We are opposed to this, for the following reasons:

In all the history of hotel and other service businesses, there has never been devised a way by which the employee would make an accurate statement regarding his or her tip income. We frankly regard the whole practice of tips as a bad one. It is an irritation to many of our guests, and it is a source of friction between management and employees. All attempts, however, to eliminate tips have failed. They have failed in hotels, in restaurants, on railway dining cars, and elsewhere, because the guest who wanted special service of some kind, would not be guided by the request of management that tips be banned. So, we have somehow to live with this practice, whether we like it or not.

Service employees in a hotel, or other service establishment, who receive tips, receive a somewhat lesser cash wage. Even so, many tip employees in hotels decline to accept an executive position, because a generous public does make service jobs highly lucrative. Many waitresses in our dining rooms, for instance, would not trade places with the cashier or the hostess.

But when it comes to an accurate declaration of income from tips that is another thing. The employee continues to regard this as a personal matter in which the employer has no responsibility. It is not uncommon for an employee to give one estimate of his tip income for income-tax purposes, and another estimate of tip income when filing a claim for unemployment or workmen's compensation benefits. The Bureau of Internal Revenue has worked diligently, always with our cooperation as an industry, in seeking to ascertain a relatively accurate measurement of this income for income-tax purposes. But the Bureau has made little progress collecting income tax or in persuading tip employees to include an accurate statement of tip income in their returns.

H. R. 6000 provides that an employee shall declare his income from tips within 10 days after each quarter. This would seem like a relatively simple procedure; and yet it comes a long way from meeting the realistic problems which an employer in a hotel will experience.

Actually the proposal would put us in a position where we would be required to deduct a 12-percent tax from money which is never in our hands, and to calculate the tax on an amount which we cannot ascertain. For example, most hotels hire casual waiters for many functions. These individual employees may not return to the hotel for a month or more when another special function is scheduled, or may never return. If the hotel is supposed to make a deduction from the cash wages of each such employee, based on tip income, an awkward situation arises. I can visualize 100 special banquet waiters standing in line before pay windows computing their tips, and giving a statement thereof to the paymaster and then having to wait in line while he figures 12 percent on each estimate and then subtracting that from the sums due each worker. Such a performance would take all night, because they are paid as soon as the party is over.

Under this bill, the procedure would be even worse; 3 months after the dinner, the casual employe would send a statement to the hotel as to tips received that night. The hotel would have no wages from which to make the deduction. We could give other illustrations, but this reveals the impracticability of making deductions from funds which the employer never has. A like problem could easily arise in

seasonal and resort hotels where the employees would never work a full 3 months and 10 days. We contend that the procedure here proposed is unworkable.

If tips are to be taxed at all, the only way we have figured out that they might be treated is to leave them to the option of the employee. If he elected to have an estimated amount of tips included in his wage, for social-security purposes, he should be required to furnish a statement to his employer, showing tip receipts, and at the same time tender to his employer 112 percent of such amount representing his share of the tax. And this would have to be done before the employee is paid. Otherwise, in view of the turn-over experienced in service industries, many employees would no longer be on the job 10 days after the conclusion of the quarter.

One of the principal reasons why we oppose this proposal is that we are afraid that employers might be held liable for retroactive tax assessments under the ensuing regulations which the Commissioner might draw if this bill were enacted in its present form. We might somehow got stuck for the tax where the employee made no declaration, and paid no tax, or had no wages coming. Or if it developed later, through investigations by the Bureau of Internal Revenue or other Government agency, that the employee had made too low a declaration at the outset, we are quite sure that management would have a retroactive assessment on its hands. The sum involved is so small that we recommend that tips not be made taxable at all.

It may be argued that this complex subject of tax based on tip income has been successfully met in the working of unemployment compensation taxes in a number of States. We do not agree that this is a comparable situation. In the first place, there is no uniformity in the various States. Many systems for computing this tip income have been tried under State laws, but none of these has worked out satisfactorily. All methods tried to date have failed in some respects. Experience under these other laws has clearly established the impracticability of this provision of the bill.

Now it might be argued by sponsors of this bill that the Treasury would never go behind the declaration of the individual employee regarding his tip income. If so, this should be made clear in the law, together with the assurance that there is no liability on the employer where the employee makes no declaration of tip income.

But while Ĥ. Ř. 6000 purports to be an amendment to the Federal social-security laws, we point out that it also contains an amendment to the laws relating to withholding of income tax. By amending the definition of "wages" in section 1621 (a) of the Internal Revenue Code, it would have the effect of requiring employers to withhold income tax upon the amount of tips received by an employee if such employee files a statement as to the amount of such tips with the employer within 10 days after the close of the calendar quarter. This provision emphasizes the impracticability of including tips in wages, as we pointed out above.

If an employee receives his pay every week for 3 months, and at the end of that time gives his employer a statement to the effect that he received several hundred dollars in tips during that period, is the employer supposed to withhold approximately 20 percent of such amount as income tax? He certainly cannot withhold it from wages

already paid, and the amount to be withheld might be so large that it would exceed several weeks' future pay, assuming the employee is still in his employ. The impracticability of such an amendment is obvious and it should be eliminated from the bill.

Let me next discuss section 210, subdivision (k), H. R. 6000, which defines "employee" to mean, among other things, any individual who under the usual common-law rules applicable in determining employer-employee relationship has the status of an employee. The bill proposes to amend this definition so as to include specifically an individual who performs service under a written contract expressly reciting that such person shall have complete control over the performance of such service and that such individual is an employee notwithstanding any modification of such contract not in writing.

The effect of this change would be to prohibit a true determination of the status of the person performing the services. It would make the language of the contract, however artificial and however misleading as to the true facts, the final and sole criterion. The obvious purpose is to prevent any determination as to the true relationship. This is not an academic point because this situation exists in connection with the employment of musicians who are members of the American Federation of Musicians.

Obviously this amendment is intended to overcome the effect of the Supreme Court decision in Bartels v. Birmingham (67 Sup. Ct. 1547). That case was based upon a set of facts which is common practice in the music world. An orchestra was built around a leader whose name and distinctive style in the presentation and rendition of dance music was intended to give the orchestra a marked individual character. The leader organized the orchestra, selected and trained the members thereof, and made contracts under which the orchestra would appear usually for a one-night stand in consideration of the payment of a lump sum. The orchestra leader took the lump sum, paid the expenses of transportation, music, et cetera, and paid the individual members of the orchestra fixed salaries, keeping the profit

for himself.

In actual practice the ballroom or hotel engaging such an orchestra had none of the powers ordinarily given to an employer. It could not hire or fire the individual members of the orchestra; it frequently does not even know their names; it could not dictate their style, method or performance, musical selections, or instruments, which they played. The Supreme Court found upon the facts that the orchestra leader, rather than the ballroom, was the true employer.

The proposed amendment is obviously designed to place the liability for social-security tax payments upon the hotel or ballroom which engages such an orchestra. The form of contract involved in the Bartels case and which is still in use, in substantially the same form, provides that the ballroom or hotel shall have complete control of the service, and describes the hotel or ballroom as the employer. The Supreme Court found, however, that this fiction could not be maintained merely because it appeared in the contract, and the Court placed the liability where it belonged, namely, upon the orchestra leader.

We also point out that the proposed amendment fails to accomplish its purpose. In placing the obligation upon the person described

in the contract as the employer, which would be the hotel or ballroom, the proposed definition of the term "employee" also fails to relieve the orchestra leader from the same liability. The amendment also places the liability upon the individual who under the usual commonlaw rules, is the employer and this would include the orchestra leader, because the Supreme Court has clearly found that upon this common state of facts the orchestra leader is such employer.

We object therefore to the qualifying phrase in the amended section for two specific reasons:

(1) It attempts to create an employer-employee relationship where none exists; and

(2) It would make both the orchestra leader and the hotel the employer and make both liable for social-security tax upon the earnings of the same employees.

Omission of the qualifying provision proposed in this amendment, would not deprive any one of social security payments to which he is entitled but merely would leave the burden where it belongs, namely, upon the orchestra leader, who is the true employer, and who makes the profit from the services of the individual employee.

We estimate that each one-half of 1 percent increase in the levy will mean approximately $4,000,000 tax annually for the hotel employers of America, based on cash wage alone. Any additional expense is viewed with alarm in these days of increasing costs and dwindling revenues. This is just one more item to be added to current pay rolls. But if an increased tax, moving up to 2 percent is to be imposed, then we reiterate that the program must be tied to an accurate, honest, actuarial table, and administered strictly as an insurance program if the fund is to continue solvent through the years.

Thank you, gentlemen.

The CHAIRMAN. Do you operate a hotel at this time?

Mr. O'BRIEN. Yes, sir. I operate three hotels, the Commodore Perry, the Secor, and the Willard, in Toledo, Ohio.

The CHAIRMAN. What is your reaction to the compulsory selfemployed insurance in H. R. 6000? Would you not be classed as a self-employed person?

Mr. O'BRIEN. No. I am an employee of a corporation.

The CHAIRMAN. That takes you out of that category, then.

Mr. O'BRIEN. Yes.

The CHAIRMAN. But if you were not, and if you were just an individual operating hotels, you would be brought under the Social Security Act.

Mr. O'BRIEN. Yes, if I were operating as an individual.

Some of the small hotels, of course, have individual proprietorship. The CHAIRMAN. Any questions?

Senator MILLIKIN. Can you give us any statistics on the percentage of the whole wage of a waiter that the tips consist of?

Mr. O'BRIEN. Well, Senator, that is one of those things that the employee does not reveal to us.

Senator MILLIKIN. I understand there would be different places and different circumstances. But give us some examples.

Mr. O'BRIEN. While they don't give us those figures, Senator, we have a pretty good idea of what they amount to in some places. Senator MILLIKIN. Give us a pretty good idea, then.

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Mr. O'BRIEN. For example, in the case of one of my hotels, the waiters report for purposes of workmen's compensation $8 a week. But we know they make more than that in one watch.

The CHAIRMAN. It depends upon the hotel and the location.

Mr. O'BRIEN. Oh, yes. Some of those positions are very lucrative. The answer is that they will not accept executive positions. Just a year ago, I offered a waitress in our coffee shop a position as hostess. She gets about $18 salary. She said she would take it for $70 a week after all deductions. That had to be net take-home pay.

Senator MILLIKIN. Does the waiter view the tip as a part of his salary?

Mr. O'BRIEN. It depends upon what purpose they are viewing it for. Yes, I would say he does, naturally.

Senator MILLIKIN. Do not the tips enter into bargaining as a part of the wages?

Mr. O'BRIEN. Well, we find usually that the unions would like to ignore that feature, when we talk with them. But, of course, we bring it in, naturally.

Senator MILLIKIN. Well, now, assume that you want to bring the waiter under the benefits of the social-security insurance system: What would be the best way to do it?

Mr. O'BRIEN. Well, the onus should be put on them to report and at the same time to tender their part of the tax.

Senator MILLIKIN. To the employer?

Mr. O'BRIEN. To the employer. Obviously, it is impossible for us to know what it is.

Senator MILLIKIN. You object to the burden on the hotelman of trying to estimate what the waiters' tips may be?

Mr. O'BRIEN. Well, it would be impossible, Senator, for us to estimate. But I would refer you again to the statement I made regarding these casual workers. You can visualize a lot of banquet waiters or waitresses lined up. We pay them as soon as the function is over. In some New York hotels, for example, there might be 100 or 150 of those. Each one would have to report his tip at the time, turn in his 12 percent or we would have to calculate it. Why, we would be serving breakfast in the morning by the time we got through.

Senator MILLIKIN. Could it be handled on a stamp plan system similar to that for migrant labor?

Mr. O'BRIEN. I have not given any thought to that. But we have no objection to it if the onus is put on the employee to report to us and at the same time tender us his share of the tax. But as the bill is written, of course, it isn't workable for us.

The CHAIRMAN. Are there any further questions?

Senator KERR. I would like to ask him about his last paragraph on page 10, Mr. Chairman. He says, in the statement:

We estimate that each one-half of 1 percent increase in the levy will mean approximately $4,000,000 tax annually for the hotel employers of America, based on cash wage alone.

Mr. O'BRIEN. That is eliminating tips and other benefits.

Senator KERR. What part is that with reference to employees whose compensation is primarily in terms of salary, aside from tips?

Mr. O'BRIEN. Of course, this is taken on an over-all picture, tip and nontip employees. I don't have the break-down as between them. Senator KERR. Would you make an estimate?