Welfare Recipients and Workforce Laws

Welfare Recipients and Workforce Laws

Order Code 97-1038 EPW
Updated June 28, 2004
CRS Report for Congress
Received through the CRS Web
Welfare Recipients and Workforce Laws
-name redacted-
Domestic Social Policy Division
Summary
Work requirements of the 1996 welfare law (P.L. 104-193) and discussions about
reauthorization of the program of Temporary Assistance for Needy Families (TANF)
have raised questions about the application of basic labor and employment tax laws to
TANF recipients. The most controversial issue has been the status of persons assigned
to “workfare” programs, in which recipients work in exchange for their TANF benefits.
The U.S. District Court for the Northern District of New York held on March 1, 2004,
that participants in the Work Experience Program (WEP) are “employees”entitled to
wage and hour protections of the Fair Labor Standards Act (FLSA). In February the
Second Circuit Court of Appeals held that WEP participants also are employees under
federal civil rights employment-related legislation. In the absence of explicit language
in the 1996 law, the Clinton Administration’s Department of Labor (DOL) maintained
that most workfare participants were employees and hence, must be “compensated” at
the minimum wage rate. Because TANF sets a minimum work week, some states might
have to raise benefits to meet the minimum wage standard for workfare participants.
Another issue is whether workfare “wages” are subject to payroll taxes. If Congress
should increase the federal minimum wage rate or the TANF work week, it would
increase the number of states whose workfare programs might have to be changed to
meet FLSA and Internal Revenue Service (IRS) requirements. This report will be
updated when significant developments occur.
Countable Work Activities
Seeking to move welfare recipients into jobs, the 1996 law stipulates that a certain
percentage of TANF parents must engage in specified “work activities” if the state is not
to lose some TANF funds. These countable activities can be grouped as follows:
unsubsidized employment; subsidized employment; on-the-job training; human capital
investment (including vocational educational training, completion of high school, and job
search), and “workfare” (work experience and community service). Table 1 shows how
TANF work activities are affected by current laws and policies concerning the federal
minimum wage rate, unemployment insurance, Social Security payroll taxes, workers’
compensation, income tax withholding, the Earned Income Tax Credit, Social Security
payroll taxes, health and safety standards, nondiscrimination, and nondisplacement of
existing workers. The table does not deal with some other laws of broad application, such
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as Title VII of the Civil Rights Act (equal opportunity in employment)1 or the National
Labor Relations Act, which governs labor-management relations in the private sector.
To be counted as a work participant, most TANF recipients must engage in a
recognized work activity 20-30 hours weekly. In states with above-average benefits and
generous treatment of earnings, many persons who find part-time jobs could remain on
TANF, at least for a time, receiving a reduced benefit. As the table shows, these persons,
if in unsubsidized jobs, would be covered by the basic workplace laws. The table also
shows that persons engaged in the act’s human capital investment work activities would
not be treated as employees and, thus, generally, would not be covered by many of the
laws. However, the 1996 law explicitly applies several nondiscrimination laws to TANF-
funded activities. It prohibits discrimination on the basis of age, disability, race, color,
or national origin. For activities paid with Welfare-to-Work (WtW) funds, added in 1997,
gender discrimination also is forbidden. The 1996 law spells out some rules against
displacing existing workers and requires states to establish grievance procedures to
resolve complaints. For WtW-funded activities, nondisplacement rules are expanded, and
states are required to establish grievance procedures also for persons alleging violations
of rules regarding discrimination and health and safety standards.
Workfare
Minimum wage. In March, 2004, a federal district court in New York ruled that
workfare participants are employees covered by the FLSA (Stone v. McGowan). The
Clinton Administration’s earlier (1997) decision2 that most workfare recipients are
covered by the minimum wage had been protested by the National Council of State
Human Service Administrators3 and some governors, but applauded by organized labor.
TANF law sets minimum average weekly hours of work; (20 hours for single parents
without a child under age 6 and 30 hours for other single parents). At the federal
minimum wage rate of $5.15, a 30-hour weekly workfare assignment equates to $154.50
in benefits ($669 per month). Only in Alaska, Wisconsin (Community Service program),
and some parts of California and New York are TANF maximum benefits for a 3-person
family (as of January 1, 2003) high enough to provide the required wage equivalent.
Many of the other states could observe the workfare minimum “wage” by adding food
stamps to the calculation, but some states would have to increase cash benefits. Up to
now, states have made relatively little use of workfare, but under the House-passed TANF
reauthorization bill (H.R. 4), more states probably would establish workfare programs in
1 The second Circuit Court of Appeals on February 13, 2004, held that WEP participants are
employees covered by Title VII of the federal civil rights act, which prohibits employment-
related discrimination on the basis of race, color, religion, national origin, or gender.
2 DOL guidance, How workplace laws apply to welfare recipients, May 22, 1997. For text, see
[http://www.dol.gov/asp/w2w/welfare.htm].
3 In spring 1998 California gave notice that it did not regard TANF workfare participants as
“employees.” The National Conference on State Legislatures also objected to FLSA coverage
of workfare recipients. It said that classifying TANF recipients who perform community service
as “employees of the state” would require states or non-profit organizations to pay social security
and unemployment taxes on their behalf and that this would weaken state job training efforts.

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order to meet the bill’s stricter work requirements. Workfare’s potential benefit cost has
been a concern of the governors as well as state lawmakers. At the same time, organized
labor fears that unless benefits for workfare participants reflect the minimum wage rate,
wage levels for entry-level jobs in both the public and private sectors will be depressed
and some regular workers may be displaced. The House-passed H.R. 4 generally would
require an average of 24 hours weekly in a narrow list of “direct work” activities. Only
in 9 states would TANF maximum benefits for a 3-person family equal the federal
minimum wage standard for 24 hours of weekly work ($535 per month). Secretary of
Health and Human Services Tommy Thompson said on March 6, 2002, that jobs that pay
at least the minimum wage were the centerpiece of the Bush proposal to reauthorize
TANF. He said the Bush Administration would insist that TANF recipients receive “at
least the minimum wage for the hours they work, including community service jobs.”
Some 13 states have established state minimum wage rates above $5.15, and FSLA
requires employers to pay the state minimum wage rate if it exceeds the federal minimum.
The DOL guidance memorandum said that states could combine food stamp benefits
and TANF grants in determining whether the minimum wage requirement was met in
food stamp workfare or food stamp wage supplementation. However, DOL said that
credit toward paying the minimum wage could not be taken for pension benefits, health
insurance (including Medicaid) or other benefits excluded under the FLSA. Under pre-
TANF law, benefits from Aid to Families with Dependent Children (AFDC) could not to
be treated as “compensation for work performed” in Community Work Experience
Programs (CWEP), and required workfare hours could not exceed the number needed to
equal the benefit, with each hour valued at the federal minimum wage rate, or, if higher,
the state minimum.
Social Security Taxes, EITC, Unemployment Insurance, and Workers’
Compensation. In the 1997 tax act, Congress prohibited the EITC for TANF payments
made for participation in work experience or community service programs. A Clinton
Administration official gave assurances in August 1997 that social security and
unemployment taxes would not be imposed on workfare jobs. On May 8, 1998, the AFL-
CIO sent a memorandum to the Treasury urging it to grant a “work relief” rather than a
“general welfare doctrine” exception from Social Security and unemployment taxes to
workfare payments. On December 17, 1998, IRS gave notice (IRS Notice 99-3) that it
had decided to treat TANF payments as exempt from federal income and payroll taxes
under the following three conditions: (1) the only payments received by the TANF
recipient are received directly from the state or local welfare agency (an entity with which
a state or local agency contracts to administer the program would be treated as the state
or local agency); (2) the person’s TANF eligibility is based on need and the only
payments for his/her work activity are funded entirely under a TANF program; and (3) the
size of the TANF payment is determined by applicable welfare law, and the number of
hours of work activity does not exceed the recipient’s TANF payment divided by the
higher of the federal or state minimum wage. IRS said its notice was based on the
“general welfare doctrine. An official of Michigan’s TANF agency has protested that the
third condition, when combined with the TANF hourly work rule, would make many of
the payments taxable unless grant amounts are “significantly increased.” He urged IRS
to drop step three of its proposed test. The extent to which TANF recipients are covered
by state workers’ compensation laws is determined by each state.

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Table 1. Workplace Laws: Application to “Work Activities” Under TANF
Vocational education,
Work experience,
high school, job-related
community service
Unsubsidized
Subsidized private or
education or skills
Workplace law
(“workfare”)
employment
public employment
On-the-job training
training, job search
Fair Labor Standards Act Yes, usually. (DOL
Yes
Yes
Yes (unless not deemed
No
(e.g., minimum wage
guidance memorandum,
an employee)
rate, overtime rules,
May 22, 1997)
child labor)
Federal Unemployment
No, provided three
Yes
Yes (Public employees
Yes (unless not deemed
No
Tax Act (Unemployment conditions are met.a
are not subject to federal an employee)
Insurance)
IRS Notice 99-3.
tax, but states must cover
most public employees
unless job is regarded as
work relief)
Federal Insurance
No, provided three
Yes
Yes
Yes
No
Contributions Act
conditions are met.a
(FICA) Social Security
IRS Notice 99-3.
payroll taxes
Workers’ Compensation State law requirementsb
Yes
Yes
Yes
No
(state laws)
Federal income tax.
No, provided three
Yes
Yes
Yes
No
(Earnings subject to
conditions are met.a
income tax)
IRS Notice 99-3. NOTE:
TANF benefits generally
would be below income tax
threshold.
Earnings eligible for
No. Explicit provision of
Yes
Yes
Yes
No
earned income tax credit P.L. 105-34

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Vocational education,
Work experience,
high school, job-related
community service
Unsubsidized
Subsidized private or
education or skills
Workplace law
(“workfare”)
employment
public employment
On-the-job training
training, job search
Occupational Safety and Yes, but OSHA does not
Yes
Yes (but OSHA lacks
Yes
No
Health Act (OSHA)
have direct jurisdiction
direct jurisdiction over
over public employees in
public employees in
many states.
many states).
Rule for persons in
Rule for persons in
Rule for persons in
Rule for persons in
activities funded with
WTW-funded activities: WTW-funded activities:
WTW-funded activities:
Welfare-to-Work (WTW)
health/safety standards
health/safety standards of health/safety standards of
grants: health and safety
of federal and state law
federal and state law that
federal and state law that
standards of federal and
that otherwise apply to
otherwise apply to
otherwise apply to
state law that otherwise
employees apply equally employees apply equally
employees apply equally
apply to employees apply
to them; grievance
to them; grievance
to them; grievance
equally to them; grievance
procedure required to
procedure required to
procedure required to
procedure required to
resolve complaints.
resolve complaints.
resolve complaints.
resolve complaints.
Non-discrimination:
Yes (explicit provision of
Yes
Yes (Explicit provision
Yes (Explicit provision of Yes (Explicit provision of
Age Discrimination Act; TANF law).
of TANF law).
TANF law).
TANF law).
Section 504 of
Rehabilitation Act;
For WTW-funded
For WTW-funded
For WTW-funded
For WTW-funded
Americans with
activities, gender
activities, gender
activities, gender
activities, gender
Disabilities Act; Title VI discrimination also is
discrimination also is
discrimination also is
discrimination also is
of Civil Rights Act (race, forbidden. Grievance
forbidden. Grievance
forbidden. Grievance
forbidden; grievance
color, national origin)
procedure required to
procedure required to
procedure required to
procedure required.
resolve complaints of
resolve complaints of
resolve complaints of
alleged discrimination.
alleged discrimination.
alleged discrimination.
NOTE: Sex
discrimination also is
prohibited by Title IX of
Education Amendments
of 1972 for any school
receiving federal funds.

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Vocational education,
Work experience,
high school, job-related
community service
Unsubsidized
Subsidized private or
education or skills
Workplace law
(“workfare”)
employment
public employment
On-the-job training
training, job search
Nondisplacement of
TANF recipient may fill
TANF recipient may
TANF recipient may fill TANF recipient may fill
Not relevant
existing workers
vacancy, but not if anyone
fill vacancy, but not if
vacancy, but not if
vacancy, but not if anyone
is on layoff from the same
anyone is on layoff
anyone is on layoff from is on layoff from the same
or a substantially
from the same or a
the same or a
or a substantially
equivalent job; if the
substantially equivalent substantially equivalent
equivalent job; if the
employer has cut
job; if the employer has job; if the employer has
employer has cut
workforce to hire TANF
cut workforce to hire
cut workforce to hire
workforce to hire TANF
recipient; or, for WTW-
TANF recipient; or, for TANF recipient; or, for
recipient; or, for WTW-
funded activities if
WTW-funded activities WTW-funded activities
funded activities if
employer has cut work
if employer has cut
if employer has cut work employer has cut work
hours below full time.
work hours below full
hours below full time.
hours below full time.
WTW activity cannot
time. WTW activity
WTW activity cannot
WTW activity cannot
violate existing collective
cannot violate existing
violate existing
violate existing collective
bargaining agreements.
collective bargaining
collective bargaining
bargaining agreements.
agreements.
agreements.
Grievance procedure
Grievance procedure
Grievance procedure
Grievance procedure
required to resolve
required to resolve
required to resolve
required to resolve
complaints of alleged
complaints of alleged
complaints of alleged
complaints of alleged
displacement.
displacement.
displacement.
displacement.
a. IRS notice 99-3 sets forth three conditions for excluding TANF workfare payments from federal income taxes and employment taxes: (1) the only payments received by the TANF
recipient are received directly from the state or local welfare agency (an entity with which a state or local agency contracts to administer the program would be treated as the state
or local agency); (2) the person’s TANF eligibility is based on need and the only payments for his/her work activity are funded entirely under a TANF program; and (3) the size
of the TANF payment is determined by applicable welfare law, and the number of hours of work activity does not exceed the recipient’s TANF payment divided by the higher
of the federal or state minimum wage.
b. According to Welfare News, May, 2004, published by the Welfare Law Center, many states have incorporated workers’ compensation protections directly into their workfare statutes,
and several court decisions have held that workfare workers are covered by workers’ compensation laws.

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