On May 20, 2015, Rep. Erik Paulsen (R. Minn.) introduced the Independent Contractor Tax Fairness and Simplification Act of 2015 (HR 2483), a bill that is identical to the bill of the same name that he introduced in 2012 (H.R. 6653). (The publisher of this blog has secured an advance copy of the Paulsen bill, which is not yet available from Congress’ official site.) Like the Fair Playing Field Act of 2013 (S. 1706), which was introduced in late 2013 by eight Democrats in the Senate, this new bill would eliminate prospectively the “safe harbor” that has been relied upon since 1978 by many businesses that may have misclassified employees as independent contractors (ICs). Similarly, both bills would allow a business that has treated a worker as an IC to qualify for a form of retroactive safe harbor for purposes of past employment tax liability if the business has had a reasonable basis for not treating the worker as an employee and has consistently reported the earnings of the worker and others similarly situated on a 1099 basis.
Neither the Paulsen bill nor the Fair Playing Field Act bill would, if enacted, eliminate the use of ICs; rather, the proposed “Findings” in both bills acknowledge the important role ICs play in the economy.
There are a number of key differences between this bill proposed by Republican Paulsen and the Fair Playing Field Act bill proposed by Democrats. The latter bill, if it were to be re-introduced and enacted, would require the Secretary of the Treasury to issue regulations or other prospective guidance clarifying the employment status of individuals for federal employment tax purposes. On the other hand, this new bill, H.R. 2483, specifically prohibits the issuance of new regulations or Revenue Rulings by the Department of the Treasury with respect to the employment status of any individual for employment tax purposes.
While both bills expressly state that the term “employment status” shall mean the classification of an individual as an employee or IC “under the usual common law rules,” H.R. 2483 (unlike the Fair Playing Field Act bill) would codify a new form of “safe harbor” if the worker meets all four of the following factors:
- incurs significant financial responsibility for providing and maintaining equipment and facilities;
- incurs unreimbursed expenses or risks income fluctuations because remuneration is “directly related to sales or other output rather than solely to the number of hours actually worked or expenses incurred”;
- is compensated on such factors as percentage of revenue or scheduled rates and not solely on the basis of hours or time expended; and
- “substantially controls the means and manner of performing the services” in conformity with regulatory requirements, or “the specifications of the service recipient or payor and any additional requirements” in the parties’ written IC agreement.
This bill puts forth a new safe harbor that appears to be limited to a defined segment of ICs who bill for services on the basis of scheduled rates, such as truckers and messenger couriers. The first mention of this bill emanated from an industry association that advocates for delivery companies, logistics suppliers, and shippers across North America. By focusing on this industry segment, the bill would exclude from its safe harbor many legitimate ICs that are traditionally compensated on an hourly rate, such as professionals (including sole practitioner lawyers, accountants, architects, and designers) as well as sole proprietors in the skilled trades (including electricians and plumbers). It would also exclude legitimate ICs who have little or no expenses or equipment, such as freelance tutors, interpreters, editors, and writers. Other legitimate ICs would undoubtedly also be excluded under the four-factor safe harbor test.
The bill may also contain a misclassification escape clause that has not been recognized by the courts and administrative agencies as indicative of IC status. While the language is less than precise, the fourth factor arguably may allow a service recipient to direct the service provider by inserting into the parties’ IC agreement “additional requirements” without creating an employment relationship. Generally, requirements imposed by the service recipient as to how the work is to be performed are taken into account in determining if the business exercises control or direction over the means and manner by which the services are performed. Such direction and control is typically indicative of employee status. In contrast, requirements as to the end-product of the services, i.e., what the services the individual is being hired to perform, are not typically an indicator of employee status inasmuch as all ICs must be told what they are being retained to do.
The scope of this new bill, like the Fair Playing Field Act bill, would also be quite limited. Neither bill would have any impact on whether a worker is an IC or employee under the federal Fair Labor Standards Act (FLSA), which governs minimum wages and overtime. The determination of whether a worker is an IC or employee under that labor law is based on a variation of the common law standard frequently referred to as the “economic realities” test. Thus, a worker that may qualify for IC status under H.R. 2483 (or the Fair Playing Field Act) for purposes of U.S. employment taxes may not qualify for IC status under the FLSA for purposes of overtime and minimum wage.
State labor, unemployment, and workers compensation laws would not be affected by either bill. Some of those laws are not based on the common law but rather contain a different statutory scheme that have a list of factors that must be met in order to qualify for IC status.
No Congressional action was taken on the 2012 version of the Independent Contractor Tax Fairness and Simplification Act. Nor was any Congressional action taken on the Fair Playing Field Act of 2012 or 2013. While the U.S. Department of Labor and IRS remain active in cracking down on independent contractor misclassification, Congress remains in a state of paralysis with respect to IC legislation. On the other hand, at least half of the state legislatures have enacted laws designed to curtail misclassification of employees as ICs. Independent contractor misclassification is also an increasingly common type of class action lawsuit. Thus, although federal legislation seems unlikely before the 2016 elections, the need to enhance IC compliance remains imperative.
Most companies with business models that are IC-dependent or simply make use of multiple ICs are well aware that they are at risk of IC misclassification liability if they have not properly classified these workers. Businesses can enhance IC compliance by restructuring, re-documenting, and re-implementing their independent contractor relationships using a process such as IC Diagnostics™; they can also reclassify or redistribute ICs as described in my 2015 White Paper on minimizing IC misclassification liability.
Written by Richard Reibstein.