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of the new definition in H. R. 6000 would contravene the policy of Congress and help small business.
The second reason urged by the Treasury Department against the common-law test during the Gearhart resolution hearings has also lost its effectiveness. The extended coverage of the Socal Security Act embodied in other provisions of H. R. 6000 would not require the courts and administrative agencies to ignore the purposes of social-security legislation (as the Department urged the commonlaw test would). Millions more are brought under its provisions by legislative direction, and not by changing the legal and economic status of the self-employed and independent contractors by juggling word definitions.
A third argument the Treasury used against the common-law test applied by the Gearhart resolution was that “to legislate these workers into a self-employed status might forever deprive them of unemployment-insurance benefits." (You may recall that the Treasury had doubt as to the feasibility of including selfemployed under an unemployment-insurance program.) That seems to me to be the most absurd argument against the common-law test which we would like to see retained. Our argument is that to legislate independent contractors into an “employee" status will (and not might) forever deprive them of their status as independent American small-business men in their own right. Show me the American citizen who has so little faith in the future that he will trade a benefit which he presently enjoys for a future benefit—that is, unemployment insurance—he hopes never to depend upon.
Summarizing what I have said earlier, the Treasury Department opposed the common-law test in determining the employer-employee relationship. Their reasons have lost their force, but still the definition of "employee" in H. R. 6000 is essentially the same as the definition the Department sought to apply by ad. ministrative regulation. We favored the common-law test then; and our argument we believe still has its same validity, which the Congress recognized by enacting Public Law 642. We believe the present law as it relates to the definition of "employee" should remain unchanged.
The CHAIRMAN. Mr. Beardmore? Mr. George W. Beardmore, of the National Lumber Manufacturers Association?
STATEMENT OF GEORGE W. BEARDMORE, ATTORNEY AND LABOR
RELATIONS ADVISER, POTLATCH FORESTS, INC., LEWISTON, IDAHO, APPEARING ON BEHALF OF NATIONAL LUMBER MANUFACTURERS ASSOCIATION
Mr. BEARDMORE. Mr. Chairman, my name is George W. Breadmore. I appear here in behalf of the National Lumber Manufacturers Association. I am an attorn and labor-relations adviser for Potlatch Forests, Inc., Lewiston, Idaho. I have been associated with the lumber industry most of my life.
My purpose in appearing here today is not to discuss the technical ramifications of this detailed, 201-page bill. There have been or will be many other witnesses far more qualified than I to speak on the mechanics of the social-security system and who have gone into or will go into these complex, though nevertheless highly important, phases of the bill. My remarks will be limited to a consideration of the proposed definition of “employee” contained in sections 104 (a) and 200 (a) of the bill (sec. 210 (k) of the Social Security Act and sec. 1426 (d) of the Internal Revenue Code, as amended by the bill).
Public Law 612 of the Eightieth Congress (the Gearhart resolution) specifically provides that the term "employee” as used in the Social Security Act does not include a person who has the status of an inde pendent contractor under the usual common-law rules applicable in determining the employer-employee relationship.
The purpose of Congress in enacting this law was to maintain the status quo of certain emyployment taxes and social-security benefits pending consideration and determination of the need or desirability of extended social-security coverage. It followed a flagrant attempt by the Bureau of Internal Revenue, through its own interpretation of the law, and without any authorization from the Congress, to extend the coverage of the Social Security Act by promulgating regulations which, in effect, would have abandoned the ordinary common-law test used in determining the employer-employee relationship.
Such regulations, if their issuance had not been forestalled by act of Congress, would have arbitrarily brought within the coverage of the Social Security Act, by administrative interpretation, "independent contractors" and would have made those independent contractors "employees" of the persons who had contracted for their services so that the persons who had contracted for their services would be liable to pay social-security taxes on their contract earnings.
H. R. 6000 would very substantially extend the coverage of the Social Security Act by direct congressional action. We believe that everyone whom the Commissioner of Internal Revenue sought to include by his proposed regulations in 1947 will be covered under H. R. 6000 without reference to the definition of employee. The issue here, therefore, is not one of coverage, but as to how taxes will be collected.
The definition of employee contained in sections 104 (a) and 206 (a) would permit the Commissioner of Internal Revenue to collect taxes on the earnings of independent contractors and their employees from the person with whom they have entered into contract. Industries like the lumber industry which make extensive use of independent contractors would then become liable for social-security taxes on many persons they have never seen and with whom they have no direct contact.
The proposed new definition of employee, in addition to applying the common-law test in determining whether or not a person is an “employee,” would classify individuals in certain occupational groups as "employees" for the purposes of the act, under certain conditions, and would also classify as employees" persons who are considered to have that status under the combined effect of seven enumerated factors—the so-called economic reality test. It is to those parts of the definition that we address ourselves and show their peculiar applicability to the lumber industry and their effect.
According to the definition, any contract logger would be an "employee" if his contract of service contemplates that substantially all of his services are to be performed by him personally, unless he has a “substantial” investment in the logging facilities or unless there is continuity in the performance of services and they are not in the nature of a single transaction.
What is a substantial investment in logging facilities? What would constitute a continuing relationship, as distinguished from a single transaction? Anyone with experience in dealing with Federal administrative agencies knows that it will take extensive interpretation to define and delimit these expressions. And.even after such interpretations have been made, there is certain to be much misunderstanding and litigation.
In the economic reality test, seven different criteria are provided and the status of a person as an employee or independent contractor is to be determined by the combined effect of these seven factors. It is difficult to imagine a more confusing set-up. There will be thousands of cases where the taxpayers will be in conflict with the Treasury Department as to what the "combined effect” is. On the basis of past experience, there can be little doubt, however, that the Bureau of Internal Revenue will classify as "employees" many thousands of persons who are not employees of those for whom they perform services, but who are actually, in fact and at law, now regarded as independent contractors.
The question of whether or not independent contractors are to be brought under the coverage of the Social Security Act is not in issue here. Many independent contractors and their employees are already covered by social security—or will be under the self-employed provisions contained elsewhere in H. R. 6000.
Federal agencies have estimated that of the special group of more than a million not now covered by social security who are to be brought under coverage, only 17,500 are contract loggers. They have further estimated that eight or nine thousand will be affected by the economic reality test which in substance is set forth in the proposed new definition of “employee." In view of the fact that there are approximately 60,000 sawmills in this country, we have no way to check the figures used by these agencies, but we believe they have grossly underestimated the number. It appears that this definition is proposed for no other reason than administrative convenience in collecting the socialsecurity tax, because—as pointed out earlier—the question of coverage is not at issue here.
If this is the reason for this legislation, it should not be accomplished by changing the definition of the word "employee." Let us be forthright and direct and say that substantial companies which make use of the services of independent contractors, or suppliers of any other kind, shall guarantee to the United States Government that social-security taxes will be collected and paid on those contract earnings and on the wages the independent contractor pays his own employees.
I merely say that as a matter of being direct and forthright about the legislation, and not to indicate any approval of that type of a collection. However, we would much rather that people would come in the front door and not try to come in the back door, as we believe is being attempted by this particular section of the legislation.
Let me give you an idea of the effect of this proposed definition through a typical example in my home State which occurred prior to passage of the Gearhart resolution. A small sawmill operator in northern Idaho had some logs to be hauled to his mill. He contracted with some men who had their own trucks to haul these logs from the woods to the mill at a stated price per thousand board feet. The mill operator was interested only in the result to be accomplished. He wanted the logs delivered at his mill within a given time. The men commenced hauling the logs and considered themselves independent contractors, as in the past and as was customary. In order to take advantage of the short seasonal hauling weather, they worked long hours and their contract earnings were substantial.
The Internal Revenue Bureau first demanded that a 3 percent transportation tax be paid on the theory that these men were engaged in the transportation business as independent contractors and subject to that tax. Then another branch of the Internal Revenue Bureau claimed that these men were "employees" and demanded that the sawmill operator pay 2 percent old-age-benefit tax on the “wages” paid, and the 3 percent tax for unemployment compensation administration. The State director of the unemployment division then deinanded the 2.7 percent tax on the “wages” for the State unemployment-benefit fund. To add further confusion, the Wage-Hour Division, when making a routine inspection of the mill owner, demanded the men to be paid time and one-half for the hours in excess of 40 worked per week on the theory they were “employees.". That was a severe penalty because of their high earnings but, in addition, under the Fair Labor Standards Act, the employer was liable for an equal amount in liquidated damages. When you consider the bulk of production in the lumber industry comes from small operators who do not have an attorney at their elbow, the confusion was confounding and compounded to the extreme. And it will be so if H. R. 6000 is passed with the present definition of "employee" in it.
What did this operator do? He did what every red-blooded American would do when forced to it. A small operator with limited means had to stand up and fight three governmental agencies with unlimited means and talent. The Gearhart resolution adopting the commonlaw principles and definition have clarified the situation.
There will be many cases like this again if the definition in H. R. 6000 is now adopted. The end result will be that the new definition of employee in the Social Security Act will be a great deterrent to the establishment of small businesses. The express policy of the Congress and of the American people to aid and encourage small business will be overlooked.
In stating the opposition of the lumber industry to the proposed new definition of "employee," I would like to emphasize the danger of classifying as "employers,” for no other reason than administrative convenience, persons who up to now have been regarded as independent contractors. I would like to urge upon the committee the fact that such a proposal is potentially dangerous to those people in our forest areas and several million farm wood lots who are dependent upon the forest products industries for all or a part of their living.
The proposed definition would disturb a long and established pattern of relationship, economic and legal, which has existed in the forest products industries and in and among those communities which are directly dependent upon such industries. While it is readily understood that competitive private enterprise is often a hazardous undertaking, it is one from which we all benefit in better service and high living standards and it should not be made more difficult by legislation which envisions burdensome administrative detail which is over and above normal business hazards.
The proposed change in the definition of "employee” would create an impossible situation for many businesses. For example, with reference to contracts that are already in existence and which are drawn under the common-law concept of the “independent contractor," in what position is the company contracting for the services of the independent contractor in attempting to abide with the definition of "employee" contained in H. R. 6000? What are the company's liabilities and obligations? The independent contractor, because of his relationship with the company which contracts for his services, can refuse to allow inspection of his books and accounts. He can refuse to disclose his own earnings and what he
pays his own employees. There is no way the company using his services can determine his pay roll and its own tax liability on his pay roll.
In conclusion let me urge again that you do not change the commonlaw concept of the employer-employee relationship nor destroy the concept of an independent contractor for the administrative convenience of a Government agency. To do so will cause great confusion and will severely discourage the thousands of men who are establishing themselves in their own businesses with small beginnings as independent contractors. In the final analysis, it would serve no useful purpose.
The CHAIRMAN. Thank you very much, sir, for your appearance. Mr. BEARDMORE. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. George M. Fuller? You may be seated, Mr. Fuller, if you wish.
STATEMENT OF GEORGE M. FULLER, VICE PRESIDENT, NATIONAL
LUMBER MANUFACTURERS ASSOCIATION, WASHINGTON, D. C. Mr. FULLER. Thank you, Senator. Mr. Chairman, my name is George M. Fuller. I am vice president of the National Lumber Manufacturers Association.
For the record, I would like to submit several statements submitted by the regional associations affiliated with the National Lumber Manufacturers Association. I have one here from the Northern Hemlock and Hardwood Manufacturers Association, of Oshkosh, Wis., another from the Southern Pine Industry Committee, covering 12 Southern States, and a third from the Southern Hardwood Producers, Inc., of Memphis, Tenn.
I would like to submit these for the record, Mr. Chairman.
(The statements referred to follow :) STATEMENT OF 0. T. SWAN, SECRETARY-MANAGER OF THE NORTHERN HEMLOCK AND
HARDWOOD MANUFACTURERS ASSOCIATION, OSHKOSH, Wis. The Northern Hemlock and Hardwood Manufacturers Association is a regional organization of small sawmill men in the Lake States. Most of its members are very small operators. This association now is entering its fortieth year.
We are opposed to those portions of sections 104 (a) and 206 (a) of H. R. GMO which will arbitrarily make employees of many contractors and subcontractors in the widely scattered timber operations of this region and take them out from under the common-law classifications under which these small businesses hare long successfully developed.
In the Lake States of Michigan, Wisconsin, and Minnesota, the extensive unbroken forests of virgin timber are gone and with them the old time sawmills which operated for many years with sawlogs from their own contiguous timier lands. These large timber holdings were adapted to the operation of large company camps where sawlogs were produced by company employees under super vision by the company.
Today we have more than 3,000 small sawmills in the Lake States and of these. the smaller classifications produce two-thirds of the lumber output. The sawmill of today is sustained by sawlogs from numerous small scattered tracts of timber. The ownership of these tracts is widely dispersed. A few of the larger companies own timberland but even this is scattered over a considerable area. The bulk of the holdings are owned by settlers and farmers, by the Sinte or Federal Government and by outside parties who hold land as an investment.