companies nationwide have deployed three main tactics to ensure they don’t have to gig workers as “employees.”
- State pre-emption legislation to keep local gov’ts from setting labor standards.
- Carve-outs, exemptions, and redefinition of platform-based workers as non-employees.
- Weakening legal tests and definitions of employee status for all workers
In response, several states have pushed legislation making it harder for gig companies to classify workers as “contractors” if they work mostly or exclusively for the gig company. One main approach is a three-factor “ABC” test.
- 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 piece cited above highlights CA and MA and includes a table that lists 17 states that have adopted the ABC test for unemployment compensation law (Two others have done so for construction) Six have adopted the ABC test for wage/hour or other regulations (three additional states have also done so for construction).
Four states have also adopted the ABC test to reduce misclassification. New Jersey, for example, has allowed its State Commission on Labor to issue stop-work orders for work-sites found 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 to evade payment of insurance premiums illegal under state fraud prevention laws, subject to fines of $5,000 for first violation, $10,000 for second violation, and $15,000 for every subsequent violation; and requiring creation of a statewide, publicly accessible database of payroll info for public works projects. Many other states have also increased penalties or created multiagency task forces on worker misclassification.
There are four other innovative, intertwined trends in enforcement of labor standards.
- Many localities and State Attorneys General have established their own enforcement offices. Pennsylvania and Philadelphia have their own offices, and Allegheny County is in the process of creating theirs.
- States have adopted more strategic, industry specific approaches, including proactive targeting of some investigations and using publicity to bring attention to sanctions imposed on violators.
- Localities like San Francisco and Seattle have funded community organizations embedded in neighborhoods to be the “eyes and ears” of state and local enforcement entities.
- Expanding “data sharing” and formal Memoranda of Understanding (MOU’s) within states and localities, as well as between federal agencies.
A recent New York Times op-ed documents the proliferation of worker misclassification and shows effective enforcement can help prevent it.
To increase their effectiveness, including pro-active industry specific enforcement, interagency task forces, and partnering with community orgs, and efforts to promote data sharing require more funding and task support.
Thanks to the Joint Task Force on Worker Misclassification, the work of this committee, and the reform efforts begun at the DLI, PA is well positioned to begin routing our worker misclassification and better enforcing labor standards.
Congrats and keep it up!