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SOCIAL SECURITY REVISION

THURSDAY, MARCH 16, 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, Myers, Millikin, Taft, Butler, and Martin.

Also present: Mrs. Elizabeth B. Springer, chief clerk, and F. F. Fauri, Legislative Reference Service, Library of Congress.

The CHAIRMAN. The committee will come to order, please.

Senator Schoeppel, we will be very glad to hear from you now on H. R. 6000.

STATEMENT OF HON. ANDREW F. SCHOEPPEL, A UNITED STATES

SENATOR FROM THE STATE OF KANSAS

Senator SCHOEPPEL. Thank you very much, Mr. Chairman.

Chairman George and members of the committee, I have requested time to appear before this committee in order to speak briefly in connection with the proposed definition of "employee" contained in section 210 (k) of H. R. 6000, beginning on page 48 of the bill. There is a sincere and intense interest in this proposed legislation among a substantial number of small-business men in my State. It is on their behalf that I appear here.

These small-business men all over my State have been urging me to oppose the provisions of paragraphs (3) and_(4) of the proposed definition of employee contained in this bill. I know that the committee has already heard much testimony and received many manuscripts describing the confusion and chaos which will surely result from the inclusion of this vague, indefinite, and ambiguous language in paragraphs (3) and (4) of the definition. I am against this not only because of its vagueness, but also because it will surely have a stilling effect on many thriving small businesses.

It would like to direct the attention of the committee to one class of independent businessmen in my State who are genuinely and understandably alarmed at the prospects of this definition becoming law. The effects this definition would have on this group is typical of many classes of independent entrepreneurs. I refer to the thousands of men in

my

State who are wholesale distributors and retail marketers of gasoline and other petroleum products. As one time chairman of the corporation commission of my State, which is a public service commission, and as chairman of the

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Interstate Oil Compact Commission, I am familiar with some of the business practices prevailing in the marketing of petroleum products.

These men generally are truly small and independent businessmen, yet, after reading the ambiguous language appearing on pages 85 and 86 of the report of the House Ways and Means Committee, I am convinced that nearly all of these independent businessmen would likely be termed "employees” of their supplying oil companies under this proposed definition.

When I first read it, I thought that the example given at the bottom of page 87 of the committee report might mean the exclusion of wholesale oil distributors from the definition. Let me read that to the committee:

Example (3), bulk oil-plant operator.--The X oil company is engaged in the business of marketing petroleum products and enters into a contract with A under which A is to operate a distribution station. A provides his own tanks and trucks. He operates the station as his own and employs assistants of his own choice. A pays all expenses arising from the operation of the station, and fixes the hours and day's during which the plant shall be open.

The combined effect of all the factors specified in paragraph (4) of the definition as applied on this case clearly shows

that A is engaged in a business of his own and is not an employee.

The committee will note that the distributor in the above example provides his own tanks and trucks. Under the marketing practices of the oil business, however, the supplying oil company usually owns the tanks and the property and leases them to the distributor. So, the example given offers no comfort to these oil distributors in view of the wording of the definition. There is no protection there against the possibility, yes, the probability, that the administrator of this law would classify as employees all of the several hundred thousand small businessmen engaged in this business of distributing and selling petroleum products.

Mr. Chairman and members of the committee, the gasoline filling station operator is a familiar figure to all members of this committee. He usually sells a well-known brand of gasoline and oil which normally comprises the preponderance of his business. But he also sells tires, batteries, and many automobile accessories. Many of them sell soda pop, candy, and the like. Some of them wash and grease cars. They may even engage in other wholly different and separated businesses. Yet, there are certain factors in the contractual arrangement they have with the supplying oil company which would cause them to be called employees of the oil company under this definition.

Mr. Chairman, as support for that last statement, let me refer to the analysis prepared by the staff of the Joint Committee on Internal Revenue Taxation dated July 22, 1949. This analysis is attached to the minority report in House Report 1300, but it represents the opinion of unbiased experts—it is more than the opinion of the minority members of the House Ways and Means Committee. At the bottom of page 195 and the top of page 196 of the report these experts conclude that it is highly probable that bulk-oil distributors and gasoline-station operators would be included as employees under the economic-dependency test, which is the basis for this definition.

Let us look for a moment at the wholesaler oil and gasoline distrib. utor. Like the filling-station operator, he usually leases from or us rent free the tanks and buildings of the oil company whose products

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he sells. Yet, he operates as and really is an independent businessman. He frequently engages in other kinds of business. Yet, this definition would make him an employee of the oil company just because the predominance of his business is from the oil company's products.

I have no hesitancy in saying that if these wholesale and retail distributors of gasoline and oil are classified as employees of the oil companies, it will cause a change in the present business practices in the industry which will in many cases destroy the independent merchants and place the distribution of products in the hands of salaried personnel.

Once again, I do not wish to burden the members of this committee with details which have already been presented to them, but I am most anxious to emphasize with all my powers, that the Congress would make a serious mistake to incorporate into the new social security law a provision which would permit the Treasury Department to exercise its uninhibited pleasure to capture small businessmen as employees.

Senator MILLIKIN. Mr. Chairman, may I interrupt the Senator? The CHAIRMAN. Yes.

Senator Millikin. In addition to those listed criteria, they also reserve to themselves this privilege, which was developed when we had the same subject before us on another occasion. I am quoting from a proposed regulation which they intended to put out but which we stopped:

Just as the above list of factors cannot be taken as all-inclusive, so, too, the statement of facts or elements set forth

cannot be considered complete. The absence of mention of any fact or element in these regulations * should be given no significance. So they can add any number of additional tests that they want to, to bring the thing out the way they want to bring it out.

Senator SCHOEPPEL. Senator Millikin, as you point out there, it does Jeave a great latitude of discretion there that, in my humble opinion, could cause considerable confusion and difficulty.

I, for one, am definitely opposed to this program of destruction of small businesses.

Mr. Chairman, I am not going to discuss the merits of the other phases of this bill, but I must lift my voice in opposition to this unsound method of increasing coverage of the law. “Self-employed” are covered by the provisions of the bill and if Congress, in its wisdom, decides to retain that provision, there is no reason for making employees out of independent contractors.

If the Congress should enact this needless definition of "employee" for social-security purposes, it will rock, if not destroy, the very foundation of American small business. The whole policy of Congress today is to encourage and foster the growth of small business. The exact opposite effect will be promoted by this new trend toward attempting to make employees out of independent businessmen. I say "trend" advisedly; already, there are three separate bills that I know about which have this same definition of employee proposed as an amendment to the unemployment insurance law-H. R. 5591, H. R. 6718, and H. R. 7331. If we enact this definition in this bill, I say to you, gentlemen, it will be only the beginning of the elimination of small business and the forcible change of a long-accepted method of doing business. Why should Congress force an industry, such as petroleum to change its entire marketing procedure when there is no good reason for doing it?

Many of these small-business men in my State, who may be found to be employees under this elastic definition of employee now in H. R. 6000 simply because a predominance of their business comes from the sale of the products of one company, have requested me to urge upon you the retention of the present definition of "employee" instead of the one contained in H. R. 6000. It is only in that way that they may continue as independent businessmen and thus promote the economic growth of our country.

I would also like to discuss briefly the second sentence of paragraph (2) of this proposed definition. That sentence reads as follows:

For purposes of this paragraph, if an individual (either alone or as a member of a group) performs service for any other person under a written contract es. pressly reciting that such person shall have complete control over the perfor. mance of such service and that such individual is an employee, such individual with respect to such service shall, regardless of any modification not in writing, be deemed an employee of such person (or, if such person is an agent or employee with respect to the execution of such contract, the employee of the principal or employer of such person).

I venture to say that a single reading of this sentence does not reveal the purpose of it. Also, only those who have studied the matter know who is behind this proposal.

My attention was directed to this sentence by petitions from several reputable businessmen in the State of Kansas who are owners and operators of places of entertainment. These constituents of mine vigorously protest the incorporation of this provision in the law. It is in the bill to satisfy the whims of Mr. James Petrillo, the president of the American Federation of Musicians. Therefore, I shall refer to the second sentence of paragraph (2) as the “Petrillo clause."

Upon receiving the protests from my State, I made some inquiry to determine the history of this “Petrillo clause." I referred to the report of the House Ways and Means Committee (H. Rept. No. 1300), and I found on page 80 of that report this statement:

The second sentence of paragraph (2) is designed to change the effect of the United States Supreme Court's holding in Bartels v. Birmingham ((1947) 332 U. S. 126)

I thereupon investigated the Bartels case. This is a case, which was finally decided by the Supreme Court, growing out of a suit by operators of public dance halls to recover social security and unemployment taxes which they had paid under protest on musicians playing with orchestras at the dance halls. These orchestras were so-called name bands which had been engaged by the dance-hall owners under a contractual arrangement with the leader of the band.

According to the decision of the Court of Appeals for the Eighth Circuit in this case (157 F. 2d at p. 298), the American Federation of Musicians required all its members to use a contract known Form B. This Form B contract, which was required by Mr. Petrillo's union to be executed by all persons who made a contractual arrange ment with an orchestra, provided that the ballroom owner was the employer of the band leader and of the musicians. The court found,

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as a fact, that this contract was adopted by Mr. Petrillo's union in order to shift the burden for payment of the musicians' social security taxes, from the leader of the band (who must also be a member of the union) to the owner of the hotel, ballroom, or club. The court also found that these contracts were not entered into "by fair

negotiations,” but were forced upon the businessmen who contracted with the orchestras.

The union's endeavor to shift the tax burden was unsuccessful, because in the Bartels case the Supreme Court concluded that it should not confine itself to the terms of a written contract between the parties in determining who is an employer and thus liable for payment of social-security taxes, but that it should consider all relevant facts and circumstances which tend to show the actual and true relationship. The Supreme Court ruled that when that test was applied the musicians were not employees of the owners of the entertainment houses, the written contract to the contrary notwithstanding.

Thus, we see that the admitted and avowed purpose of the Petrillo clause is to permit a labor union to create the employer-employee relationship in any case where that union has the monopolistic powers and control of the occupational group which it represents. Does Congress wish to abdicate to a union the power to determine who is an employee, simply because that union is powerful enough to compel the execution of a certain kind of contract? I submit, if the committee please, that this kind of legislation is pernicious in character and is class legislation of the worst sort.

I shall not burden the committee by indulging in speculation as to all the possible interpretations which the Treasury Department might place upon the Petrillo clause, but one needs only to read that sentence to realize that a literal interpretation of its words might result in the inclusion of many relationships within the scope of master and servant for purposes of social security.

If this should become law, it will constitute an open invitation to all labor unions to insist upon the inclusion of the appropriate provisions of the musicians' union's Form B in all contracts of employment.

In conclusion, Mr. Chairman and members of the committee, I strongly urge this committee to strike out of the definition of em ployee now in H. R. 6000, the second sentence of paragraph (2) and all of paragraphs (3) and (t). This definition as now written would (a) make employees out of independent contractors, (b) promote lawsuits, and (c) destroy small businesses,

On behalf of the many small-business men of Kansas, whose very existence, they think—and I share their views—is threatened by this legislation, I sincerely want to thank the members of the committee for the courtesy that you have extended to me to appear before you in their behalf and present some of these matters that I have just outlined.

The CHAIRMAN. We are very glad to have your views, Senator, and your appearance before the committee.

Senator SCHOEPPEL. I have left copies for the members of the committee and those who might desire them.

The CHAIRMAN. The next witness is the Honorable Carl T. Curtis, United States Congressman from the State of Nebraska.

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