Today, we will be bringing some light to an issue that, over the course of a couple of decades now, has seen a lot of talk but very little action. By some estimates, America’s underground economy is a big as $1 trillion, contributing to over $100 billion in lost revenue a year. At the heart of the issue is the fact that many companies are taking shortcuts, sidestepping lawful hiring practices to gain a competitive edge.
This is an issue that impacts both large and small businesses. Employers across the United States have found that tax laws and worker protections can be avoided if they treat workers as independent contractors. Some companies go to great lengths to avoid paying employment taxes and providing benefits to workers. Kellogg, Brown and Root Inc. (KBR) has avoided payroll taxes by hiring workers through shell companies in the Cayman Islands which has resulted in losses of hundreds of millions of dollars in payroll taxes. Tactics like this are inexcusable—and I recently introduced legislation to address this issue.
But as we will hear from our witnesses today, tax shelters in the Cayman Islands are not needed to cheat workers out of benefits. Right here in Massachusetts, workers are being harmed by employers who want to take the easy way out and not pay unemployment insurance, workers’ compensation, and social security taxes, and escape the cost of withholding income taxes.
Too many workers are being misclassified as independent contractors − an arrangement in which the employer is not responsible for withholding of income or paying employment taxes. Employers who erroneously misclassify their workers stand to save as much as 30 percent of their payroll costs. This puts law abiding employers at a disadvantage.
The misclassification of workers is not just a financial issue. It is a values issue. Employers that wrongly treat their employees as independent contractors do not have to provide them with many of the worker protections that are considered to be fundamental in this country. For more than a century, workers in this country have fought hard for the protections now often taken for granted in this country. Employers should not be permitted to take away these protections simply by filing a different tax form.
This morning, we will hear from Scott Morrisey. Scott’s company, Red Line Wall Systems, is constantly finding itself on the wrong end of a procurement decision because his company, which plays by the rules, can’t compete with the pricing bids submitted by competitors who are getting away with these unscrupulous hiring practices.
We were also going to hear testimony from Sara Stafford, sole owner of Stafford Construction Services − a small business with 65 employees. Unfortunately, an urgent family matter has prevented Ms. Stafford from being with us here today. However, she has submitted important testimony about how difficult it is to compete with companies that do not play by the rules.
In her testimony, Ms. Stafford tells how Stafford Construction Services recently bid on, and lost, a $500,000 contract funded by federal, state and local taxes. An investigation by the Attorney General’s office revealed that the winning company had employed undocumented workers as well as misclassified employees, and had failed to pay benefits to workers in cash as the company had reported in its paperwork. As a result, her competitor was able to bid 15 percent less on the contract.
We’ve also got two incredible advocates for workers in the state of Massachusetts here with us today to give us an idea of how workers are impacted. I want to welcome my friends Frank Callahan and Mark Erlich, who are two of the best friends workers ever had in this state. Thanks to you both for making the time to be here.
Finally, we’ll hear about what actions Massachusetts is taking to end this abusive practice. Governor Patrick and Attorney General Coakley have done a terrific job on this issue, establishing a task force to look more closely at what can be done from a policy stand point and stepping up enforcement efforts for the laws that are already on the books.
I want to thank my good friend and my partner John Tierney, who has joined us today. John, along with Richie Neal, has been working hard to address this issue on his side of the Capitol, and they’ve introduced a good bill, the Taxpayer Responsibility, Accountability, and Consistency Act, that I’m taking a close look at. Thanks for joining us, Congressman.
I look forward to hearing the testimony of each of our witnesses, and to hearing suggestions on how the federal government can match the effort being made here in the Commonwealth.
Before I turn it over to Congressman Tierney for a few words on the subject, I would like to thank Bunker Hill Community College for allowing us the use of this facility. And I would like to thank all those in the audience for their presence.