Who’s the Boss: Restoring Accountability for Labor Standards in Outsourced Work

Who's the Boss: Restoring Accountability for Labor Standards in Outsourced Work

Executive Summary

Business outsourcing is on the rise, through practices such as multi-layered contracting, use of staffing or temp firms, franchising, misclassifying employees as independent contractors, and other means.  The label on a worker’s uniform and the brand on the outside of the establishment where the work occurs may not match the business name on the paycheck or the company that recruits and hires that same worker.  Lead companies that outsource distance themselves from the labor-intensive parts of their businesses and their responsibilities for those workers.  While some of these outsourcing practices reflect more efficient ways of producing goods and services, others are the result of explicit employer strategies to evade labor laws and worker benefits.  This restructuring of employment arrangements may well foreshadow a future of work different from the employer-employee paradigm around which many of our labor standards were constructed, but it should not spell the end of living wage jobs or business responsibility for work and workers. 

This report describes some of the organizational shifts in the way businesses operate, profiles some of the leading lower-wage service sectors where these outsourced structures have taken hold, and describes how these changes can result in poor working conditions and a lack of corporate responsibility. 

Anecdotal evidence suggests that the ambiguous legal status of many workers in contracted jobs is one of the central factors driving lower wages and poor working conditions in our economy today. 

  • Median hourly wages for workers in janitorial, fast food, home care, and food service, all sectors characterized by extensive contracting and franchising, are $10 or less;
  • Once outsourced, workers’ wages suffer as compared to their non-contracted peers, ranging from a 7 percent dip in janitorial wages, to 30 percent in port trucking, to 40 percent in agriculture; food service workers’ wages fell by $6 an hour;
  • These same sectors see routine incidences of wage theft, with 25 percent of workers reporting minimum wage violations, and more than 70 percent of workers not paid overtime;  and
  • Construction, agriculture, warehouse, fast food, and home care workers suffer increased job accidents compared with workers in other sectors.

Conscientious employers are harmed, too, as they are unable to compete with lower-bidding companies reaping the benefits of rock-bottom labor costs.  Local economies and the public lose out when paychecks shrink, taxpayer-funded benefits subsidize the low wages, and employers skirt payroll and other workplace insurance payments. 

Negative consequences of outsourcing can be mitigated somewhat through rigorous enforcement of existing federal and state laws to hold more entities accountable for degraded conditions under the broadly-defined workplace “joint employer.”

In addition, there are promising models in the states:

  • More than 30 states create a presumption in their laws that work creates an employment relationship with attendant rights and responsibilities;
  • Illinois, Massachusetts, California, and other states hold lead companies jointly accountable along with contractors, including staffing firms, in certain industries;
  • California requires responsible contracting in selected outsourced sectors, and
  • Worker advocates have negotiated innovative private codes of conduct to broaden responsibility for supply-chain working conditions.

While these approaches are promising, more needs to be done.  The United States should follow other countries and re-regulate staffing arrangements, making both parties responsible for working conditions and, in some cases, prohibiting outsourcing where accountability is not possible.  In addition, a small but growing number of worker advocates are bringing these practices to light and devising innovative campaigns to hold more firms accountable for the workers in their realm, especially in low-wage industries. 

The report concludes with a recommendation for a new and broader legal and policy framework that creates responsibility for working conditions down the domestic supply chain and in myriad contracting structures.  Under the framework, any subset of business players or creators of supply chains and outsourced arrangements that can impact the working conditions in those arrangements because they are still controlling key aspects of the business operations would be held responsible for the labor conditions.  By moving away from existing, more-limited employer liability paradigms under labor and employment laws, this policy frame better responds to the constellation of employment arrangements typifying many business operations today, aligns accountability with the capacity to know of and control the operations around work, and thereby creates a better chance that labor standards and protections will hold.


  1. I.               Introduction

 

Our economy is in the midst of a major restructuring in the way business operates, particularly in fast-growing service industries.  Whether the result of contingent work structures, outsourcing to contractors, the misclassification of employees as independent contractors, individual franchising, or other strategies, increasingly the businesses that individuals “work for” are not the ones they are “employed by”—a distinction that can hamper organizing, erode labor standards, and dilute accountability.

These organizational changes are an important part of the story of the “future of work” and have greatly contributed to the degradation of jobs and attendant income inequality in many sectors.

Some of these arrangements—broadly termed “outsourcing” (see box below for related terms)—truly reflect efficient ways of producing goods and services, while others represent explicit attempts by employers to evade their legal obligations to workers.  But all challenge nearly century-old workplace policies built around direct, bilateral employment relationships, and many discourage companies from taking responsibility for workplace problems.  In outsourcing work, all too often companies outsource responsibility as well—and by design or effect, create poor-quality jobs and undermine businesses trying to do right by their workers and the economy overall.

This report illuminates the scope and characteristics of companies’ decisions to outsource or use related structures in a variety of high-growth and lower-wage sectors that result in poor working conditions, with no accountability on the part of those companies.  It describes how this lack of responsibility in the face of complex supply chains, multi-tiered business arrangements, and inaccurate job labels harms workers, law-abiding employers, and the economy overall.  It details the culture of non-compliance that has emerged in many of our economy’s largest and fastest-growing sectors, as firms encourage intense low-bid competition by subcontractors, evade unions, and skirt baseline labor and employment standards.

Finally, the report chronicles policy responses to the problems under existing and new models, assessing successes and lessons learned, and proposes a new framework to encourage and require more accountability from those in a position to ensure fair working conditions. 

  

Myriad Forms and Evasions

The new forms of work arrangements and production can reflect legitimate structural change and a response to heightened competitive pressures.  Employers appropriately contract every day with independent businesses for specialty jobs that those businesses also perform for a variety of other customers.  These independent businesses invest capital in their firm and bring technical skills.  Lead companies cede control to them as specialists.  These arrangements are not the focus of this report. 

Other companies outsource work to separate middlemen entities, sometimes creating multi-tiered supply chains with complex structures, as Walmart and other big-box retailers have done.  Others insert temporary, staffing, or leasing firms to “payroll” their existing staff, who then become the “employees” of that staffing firm, as many warehousing and light manufacturing companies do.  Still others create nominal businesses by requiring their workers to be independent contractors, limited liability corporations (LLC), and even individual franchisees as a condition of getting a job, as janitorial, delivery, construction, and port trucking companies do.  These practices are the target of this report.

 

[insert box of terms here] Box: “Outsourced workers - related terms” duplicate part of box from p. 6 of 2006 GAO report]

 

These reconfigurations can create confusion on the part of workers and enforcement agencies; inserting a temporary, staffing, or other labor broker between employees and the firm can enable a lead company to claim that the direct contractor is the workers’ sole employer.  Workers who sign “independent contractor” or “franchise” agreements as a condition of getting a job are led to believe that they have no rights to workplace protections, and companies that pay off-the-books can be difficult to track down. 

Classic definitions of employment under applicable workplace protection laws do not capture enough of these often-convoluted structures, and allow companies to evade responsibility for workers who historically were considered to be in the businesses’ domain.  Outsourced workers can lose out on protections under core wage and hour, discrimination, and health and safety laws.  They may have no safety-net compensation for on-the-job injuries or layoffs.  They may lose access to career ladders, health care coverage, and retirement benefits available to direct employees.[1]  Many of the workers in these jobs are immigrants who are afraid to come forward to complain of unfair treatment.  And unfortunately, there is a close correlation between contracted occupations and those with the highest numbers of workplace violations.[2]

These arrangements can mean that workers and our economy lose out on the growth and opportunity that come from better jobs.  And law-abiding employers cannot compete with companies that use these structures to evade responsibility for the jobs in their overall businesses. 

 

Restoring Employer Responsibility

Baseline workplace protections remain an essential bulwark against degraded jobs and the resulting economic distress for workers, families, and communities.  The starting point for ensuring accountability for meeting these core labor standards is robust and strategic enforcement of existing broadly-defined labor laws.  There is much that can and should be done using these tools, including holding more entities and individuals responsible as “joint employers” and applying state laws that create a presumption of employment status for workers in these altered employment arrangements.  State-level “responsible contractor” provisions can also bring enhanced accountability and create strong incentives for companies to outsource responsibly. 

In addition, this report proposes a new framework, in which a broader subset of the players and creators implicated by these myriad layers and forms of employment arrangements are explicitly responsible for their workers.  This would include those entities that are in a position to ensure compliance with labor standards because they know of work being performed in and can exercise operational control over their business, broadly defined.  This more expansive reach would capture some but not all entities in a supply chain and hold them responsible for workplace violations in the chain. 

This framework moves away more purposefully from the more-limited employer responsibility paradigms in labor and employment regulation, instead creating more entities bound to care about what happens in the workplaces in their realm of control. 

 

II. Outsourcing, Contracting, and Beyond: An Overview

 

A.  Types of Structures

Companies that outsource use a variety of structures to do so, depending on the employer and the industry.  There are numerous variations to these basic arrangements, with individual iterations mattering for purposes of what individual or entity should be responsible.  We highlight here some paradigmatic structures to illustrate our reform prescriptions.

The simplest outsourcing models are those that entail only a firm-to-worker engagement, with an employer converting all of its employees to “independent contractors,” or requiring applicants to sign agreements purporting to make them “independent contractors,” “franchisees,” or limited liability corporations (LLC’s).  The case law and literature are replete with examples of employers in construction, cable and cell tower installation, janitorial, delivery services, and port truck driving that have used this model.[3]  This misclassification often occurs at the bottom of an outsourcing chain involving multiple layers of contractors between the workers and the lead company setting the terms of the arrangements.

[insert diagram of i.c./ franchisee/ LLC’s here – Figure 1]

Another widely-recognizable form of outsourcing is one in which an employer inserts an intermediary between itself and the workers and designates the intermediary as the workers’ sole “employer.”  These intermediaries may be “labor only” temporary or staffing agencies—which often provide workers who are anything but temporary—or specialized contractors who work within one specific industry.  Examples of the latter include farm labor contractors, drywall companies, and garment “jobbers.”  A variant of this type of two-tiered structure is companies that franchise their businesses to another, such as in the fast-food industry.

Extreme examples of this contracting can be found in some hollowed-out hotels and hospitals, where almost every segment of the business (housekeeping, catering, building services, recordkeeping, professional staffing) is outsourced to other entities, leaving a skeletal crew of direct employees. 

[insert figure of two-level contractors and temp/ staffing firm here- Figure 2]

In still other sectors, there are multiple layers of contractors, with the first-tier contractor operating as a broker that secures contracts and then contracts with a second tier of sometimes-undercapitalized subcontractors.  At the second tier, fierce competition means the subcontractors have little ability to comply with labor laws, but are nonetheless designated as the “employer” of the workers at the bottom of the chain.

These multi-tiered outsourcing arrangements are a simpler variant of the supply chains common in retail and garment.  On one end of the chain, one or more tiers of contractors make the products for a brand, often in other countries.  The brand or major retailer imposes price controls that make it next to impossible for contractors to pay workers producing goods at the bottom of the chain fairly.  Then, as products move further through the chain, the retailer’s tight control of prices pits bidding subcontractors against each other, creating unsafe and underpaid workplaces in warehouses, ports, and other logistics distribution centers.

 

[insert diagram of multi-tiered supply chain here- Figure 3]

 

  1. B.    Outsourced Industry Profiles 

The arrangements described above are manifested in a number of large and growing sectors, with resulting harm to the working conditions; a few are highlighted in this section. 

 

Contracting in the Janitorial Industry

The janitorial services industry generates approximately $47.2 billion in revenue per year, with revenues expected to rise in the recovery.[4]  In the past two decades, companies’ outsourcing of janitorial services has grown dramatically.[5]  As a result, janitors who often clean restaurants, hospitals, and offices are most likely not hired directly by the facility that they clean; instead, they work for a janitorial contractor.

Under a typical model of outsourced labor in the industry, a lead company contracts with a janitorial company to provide maintenance services at the lead company’s facilities.  The first tier janitorial company does not directly provide cleaning services, and instead hires second-tier subcontractors to provide cleaning services at a lower price.  The second-tier subcontractors provide the janitors to clean facilities.  Second-tier subcontractors are often able to make a marginal profit only by engaging in cost-saving strategies, including misclassifying janitors as independent contractors or selling “franchise” licenses to unwitting workers. Second-tier contractors save costs by evading payroll taxes, workers’ compensation, and minimum wage and overtime requirements at the cost of the janitorial workers.[6]  Industry analysts note that “non-employers”—those classified as independent contractors and franchises—account for 93 percent of all janitorial service companies.[7]

Violations of basic labor law protections are endemic in the janitorial industry, and job quality has decreased significantly since the emergence of these contracting and franchising models.  One academic study found that janitorial workers suffered a four-to-seven percent wage penalty from 1983 to 2000 as a result of outsourcing in the industry.[8]

 

CONTRACTING:  JANITORS

Number of workers in the janitorial industry: 2,101,810[9]

Estimated percentage in contracted work: 37%[10]

Demographics: 18.4% African American; 3.9% Asian; 30.3% Hispanic[11]

Median wage: $10.86/hour; $22,590 annual[12]

Incidence of wage theft: 26% minimum wage violations; 71.2% overtime violation rates; 72.5% off-the-clock violations[13]

 

Franchising in the Fast-Food Industry

The franchising structure began in the 19th century after the McCormick Harvesting Machine Company and the Singer Company found that wholesalers neither wanted to distribute nor repair their products.  To address this void, the companies built a network of independent agents to be the exclusive sellers of their products.[14]  In the mid-20th century, Ray Kroc (the founder of McDonald’s) and others began using the franchise model in the fast-food industry.  Today, nearly all fast food in the United States is sold through this model.[15]

 

Publicly-traded fast-food companies including McDonald’s, Yum!Brands, Subway, Burger King, Wendy’s, Dunkin’ Donuts, Dairy Queen, Little Caesars, Sonic, and Domino’s are highly profitable.  In 2012, these companies collectively earned $7.44 billion in profits; paid $52.7 million to their highest-paid executives; and distributed $7.7 billion in dividends and buybacks to their shareholders.[16]

By contrast, fast-food franchisees themselves are in many cases unprofitable.  A 2007 study commissioned by the brands found that franchises have a higher failure rate on Small Business Administration loans than non-franchisees.  Like other contractors, franchisees can easily be replaced if their business fails. 

Franchise brands typically dictate the terms of agreements with their franchisees, including charging exorbitant fees for the right to operate their businesses.  Lead companies can exert significant control over the day-to-day operations of their franchisees.  The franchisors can dictate how many workers are employed at an establishment, the hours they work, how they are trained, and how they answer the telephone.  While the brands claim that they have no influence over wages paid to workers, they control wages by controlling every other variable in the businesses except wages.

 

Recent news reports say that McDonald’s computers keep track of data on sales, inventory, and labor costs, calculate the labor needs of the franchisees, set and police their work schedules, track franchisee wage reviews, and track how long it takes for employees to fill every customer order.[17]  Domino’s Pizza tracks the delivery times of its franchisee’s employees, holding them to the brand’s standards.[18]  McDonald’s reportedly acts as a labor broker for its franchisees, via a website that screens applicants.  Fast-food workers say that on occasion, McDonald’s has fired employees of its franchises, exercising a right commonly associated with employer status.[19]

Fast-food workers make a median hourly wage of $8.94.[20]  Two-thirds of core front-line fast-food workers are adults 20 and older, and 68 percent are the main earners in their families.  More than one-quarter are raising children.[21]  Compared to the overall economy, fast-food jobs are twice as likely as other jobs to pay so little that workers are forced to rely on public assistance (52 versus 25 percent).[22]  In fact, the low-wage business model at the 10 largest fast-food companies in the country costs U.S. taxpayers more than $3.8 billion each year to subsidize public benefits these workers are forced to rely on to meet their basic needs.[23]  In New York, 60 percent of fast-food workers say they are forced to rely on public assistance to cover basic needs.[24]

Even beyond the impact of low wages, fast-food workers’ earnings are depressed by extensive wage theft and violations of health and safety laws.  Nationally, nearly 90 percent of fast-food workers surveyed in early 2014 reported some sort of wage theft on the job.[25]  One survey of fast-food workers in New York found that 30 percent of the workers had late or bounced checks, 30 percent had overtime violations, and 36 percent had off the clock violations.[26]  A national study on health and safety conditions in the restaurant industry found that 95.3 percent of workers had been either cut or burned on the job; 24.5 percent came into contact with toxic chemicals on the job; 87.7 percent did not get paid sick days, and 63.6 percent cooked and served food while sick.[27]


Recently, fast-food workers have begun to highlight wages and working conditions in their industry.  In March 2014, the McDonald’s Corporation was sued in seven class action lawsuits filed in California, New York, and Michigan for violations of wage and hour standards, including requiring workers to work off the clock, failure to pay overtime pay for overtime work, and failure to provide workers rest and meal breaks.[28]  That same month, New York Attorney General Eric Schneiderman announced two settlements of claims against McDonald’s and Domino’s franchisees for failing to pay proper wages.  An earlier wage and hour claim brought by delivery workers was settled for $1.3 million after the Domino’s corporation was added as a defendant.[29]

 

Box: Franchising in Fast Food:

Number of workers in the fast-food industry:  3.8 million.[30]

Estimated percentage contracted (in franchisee stores):  76.3% as of 2007.[31]

Median wage: $8.94

Demographics:  70% are over age 19; 56.4% women; 41.5% people of color.[32]

Incidence of wage theft:  A recent nationwide poll of fast-food workers found that nearly 89% have been the victim of wage theft at their fast-food job, and most have experienced multiple forms of wage theft.[33]

 

Contracting in the Home Care Industry

 

[put home care worker profile someplace around here]

 

The home care industry employs two million home care workers and is both the fastest-growing sector of the American economy and one expected to add the most jobs throughout the decade.[34]  While few home care employers are subcontractors in the traditional sense, jobs in this industry are characterized by an attenuation of the employment relationship with multiple entities between the funding source and the worker.  Medicaid and Medicare (and other government programs) are the primary sources of funding for home care jobs and directly or indirectly set workers’ pay rates, funneling funds through one or more employer entities that issue workers’ paychecks and perform other employer functions.[35]  The result is often a complex work structure, where workers in publicly-funded programs relate to two, three or more entities for different aspects of their job, including home care agencies, fiscal intermediaries, quasi-public entities, and Medicaid recipients (the clients served by the workers).  In addition, the private-pay portion of the industry has seen an increase in for-profit franchises and “registries” that misclassify workers as independent contractors, and for-profit and non-profit agencies operate in the private pay and underground “gray market.”[36]

 

Wages and worker protections in home care are almost uniformly poor.  Medicaid and Medicare home care funds, already in short supply as governments seek to trim budgets, are further drained when home care agencies take their cut for overhead and profits, leaving little money for the workers.  On average, agencies take about half of the hourly rate they receive from the government or families, leaving workers with median wages of under $10 an hour.[37]  Many workers do not have health insurance, and over half of the personal care workforce relies on public assistance.  Another cause of low wages is workers’ 40-year exemption from federal minimum wage and overtime protections, which the U.S. Department of Labor recently closed through a rules change scheduled to go into effect in January 2015.[38]  But violations are high even in states that have covered home care workers under wage laws, because workers fear to report violations and responsible employers are elusive.

 

Unions have won state legislation establishing employers-of-record in several “independent provider” programs; these reforms allow workers to collectively bargain with a common state entity and have significantly boosted wages.[39]  But throughout the industry, workers are plagued by involuntary part-time work on the one hand, and excessive overtime, often without the required overtime pay, on the other; nonpayment of wages for travel time between client homes, training time and nighttime work, and other off-the-clock violations; and high injury rates.     

 

CONTRACTING: HOME CARE WORKERS[40]

Number of workers in the home care industry:  2 million; of those, 630,000 estimated in Independent Provider programs

Part-time workers: 56%

Demographics: 32% African American; 17% Hispanic/Latino; 7% Other; 44% White; 24% Foreign-born

Median wage:  $9.38 

Incidence of wage theft:  17.5% minimum wage violations; 82.7% overtime violation rate; 90.4% off-the-clock violations[41]

 

[put hospital worker profile around here somewhere]

 

Contracting in the Food Service Industry

 

Food service contractors provide catering services and related food services at public institutions such as correctional, educational, and healthcare facilities, and to airports, hotels, recreation, and sports facilities.  Food service contracting is growing:  industry revenue is forecast to grow an average of 3.2 percent per year over the next five years, to $38.3 billion.  An estimated 423,000 workers will work for food service contractors in 2014.  Major players in the food service industry include Aramark, Sodexho, and Compass, which generate 90 percent of the sector’s revenue.[42]

 

Although food preparation and service work is one of the fastest-growing occupations in the United States, food service workers earn among the lowest wages in the country.  The Bureau of Labor Statistics estimates that the median hourly wage for food service workers in 2013 was $9.15 per hour, or $19,020 per year.[43]  Institutions’ shift to food service contractors, moreover, often results in lower wages for workers performing the same duties as in-house employees.  One study of contracted food service workers found that workers previously employed by a public school district and then employed by subcontractors experienced pay cuts as great as $4.00 to $6.00 per hour.[44]

 

CONTRACTING: FOOD SERVICE WORKERS

Number of workers in the food service industry: 11,914,590[45]

Demographics: 12.2% African American; 5.7% Asian; 24.4% Hispanic[46]

Median wage: $9.15/hr, $19,020 annual[47]

Incidence of wage theft: 23.1% minimum wage violations; 67.8% overtime violation rates; 72.9% off-the-clock violations[48]

 

 

Contracting in the Warehouse and Logistics Industry

 

[put warehouse worker profile from Schneider Logistics someplace around here]

 

Warehouse and logistics workers play a central role in U.S. commerce, transferring imported goods from shipping containers to warehouses and reloading goods for shipment to retail stores around the country.  However, recent reports show that warehouse and logistic workers face low wages, with few worker protections, as a result of outsourcing.[49]

 

Outsourcing has reshaped the warehouse and logistics industry with the use of “third-party logistics” (or 3PL) firms, highly integrated companies with the capacity to handle goods at several different points in a supply chain.  A reported 77 percent of Fortune 500 companies use 3PL firms.[50]  These third-party logistics companies, in turn, contract with staffing agencies, which hire temporary workers to unpack, load, and ship goods to retail facilities across the country.[51]

 

Third-party logistics firms encourage bidding wars among motor carriers and staffing firms, placing continual pressure on contractors to provide cheaper services.  These lower rates are passed on in the form of decreased prices for truck drivers (who are often misclassified as independent contractors) or decreased wages for warehouse workers.[52]  Workers employed at the bottom of this supply chain face deteriorated working conditions, with significant increases in wage and hour and health and safety violations as staffing agencies cut corners.  As one study of outsourced and temporary logistics workers in New Jersey found, more than one in five workers earned incomes below the federal poverty level; more than one in ten had reported an injury on the job, and over 40 percent had not received necessary safety equipment.[53]  A judge in a still-pending wage and hour class action suit against Walmart, Schneider Logistics, and several temp and staffing firms involving working conditions in California warehouses has found that Walmart and Schneider jointly employed warehouse workers, along with the direct lower-level subcontractors.[54]

 

Extensive outsourcing by some giant corporations, most notably Walmart, across multiple industries in their supply chains has placed labor costs in competition, driving down wages and eroding working conditions.  By aggressively outsourcing many labor-intensive parts of its business to the lowest bidders, and taking advantage of its huge size and market dominance, Walmart has engendered workers’ rights violations throughout its vast network of subcontractors—from the workers who process seafood sold in its stores[55] to the warehouse workers who ferry Walmart goods from suppliers to customers.[56]

 

Box or sidebar quote: As Walmart’s leadership once explained to Wall Street analysts, “The misconception is that we’re in the retail business, we’re in the distribution business.”[57]

 

SUBCONTRACTING: WAREHOUSE AND LOGISTICS WORKERS[58]

Number of workers in the warehouse and logistics industry: 3,428,800

Median wage: $11.04/ hour; $22,970 annually

Incidence of wage theft: 25.2% minimum wage violations; 44.3% overtime violations for packaging and warehousing; 66.0% off the clock violations[59]

 

 

Outsourcing in the Agricultural Industry

 

[put agricultural worker profile someplace around here]

 

Farm work has long been characterized by an employment dynamic that has now spread to many other industries.  Profitable multinational interests—some involved directly in the growing of agricultural products and others that purchase these products—have for decades attempted to shed responsibility for workplace abuses by hiring farm labor contractors.  The farm labor contractors are often thinly capitalized and face fierce competition for agricultural employers’ business, leaving them little choice but to accept contract terms dictated by the growers.  At the bottom of this chain lies an overwhelmingly immigrant workforce of some two million farmworkers, whose physically demanding jobs are characterized by low wages, high accident levels, and no workplace benefits.

 

The share of workers subcontracted from a primary agricultural firm and employed by a farm labor contractor increased by 50 percent between the periods 1993 to 1994 and 2001 to 2002.[60]  Some estimates place the number of farmworkers employed by farm labor contractors as high as 80 percent.[61]  Earnings for workers employed by labor contractors are lower than those directly hired by growers.  A 1993 study in California found that annual earnings for workers employed by farm labor contractors are only 60 percent of those for workers hired directly by growers.[62]

 

For decades, farmworkers have been excluded from major labor-protective laws in the United States, including federal overtime pay and the National Labor Relations Act.[63]  Minimum wage violations are a longstanding problem that can be traced to the contracting system.

 

BOX:  CONTRACTING:  FARMWORKERS

 

Number of workers in the industry: Approximately two million.[64]

Estimated percentage in contracted work:  As high as 80%.[65]

Demographics:  76% immigrant,[66] more than half undocumented.[67]

Median wage: $8.90 to $11.10 per hour.[68]

Incidence of wage theft: A 1999 DOL study found a compliance rate with the Fair Labor Standards Act and the Agricultural Worker Protect Act was between 50% and 65% for lettuce, tomato and onion growers.[69]

 

BOX: Guestworker programs:  a study in outsourcing [put someplace near agriculture]

 

The federal H-2A and H-2B “guestworker” programs allow employers to hire temporary foreign workers for seasonal jobs in agriculture and other industries.  In addition, recent investigations have uncovered a number of high-profile incidences of use of foreign students in the J-1 “cultural exchange” visitor program to provide cheap labor in Hershey’s warehouses and McDonald’s outlets, for example.[70]  Over 200,000 visas were issued in these three programs combined in 2012.[71]

 

U.S. guestworker employers rely on private individuals or agencies to find and recruit workers in their home countries.[72]  Abuses by recruiters, intermediary processing agencies, and host employers, ranging from wage and hour and housing violations to human trafficking, have been well documented.[73]  Lured with false promises of lucrative jobs and permanent U.S. residency, temporary foreign workers have signed over property deeds, dissolved life savings, and fallen into debt to pay up to $20,000 in “recruitment” fees—only to be placed in abysmal working and living conditions when they arrive in this country.[74]

 

Worker organizing and litigation, including by the National Guestworker Alliance, Centro de los Derechos Migrante, and the Southern Poverty Law Center, have brought national attention to the way in which employers use the H-2B program, in particular, to obtain cheap labor to be performed by a vulnerable and exploitable workforce.[75]

 

Contracting in the Staffing Industry

 

The temporary employment and staffing industry is composed of companies that offer workers to other companies, sometimes for a limited time.[76]  Workers in this industry are by definition outsourced workers, as the lead company contracts with the staffing firm for their labor.  Temporary and staffing agencies provide workers for companies in a variety of underlying industries and occupations, from business services to manufacturing and from clerical to production.[77] 

 

The staffing industry grew sharply in the 1990s, more than doubling as a share of overall employment by 2000 to 2.9 percent, or 3.8 million jobs.  In 2013, there were approximately 3.4 million jobs in the staffing sector, accounting for 2.5 percent of U.S. employment.[78]  But according to the American Staffing Association, the pool may be larger:  the industry says that every year a tenth of all U.S. workers finds a job through a staffing agency. [79]

 

While staffing industry employment still represents a relatively small share of the labor market, the sector plays an important role during recessions and recoveries, rising and falling more sharply than total employment (Table 1).  During the Great Recession, for example, U.S. employment declined from peak to trough by 6 percent while staffing employment dropped by 36 percent (Table 1, left).  Similarly, in the four years from when staffing employment hit bottom in August 2009, the sector grew by 41 percent, compared with just 6 percent overall (Table 1, right).

 

Staffing jobs made up similar shares of total employment changes over the Great Recession relative to the two prior recessions, when the sector’s share of jobs lost was higher than the share gained (Table 2).  Eleven percent of jobs gained since employment hit its low point in February 2010 have been in the staffing sector.  It may be too early to tell, but the strong growth of the sector along with its position among recovered jobs suggest it may hold a greater share of employment in the future.

 

 

Table 1: Percentage Change in Total and Staffing Employment Over Last Three Recessions[80]

 

Job Loss (High to Low)

Job Growth (4 Years From Low)

Recession

Total

Staffing

Total

Staffing

1990

-1%

-6%

8%

67%

2001

-2%

-18%

6%

14%

2008

-6%

-36%

6%

41%

 

Table 2: Staffing’s Share of Total Jobs Lost and Gained Over Last Three Recessions[81]

Recession

% of Jobs Lost

% of Jobs Gained

1990

5%

11%

2001

13%

1%

2008

9%

11%

Source: NELP analysis of Bureau of Labor Statistics data

 

Employers in certain occupations and industries have increased their use of temporary and staffing models, creating a shift in the types of occupations dominating the sector.  In particular, the last 30 years have witnessed a transfer of temporary work from white-collar occupations, specifically office and administrative support occupations, to blue-collar occupations, like production and material-moving:  in 1990, four in ten (42 percent) workers in staffing were in office and administrative support jobs, whereas in 2013, these occupations made up just 21 percent of the industry.[82]  Of the 10 largest staffing firms in the United States in 2012, eight list industrial work as their largest staffing segment.[83]  This is consistent with other research documenting an increasingly heavy reliance by the manufacturing industry on staffing agencies.[84]

 

Temporary workers typically experience lower wages, less job security, and fewer workplace benefits compared to permanent, full-time employees.[85]  A 2012 UC Berkeley Labor Center study concluded that temporary workers in California, for example, are twice as likely as non-temps to live in poverty, face lower wages, and less job security.  Median hourly wages for temp workers were $13.72 as compared to $19.13 for non-temps.  Temp workers are also twice as likely to receive food stamps and be on Medicaid as other workers.  The Berkeley study concludes that temporary and outsourced arrangements erode wages and working conditions for workers in those positions.[86]  For temporary workers employed in manual occupations in particular, it may also mean being subject to unsafe working conditions and other abuses as host companies and temp agencies each blame the other for health and safety violations.[87]

 

Latinos make up 16 percent of employed workers, and African-Americans, 11 percent, but both groups are overrepresented in the staffing industry:  20 percent of workers are African-American and 20 percent are Latino.[88]  They also make up relatively large shares of workers in production, transportation and material moving occupations, which make up a significant share of jobs in the sector:  22 percent of these workers are Latino and 15 percent are African-American.

 

Breakdowns of racial and ethnic groups by occupation tell a similar story.  Employed African-American and Latino workers, especially men, are more likely than employed White and Asian workers to be employed in production, transportation and material moving occupations.  In 2013, 25 percent of Black men and 22 percent of Latino men were employed in such occupations, compared with 17 percent of White men and 13 percent of Asian men.

 

Box: Temporary and Staffing Work

 

Number of staffing agency workers in the United States: 3.4 million (2.7 million in temporary help services)

Estimated percentage of industry contracted:  100%

Median wage:  $12.40[89]

Demographics: African Americans and Latinos over-represented in temporary industries.[90]  Undocumented workers are also an increasing source for temporary labor.[91]

 

 

Contracting in the Port Drayage Industry

 

[put port trucker profile someplace around here]

 

There are an estimated 75,000 port truck drivers in the United States.[92]  These are the workers who transport around 250 million metric tons of imported goods worth $900 billion dollars from our ports to railheads or other logistics firms. 

 

Prior to deregulation of the trucking industry in 1980, port trucker jobs were family sustaining, union jobs.  After deregulation, new companies, mostly small and without assets, entered the industry, driving down rates and wages.[93]  The companies soon turned to a new business model:  they could cut costs by shifting liability to drivers, simply by calling them “independent contractors.”

 

Approximately 80 percent of port truck drivers are now labeled “independent contractors.”  Of these, approximately 80 percent, or 50,000 workers, are misclassified.[94]  The shift to an independent contractor model from an employee model is correlated with a 30 percent decline in wages between 1980 and 1995.  Current median net annual earnings for port drayage drivers are $35,000 for those classified as employees, and $28,783 for those classified as independent contractors.[95]

 

The port trucking business model includes passing the capital costs of the business onto its workers.  Trucking companies do not own their own trucks; instead, they require workers to sign contracts attesting that they are independent contractors, “leasing” themselves and their trucks back to the companies.  The companies retain nearly complete control over the work:  they tell the workers when, where, and how to perform the job, and require that workers render services to only one company at a time.[96]

 

In the past three years, workers have begun challenging their characterization as “independent contractors,” with positive results.  Nearly every relevant federal agency, including the U.S. Department of Labor, the Internal Revenue Service, and state agencies from Washington, New Jersey, and California, have held that port truck drivers should be properly classified as employees.[97]  The California Department of Labor Standards Enforcement has assessed more than one million dollars in back wages owed to 19 misclassified port truck drivers, with more decisions on the way.[98]

 

Box  CONTRACTING:  PORT TRUCK DRIVERS

 

Number of workers in the port drayage industry:  75,000

Number of workers contracted:  60,000

Median Wage:  Contractors:  $11.91  Employees:  $14.71

 

 

Public Contracting

 

Under ever-increasing pressure to cut budgets and workers, both the federal government and the states have increased their reliance on the private sector to provide a variety of goods and services that have traditionally been supplied by the governments.  Federal spending on contracts for good and services rose 150 percent in recent years, from $206 billion in 2000 to $517 billion in 2012.[99]  According to the Economic Policy Institute, even before the Great Recession, federal contract workers represented 43 percent of all employees doing work for the federal government.[100]  A 2008 study by the Center for American Progress found that of the 5.4 million federally-contracted service workforce, an estimated 80 percent earned below the living wage for their city or region.  Four types of contracts were particularly likely to pay low wages:  utilities and housekeeping; property maintenance and repair; clothing and apparel; and food preparation.[101]  In many cases, contracting agencies award service contracts based solely on the lowest bid submitted, which gives contractors an incentive to cut costs by cutting compensation packages.

 

A recent survey of 567 workers in contracted jobs who provide food service, retail services, or janitorial services in various buildings occupied or controlled by the federal government, and 34 port truckers who haul loads under federal contracts, found that most (74 percent) earned less than $10 per hour.[102]  Few reported receiving paid sick days, employer-provided health insurance, or a retirement plan.  In fact, more than half of the workers interviewed reported receiving no benefits at all.

 

Many federal contractors are also frequent violators of core labor laws.  A recent Senate inquiry found that almost 30 percent of the top violators of federal wage and safety laws are also current federal contractors.[103]  A 2004 Department of Labor investigation found that in 80 percent of its wage and hour investigations, employers operating under the federal Service Contract Act had failed to pay legally-mandated minimum wages and benefits.[104]

 

Like many other workers in low-wage outsourced jobs, one in five of the food service, retail, and janitorial workers interviewed for the survey described above reported depending on Medicaid for their health care.  And 14 percent depend on the Supplemental Nutrition Assistance Program (food stamps) to meet their family’s food needs.[105]  A study of school cafeteria workers employed by private contractors found that these workers are nearly twice as likely as the workforce as a whole to participate in one or more public assistance programs:  36.3 percent compared to 19.7 percent.[106]

 

President Obama’s promulgation of an executive order requiring that wages on federal contracts must be no less than $10.10 an hour will help boost wages for many of these workers.[107]  A report of states and localities that had adopted contracting policies similar to the President’s executive order found that these policies reduced the hidden public costs of low-wage work, while delivering better-quality services for the taxpayer and encouraging more companies who paid decent wages to enter the bidding process.[108]

 

Box: Public sector outsourcing

Number of workers: 9,681,240.[109]

Estimated percentage in contracted work:  estimated 2 million low-wage jobs are publicly funded.[110]

Demographics:  57.7% female at state and local level; 42.2% in federal;[111] 30% more African Americans in public sector than other workers.[112]

Median wage: $26.41, but wide range of jobs, larger occupations within government sector range $9.00 to $23.44 per hour.[113]

 

III. Outsourcing Degrades Jobs, Harms Law-Abiding Employers and the Economy 

 

In many industries where outsourcing is on the rise, the intense pressure on contractors to compete fiercely for the work under the contract drives them to reduce labor costs, sometimes illegally, in order to underbid competitors.  This race-to-the-bottom dynamic, combined with a decreased ability of government regulators to detect violations among a sea of small players, has severe consequences not only for individual workers’ pay and job standards, but for the economy as a whole:  local economies are strained by the cumulative effect of lower wages on consumer spending and reliance on safety-net programs; local, state, and federal tax revenues suffer; public safety is undermined; and responsible employers attempting to play by the rules cannot compete.

 

A. Unfair Competition

 

In many sectors, including ones profiled above, outsourcing is now a deeply-entrenched business model that has transformed the industry.  In at least some segments of key industries, competing firms cannot survive unless they violate workers’ compensation laws, skimp on their unemployment insurance taxes, and pay less than the required minimum or prevailing wages; often, they achieve all of these by misclassifying workers as independent contractors, franchisees, or other non-employee labels.  Companies that misclassify their workers can save as much as 30 percent of their payroll costs.  Businesses that require workers to sign independent contractor or individual franchise agreements or pay off the books can underbid their law-abiding competitors, particularly in labor-intensive sectors like construction, delivery, and building services. 

 

In the construction industry, for example, general contractors facing stiff competition for contracts push heavily on subcontractors to reduce project costs, which leads—intentionally or not—to neglect for workers’ rights as subcontractors are forced to trim expenses.  As described by the authors of one recent report, the industry is “a fiercely competitive contract industry, characterized by slim profit margins, high injury and [workers’] comp rates, comprised largely of numerous small to medium-sized companies whose numbers and size may make them more likely to operate beyond the view of state regulators.”[114]  Janitorial cleaning contractors like Coverall, Jani-King, and Jan-Pro base their business models on calling their janitorial workers “franchisees,” requiring their workers to pay for the right to clean a particular building.[115]  The U.S. Department of Labor’s Wage & Hour Division has named janitorial and construction as two of its top priority industries,[116] specifically citing high labor-standards-violation levels and use of contracting structures.[117]

 

In addition, employers that engage in independent contractor misclassification enjoy   l savings of as much as 30 percent of payroll, meaning that law-abiding firms treating their workers as “employees” struggle to compete, and in some cases are driven out of business.  Some businesses in labor-bidding sectors have backed more robust enforcement and other reforms to stem labor standards violations and the race-to-the-bottom, in hopes of leveling the playing field.[118]

 

The costs of these business models, and of independent contractor misclassification in particular, are shocking.  While the broader financial costs of outsourcing have yet been measured, federal and state governments suffer a hefty loss of revenues due to misclassification of employees as independent contractors, in the form of unpaid and uncollectible income taxes, payroll taxes, and unemployment insurance and workers’ compensation premiums.  Misclassification of this magnitude exacts an enormous toll:  researchers found that misclassifying just one percent of workers as independent contractors would cost unemployment insurance trust funds $198 million annually, and a 2009 report by the Government Accountability Office (GAO) estimated that independent contractor misclassification cost federal revenues $2.72 billion in 2006.[119]

 

A wave of state-level studies on the costs of independent contractor misclassification over the past decade supplement federal data to paint a bleak picture of how this practice robs unemployment insurance and workers’ compensation funds of billions of much-needed dollars and significantly reduces federal,