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SOCIAL SECURITY REVISION

MONDAY, MARCH 13, 1950

UNITED STATES SENATE,
COMMITTEE ON FINANCE,

Washington, D.C. The committee met at 10 a. m., pursuant to recess, in room 312, Senate Office Building, Hon. Walter F. George, chairman, presiding.

Present: Senators George, Byrd, Hoey, Kerr, Millikin, Brewster, and Martin.

Also present: Senator Thye, Representative Frank W. Boykin, First District, Alabama; Mrs. Elizabeth B. Springer, Chief Člerk; and F. F. Fauri, Legislative Reference Service, Library of Congress.

The CHAIRMAN. The committee will come to order.

Mr. Canfield is the first witness. You may come around and have a seat.

STATEMENT OF ROBERT E. CANFIELD, NEW YORK, N. Y., REPRE

SENTING AMERICAN PULPWOOD ASSOCIATION

Mr. CANFIELD. My name is Robert E. Canfield. The address is 122 East Forty-second Street, New York City.

I am appearing for American Pulpwood Association in opposition to the proposed amendment of the definition of "employee” in the Social Security Act and the Internal Revenue Code, which proposal is set forth in sections 206 (a) and 104 (a) of H. R. 6000.

The American Pulpwood Association represents the pulpwood industry; that is, dealers in and producers and consumers of pulpwood throughout the United States. Pulpwood is the basic raw material from which nearly all paper and paperboard is made, and paper and paperboard, of course, are the basic commodities without which no other industry, no government, no school, no form of written communication can exist, without which freedom of the press is a meaningless phrase, without which, in fact, civilization as we know it would be impossible. There is, therefore, public interest and concern aplenty in what concerns the paper and paperboard industry, and the industry which supplies its basic raw material.

The pulpwood industry is opposed to the inclusion of the definition of "employee" in H. R. 6000 as proposed in the sections 104 (a) and 206 (a) because it knows that that definition, if made law, would not accomplish what some think it is intended to do, and indeed would accomplish little if anything desirable. On the contrary, it would cause à major upheaval of the industry and a complete change in the methods of wood procurement in common use for many years by most consumers of pulpwood, necessarily involving the destruction of thousands of small businesses. This is something which the industry certainly does not desire, and which it can hardly believe Congress would be happy about.

Let us take these points up one at a time, and in the order stated :

(1) The objectionable definition would not add one single solitary person to the social-security rolls. All of the persons to whom the seven “slithering criteria” (to use Senator Millikin's expression of a year or so ago) could possibly be applied are either employees of someone, and as such covered by the present act, and the proposed act, or are self-employed, and as such would be covered by the provisions of H. R. 6000 providing for social-security coverage of selfemployed persons.

(8) Whether this definition is in the law or not, it would not affect by one penny the amount of the benefits to be paid under the law to any person. This is so because H. R. 6000 provides that despite ditlerent tax rates for employees and self-employed persons, the benefits payable to each are identical.

These two basic facts being true, it is clear that any of you, Democrat or Republican, can, with a perfectly clear conscience as far as party commitments are concerned, vote against the inclusion of all parts of the proposed definition that seek to include other than common-law employees as "employees” for the purpose of the act. The platforms of both parties may call for broader coverage and greater benefits, but both objectives are accomplished by H. R. 6000 in identical degree, whether or not any new definition of "employee" is included in it. The platforms of neither party called for disruption of existing business relationships, the creation of a wholly new class of persons which for want of a better description, might be called administrative law employees, or the delegation by Congress to an administrative oflicer of its power and obligation to determine tax liability.

If paragraph 4 of the definition will not give coverage to anyone and will not improve anyone's benefits, what will it do that might possibly seem desirable? I have stretched my imagination to come up with this list:

First, it would save a self-employed person who was held to be an employee some mone

To be exact the amount he would save at the maximum would be 52 cents a week in 1950 and an average of 81.3 cents per week over the next 20 years.

I doubt if either Congress or the self-employed person would think of putting such a small price tag on the loss of independence and of the opportunity to start a small business which might, as so many have in America, become big.

Second, it would increase the Treasury's take by the same amount.

This, of course, results from the fact that under H. R. 6000 the tar paid by a self-employed person would be 75 percent of that paid by and for the account of an employed person-a difference for which no actuarial basis has been demonstrated by anyone, and which Dr. Altmeyer in his own words admits is “merely a compromise" and without attempt to make any exact estimate.”

Third, it would also increase the Treasury's take by improring the "track breakage."

I do not suppose the Treasury Department will be very pleased with my use of terminology deriving from the parimutuel betting on the horses.

Senator KERR. Do you think they will know anything about that? Mr. CANFIELD. The Treasury Department? They should.

Senator KERR. Maybe they have not had the benefit of the experience that the witness has had.

Mr. CANFIELD. That is quite possible.
Senator MILLIKIN. They collect quite a lot of revenue from them.
Mr. CANFIELD. That is why I think they should know about it.

But I can think of no more apt description for the curious quirk in the law which provides that where a person is employed by two or more employees, each shall withhold and each shall pay full socialsecurity taxes, the excess withheld being recoverable by the employee, but the excess paid by the employers being recoverable by no one but retained in the Treasury as pure windfall.

Fourth, it will make the Treasury's collection job and perhaps its bookkeeping somewhat easier.

No doubt it is easier to deal with a few big business units rather than with many small ones. This hardly appears, to me at least, a valid reason for forcing small-business men out of business. Parenthetically, it might be noted that it will not simplify the bookkeeping of the Social Security Agency, since all of their records are individual records.

Fifth, and last, and also (despite the fact that I am a lawyer) in my opinion least desirable, it will make lots of work for lawyers.

The creation of a whole new concept of relationship between persons who perform services and persons for whom they are performed, with accompanying tax liabilities, under the best circumstances would be bound to give rise to a great deal of litigation. When this is due to a definition so broad and so nebulous as to make it impossible for anyone to say in advance when the relationship may be deemed to exist, it can hardly be regarded as under the best of circumstances, and the amount of litigation is bound to be even greater.

We have, therefore, two things that the proposed definition will not do which may be thought to be socially desirable, but which have been done by other means, and five things which it will do, none of which as any social significance, and all of which add up to virtually no value. Against this must be measured the unquestioned major result of the use of that definition of "employee” which I would like now and for the balance of my statement to analyze and discuss.

Like most other manufacturing industries, the pulp and paper industry has depended upon others for the bulk of its raw materials. It is not integrated from tree to finished product. Over a period of many years, and since long before any wage and hour act, social security act, or even workmen's compensation acts were passed, it was clearly brought home to these companies that they could not go out in the immediate vicinity of their mills and cut pulpwood to supply all their needs. They had to obtain their requirements from scattered sources and from areas where it was more practical to arrange for local cutting and transportation of the wood than it would be to do it themselves.

The pulp and paper industry obtains this most important raw material generally from five sources:

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1. By purchase from dealers, who in turn purchase the pulpwood from producers or farmers.

2. By purchase from producers who cut pulpwood from their own lands, or lands upon which they have acquired stumpage rights.

3. By making arrangements with contractors to cut pulpwood from the pulp and paper companies' own lands.

4. By purchase from farmers who cut wood from their own woodlots, and

5. By cutting from their own lands with their own employees.

The third of those, making arrangements with contracts to cut pulpwood from the pulp and paper companies' own lands is what the trade calls contract logging. That differs from the use of contract log. gers in section 3 of the paragraph of definition. I think you will probably hear more about it, and there might be confusion because the trade term talks about contractors who may have large amounts of equipment and big crews, and section 3 talks of contract loggers only as the individual who works all by himself.

These arrangements take a great variety of forms. Sometimes it is contemplated that the dealers, producers, farmer's, or contractors will deliver the wood at the mill with their own employees and their own trucks. Sometimes it is contemplated that the transportation work, or various other phases of the work, will be subcontracted. Sometimes it is contemplated that the plup and paper companies themselves will arrange for the transportation of the wood, either with their own employees and equipment or by contracts with motor carriers or barge carriers or railroads.

The persons who actually cut and transport pulpwood are employees of someone under the present act and would be such under paragraph 1 and 2 of the definition of "employee" in the proposed act. They are employees either of dealers, or producers, or contractors, or of the pulp and paper companies. Farmers cutting wood in their own wood lots are the exception. As farmers they are not covered by either the existing law or by H. R. 6000.

I think I am wrong about that. Apparently H. R. 6000 has a provision where if a person works during any pay period for more than 50 percent of his time at a covered employment, he can be an employee, and that means a lot of farmers with hired hands who do some woodcutting will suddenly find they have employees covered by social security where they did not imagine so before.

The dealers, producers, and contractors are not covered under the existing act, but would be covered as self-employed under the proposed bill. It is these latter independent contractors who are the people that the majority of the Ways and Means Committee repeatedly says “should be covered as employees.” What possible reason for these particular self-employed persons being covered differently than other self-employed persons and what difference it makes whether a person is covered as an employee, or covered in some other manner. is never made clear, or hinted at for that matter, and I, for one, cannot guess. If a person is covered, he is covered, and the purposes of the Social Security Act are carried out. Whether his coverage is as an employee or as a self-employed person makes no possible difference as far as the purpose of the act is concerned.

If these people are to be declared to be employees of the pulp and paper companies, presumably their employees would also become the

employees of the pulp and paper companies. The obligation of an employer under the social-security law is to pay a stated percent of the wages paid to each employee and to withhold a similar amount from the wages paid each employee at the time they are paid, and to pay over those amounts quarterly to the Government. Performance of that obligation is simple enough in the case of actual employees. It is completely impossible in the case of independent contractors and their employees, arbitrarily determined to have the status of employees of pulp and paper companies by the application of paragraph 4 of the definition of employee in H. R. 6000.

What is the “wage” paid to an independent contractor? Obviously it is not the full price paid him for the performance of his contract. The only thing comparable to wages is his profit, and the provisions of H. R. 6000 with reference to the base for social-security tax in the case of self-employed persons would indicate that this is the measure to be taken. How do you withhold from profit at the time of payment? When do you pay a profit? How do you go about determining the profit of somebody over whom you have no control? Is it not at least conceivable that an independent businessman has no desire to disclose and will refuse to tell persons with whom he deals what his profit is? How much of his profit is attributable to wood produced for or sold to one company, and how much is attributable to wood produced for or sold to another company? How much work he did producing naval stores or railroad ties or all of the other things that people operate in? Merely to ask those questions is to demonstrate the utter impossibility of complying with the law if someone tells you that a person, who is in fact an independent contractor, is to be deemed an employee for purposes of the social-security law.

How about the contractor's employees? On the present basis of doing business, the pulp and paper companies do not know who they are, how

many

there are, or what they are paid, and have absolutely no method of finding out except from the contractor. Is it not just possible that the contractor would refuse to tell them about it? Assuming that he would tell the pulp and paper mills whom he employed and how much he paid them, how can the companies withhold from wages which they do not pay? Again, merely to ask the question is to demonstrate the impossibility of compliance with the law.

The answer to the dilemma is perfectly clear. If one is to be charged with the obligations imposed by the Social Security Act on an employer, he must in fact be an employer. There is no other way to handle it.

That is what must, and inevitably will happen if paragraph 4 of the definition is applied and independent contractors and their employees are held to have the status of employees of pulp and paper mills. They will have to become employees in fact so that the employer may be able to discharge his legal obligations. Maybe it will not make much difference to an employee of a contractor that he now becomes an employee of someone else, but it certainly will make a difference to the contractor that he has been forced out of business, has lost his independence, his opportunity to make a profit, his pride in creating a small business which some day might become big. Personally, I think it might make a great deal of difference to the employee, too. There is a lot more comfort and security in working for

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