represents the hardwood industry in North and South Carolina, northern Georgia, Tennessee, Kentucky, West Virginia, and Virginia, and the Northeastern Lumber Manufacturers Association, which is in the New England States and the Northern Hemlock and Hardwood Manufacturers Association, which is in Michigan and Wisconsin. In order to conserve your time, I am not going to try to give you the picture from each one of these districts, because they are practically all

the same.

All of the sawmills in the East are practically small business. There aren't, with possibly few exceptions, any really large operators in this entire territory. We are all faced with exactly the same problem. Senator Tobey has expressed to you the feeling of the sawmill men up in New Hampshire and New England. I don't know of a single sawmill man or logger or anybody else that I have any contact with who is in favor of this definition of an employee in H. R. 6000, as it is written.

Senator George, we operate, down at Ellijay and Jasper, Ga., and I know you are very familiar with that particular country down

there.

The CHAIRMAN. Yes, I am.

Mr. VEACH. You can go all the way from Mineral Bluff through Blue Ridge and on down to Marietta and Atlanta, and you will find 300 different kinds of small mill operators.

The CHAIRMAN. Yes, I am very familiar with that.

Mr. VEACH. They are all doing the same thing in a different way. There is no way in the world that I know of that you can actually describe what a contract logger or a small sawmill operator is doing.

I had the honor and privilege during the war of serving our Government in the procurement of hardwood lumber and softwood lumber for the armed services. On one occasion we tried to help the Office of Price Administration to define what green lumber was just the words "green lumber." What is the difference between green lumber and dry lumber? We worked on it for 4 years, and we never did come out with a satisfactory answer of what was green lumber and what was dry lumber. I feel that this situation here, on the matter of trying to define an employee is almost as complicated as trying to define green lumber. We have had occasion in our operations to go before the Supreme Court of the State of North Carolina to determine what an independent contractor was and what an employee was. As a result of our experience I think that we can safely determine today in our contracts whom we are responsible for and whom we are not responsible for.

Now, here is the thing that worries me about this whole proposition. What liability do I assume as a sawmill operator in doing business with a man who I consider as a small-independent businessman with whom I am doing business? I can cite you examples of people like John Rogers, now living at Ellijay, Ga., today, who started out with me 15 years ago without a nickel, but with, however, a knowledge of the logging business. Today he has developed to where I suppose he has $25,000 worth of equipment, caterpillar tractors, bulldozers, teams, a trained organization, and so forth. If he were to start out today under this new definition, because of the liabilities involved, he would never be able to get started.

60805-50-pt. 3- -33

Let us take Ellijay, Ga. We own a little land down near Ellijay, but it is pretty widely scattered. As a practical matter, we find it necessary to make a contract with a logger to go in and produce logs and lumber and deliver it to the railroad track in Ellijay for, we will say, a price of $30 a thousand. We know from our experience that if he is a good logger and a good sawmill man and he uses reasonable intelligence and works hard, he can make a profit on the operation. It is entirely up to him who he hires, when he hires him, in what weather conditions he will operate, whether road conditions are reasonable for the use of his trucks, or whether he does his own trucking or gets somebody else who is in the trucking business to haul the lumber into the railroad siding at Ellijay. Under the definition of an employee in H. R. 6000, I will be darned if I know what sort of a liability I have as a businessman in doing business with this man. Will I be responsible under the Social Security Act for a tax on the full $30 that we are paying this man? Do we have to get an accountant to sit down and figure out what his profit would be as a self-employed man, you might say? Just what definition would you use to determine the amount of money that the social security would be paid on? On all of the people that he has working for him, be it one, two, three, four, or five, there would be actual salaries or wages on which he would pay anyway into social security. But just whom do we assume responsibility for?

According to the definition in H. R. 6000, even though our contractor is completely independent and operating beyond our control, the fact that his business is integrated with ours and is an essential part of our business, so to speak, in that he is manufacturing lumber and turning it over to us, would seem to make us responsible for social security taxes if somebody in the Treasury Department came down and investigated the matter and so decided.

For another example, a man might come to us and say that he knows where there is a piece of timber that he can buy from a farmer. He tells us he wants to cut that piece of timber and he wants us to buy the timber for him. He takes all of the risk as to whether or not there is 150,000 feet or 200,000 feet of pine and hardwood on the particular tract. We advance him the money to buy this piece of timber, which he pays back to us on, we will say, at the rate of $10 a thousand.

According to the definition of employee in H. R. 6000 that I see in this book, here, he probably would be held not to have sufficient capital to be an independent contractor. We would practically be prohibited from helping this small independent man because under this definition we wouldn't know what our liability was, and they might come back on us later for any number of years and say, that our liability is on the full $30 a thousand that this man received for what he delivered in to us. As I see it, it would force all of us in the entire eastern part of the United States to discontinue doing business with anybody as an independent contractor because of the terrific risk and liability that we would be up against.

Senator Hoey has the same problem in North Carolina that Senator Tobey has in New Hampshire and your constituents have down in Georgia. I am sure Senator Hoey is familiar with the section around Murphy and Robbinsville and Bryson City and on into Asheville, N. C., where we have our operations. We do some business in pulpwood in that area. A man comes to us frequently and says "You have

some pulpwood over here on your land, and I would like to cut that pulpwood and deliver it in here." And you say, "Well, we will give you $10 per cord for this pulpwood and charge you a dollar for the stumpage which belongs to us. The rest of it is entirely up to you. You deliver the pulpwood whenever you want to. You load it on cars whenever you want to, and we will pay you for it at that time." If the weather is good, he works on his tobacco. If the weather isn't good, goes out and works on this pulpwood.

he

Now, we couldn't do that under the new definition, as I see it, because we wouldn't know what our liability is. We will not know whether we are responsible for paying social-security taxes and all the rest of the taxes and liabilities that would be added on by the other bureaus of the Government if they are successful in getting this. definition in. We couldn't do business with that man, and he would be deprived of the privilege of earning that additional money.

Certainly in any ordinary understanding of the terms of business, in all the years I have been in business, he is very clearly an independent operator; but he would be clearly construed as an employee if they turn the definition around the way it is here. They say there are seven criteria that you can use in determining whether this man is an employee or not. Well, who is going to do the determining? The only person that can do the determining is the Federal Administrator, for this particular act, who would come out to Robbinsville, or come down to Ellijay, Ga., and say that in his opinion we have been wrong, we have guessed wrong, and we are liable for some certain amount. There is no way of our determining what that is. Well, it would change our operations completely.

Senator HOEY. Is that the method by which you obtain most of the pulpwood for the paper mills and other lumber plants?

Mr. VEACH. In Graham County, N. C., which is the particular territory in which we operate on pulpwood, practically all of our operations are confined to individuals, mostly farmers, or cattlemen, or something like that, who want to go on our land, cut pulpwood, and deliver it to our railroad siding. And we in turn act as an agent for the Champion Paper & Fiber Co. and deliver the pulpwood to them. Under this definition, I am sure that the Treasury intends to call that man an employee. Otherwise they would not have him in there as a contract logger.

The CHAIRMAN. At least, they could call him an employee.

Mr. VEACH. That is it.

Senator, I apologize for wandering from my statement here, because my statement sets out to illustrate the difficulties we would have and the reasons therefor, if H. R. 6000 defined an employee in this way. But I listened to testimony here yesterday, and I listened to Senator Tobey's testimony here this morning, and the thing that bothered me and the thing that I would like to have you honorable gentlemen think with me about for a few minutes is this problem that we are faced with in trying to operate under such an uncertainty. The problem was recognized in 1948 when the Gearhart resolution was passed. Congress went to the trouble at that particular time to state that the common-law definition of an employee and an independent contractor should obtain. Now the Treasury is trying to go back again and again and again and put in a definition which would so interfere with the

rules of the game that we wouldn't be able to play the game. I can't understand why it is that these people are trying to change the rules and completely rewrite definitions that the Supreme Court of the United States and all of our other courts have worked for 150 years to establish.

I don't know of anybody, Senator George, who would not be affected, in north Georgia, or in all of Georgia as far as that is concerned, in these hundreds and hundreds of small logging and timber and cutting and pulpwood operations, by this change. I haven't talked to a single one of them who isn't disturbed about this definition, or anyone who is in favor of having the definition go into the law as you have written it.

I am not trying to discuss with you this morning the problem of the over-all coverage, who should be covered and who should not be covered. I am trying to discuss the matter of the percentage that should be collected from the pay rolls to take care of this old-age insurance. Other people who know far more about it than I do have discussed that phase of it with you at length. I am trying to discuss this definition with you from the standpoint of the territory that you and Senator Hoey are familiar with, and have you try to visualize the problems that we would be faced with if this law should go through. I think, sir, that is all I have to say.

The CHAIRMAN. Are there any questions?
Thank you very, very much, Mr. Veach.

Mr. VEACH. Thank you, Senator.

(The prepared statement of Mr. Veach follows:)

STATEMENT OF JOHN B. VEACH IN BEHALF OF NATIONAL LUMBER MANUFACTURERS

ASSOCIATION

My name is John B. Veach. I am president of the Hardwood Corp. of America and associated companies which operate in western North Carolina, northern Georgia, and eastern Tennessee. I appear here in behalf of the National Lumber Manufacturers Association, Washington, D. C., a federation of 16 regional associations representing lumber manufacturers in all parts of the United States. I am vice president and treasurer of that organization.

The lumber industry as a whole, as well as my own little operations, is strongly opposed to the definition of "employee" which H. R. 6000 proposes to insert in the Social Security Act and in the Internal Revenue Code, and to the repeal of Public Law 642 of the Eightieth Congress (the so-called Gearhart resolution). We believe this new definition is unnecessary and, from my own personal experience, I believe that it will have many serious and undesirable consequences.

The proposed new definition of "employee" tries to go far beyond any accepted present concept of the term and would, in effect, adopt the interpretation which the Bureau of Internal Revenue in its proposed regulations in 1947 tried to force on industry by administrative interpretation-and which the Congress rejected when it enacted the Gearhart resolution. The new definition embodies the socalled economic-reality test for determining whether a person is an employee or an independent contractor. This economic-reality type of test is one that the courts dislike but the bureaucrats like because of the latitude they are given. The new definition would not only create serious uncertainties, but would result in serious retroactive tax liability in cases where an operator guessed wrong. The new definition would force all thinking companies to forget the independent contractor and put him out of business.

By virtue of Public Law 642 of the Eightieth Congress we have a fairly clear understanding at the present time of who is an employee under the social-security law. The proposed definition would destroy this understanding and leave the determination of employee status almost entirely to the judgment or whim of Federal administrative officials. Thousands of persons will not know their tax liability until it is determined for them by the Treasury Department; and when it is determined, it probably will be retroactive.

The new definition of "employee" leaves unsolved the very problems which brought about enactment of Public Law 642 of the Eightieth Congress (familiarly known as the Gearhart resolution). This law provides that an individual who is an independent contractor under the usual common-law rules is not an "employee" as the term is used in the Social Security Act and the Internal Revenue Code. It is the present law, which H. R. 6000 proposes to change by redefining "employee." How can the average businessman operate when someone is always thinking up ways to change the rules of the game?

Looking back 2 years, it was passage of the Gearhart resolution which prevented the Treasury Department from issuing regulations applying the so-called economic-reality test in determining the employer-employee relationship. The proposed Treasury regulations were intended to extend the Social Security Act to a class of employees not then covered and to simplify the collection of taxes by imposing that collection on the person who did business with independent contractors.

The arguments we advanced at that time favoring enactment of the Gearhart resolution are the same we advance today in opposing the proposed new definition of "employee' contained in H. R. 6000. Our fundamental objection was so ably expressed by the then chairman of this committee, Senator Millikin, in discussing this same matter with the representative of the Treasury Department, that we would like to quote him here. Senator Millikin said: “* * * you [that is, the Treasury Department] are completely in the field of discretion and you do not have dependable criteria on which to base a sensible solution." The quotation of Senator Millikin follows his questioning of the Treasury representative on a problem of our own industry-that is, When is a timber cutter an employee and when is he an independent contractor? Senator Millikin endeavored without success to get an opinion, suggesting finally, "So if he has a little saw he is [an employee], and if he has a big saw he is not?" The Treasury representative avoided the question. The attempted definition of a contract logger contained in H. R. 6000 still does not answer the question, and it is not clarified by the House hearings or report.

I refer to subsection (k) (3) (E) under section 210 of the Social Security Act, as amended by H. R. 6000. What exactly is a contract logger? What does "performed personally" mean with reference to his contractual services? What would be a "substantial investment"? Would it have to be a sawmill as implied by the representative of the Treasury? What exactly is the "continuing relationship" referred to in the definition? What exactly is "integration of the individual's work in the business to which he renders service"? I submit that these little words will lead to much uncertainty and litigation as a result of administrative interpretation. The industry has much to fear from administrative interpretations, a fact recognized by this committee during the Gearhart resolution hearings.

Administrative discretion and lack of definition and reliable criteria are the very grounds upon which we oppose the definition of employee contained in H. R. 6000. The Federal agency is left a wide-open field of discretion; there are no dependable criteria. H. R. 6000 would abandon a long history involving the common-law test in determining the employer-employee relationship. Thousands of borderline cases determining whether one is an employee or an indepedent contractor now serve the employer as guideposts in figuring out his legal and economic responsibilities, which he must know with great dependability to carry on his business. H. R. 6000's definition of "employee" would junk these guideposts for the so-called economic-reality test which is untried and has had very little judicial application to serve as a guide for administrative interpretation.

As stated earlier, our arguments in favor of the Gearhart resolution are equally valid against the definition of "employee" in H. R. 6000. Conversely, the arguments which the Treasury Department used against the passage of the present law have lost most of their force and logic.

The Department's major premise was that adoption of the common-law test in determining the employer employee relationship would deprive several hundred thousand persons of social-security coverage. The question of coverage is no longer at issue; probably the majority of these several hundred thousand will be covered under the self-employed provision of H. R. 6000. There being no real question as to coverage involved, then we submit that if the common-law test is abandoned for the new definition of "employee," many independent contractors will lose their status as independent American small businessmen and become "employees" of those with whom they now have contracts. Enactment