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Independent Contractor Classification Legislation Introduced in Congress
The Independent Contractor Proper Classification Act of 2007 (S 2044), sponsored by Sen. Barack Obama (D-IL) and co-sponsored by Sens. Richard Durbin (D-IL), Edward Kennedy (D-MA), Patty Murray (D-WA), Barbara Mikulski (D-MD), and Barbara Boxer (D-CA) has been introduced to provide procedures for proper classification of employees and independent contractors, including changes to Section 530 of the Revenue Act of 1978 (Section 530). Section 530 provides businesses with relief from federal employment tax obligations in the event of an identified misclassification of workers, if certain requirements, such as reasonable basis, substantive consistency, and reporting consistency, are met.
In a commentary published in the Chicago Sun Times, Senators Obama and Durbin expressed concern that misclassified workers were denied basic employee protections, such as workers’ compensation and overtime pay, and were treated for tax purposes as self-employed. Noting that true independent contractors operate their own businesses, invest capital in their businesses, and perform services separate from the work of other employees, the senators also cited statistics indicating a $53.7 million loss of Illinois state unemployment insurance taxes and between $149 million and $250 million loss of Illinois state income tax.
The legislation would amend Section 530 of the Revenue Act of 1978 (as currently amended) by:
- Adding a new provision that the treatment of an individual as a non-employee would not apply for any period after a determination by the Secretary of the Treasury that the individual shall be treated as an employee. This provision would apply to determinations made after the date the bill is enacted.
- Eliminating the provision prohibiting the Department of Treasury and IRS from issuing regulations or revenue rulings with respect to the employment status of any individual for purposes of employment taxes. This provision would be effective on the date of enactment.
- Eliminating employers’ ability to rely on a long-standing recognized practice of a significant segment of the industry in which the individual is engaged (e.g., “industry practice”) as a basis for claiming the Section 530 safe harbor. This provision would be effective 60 days after the date of enactment.
- Adding a new provision that would require the Secretary of Treasury to establish administrative procedures, within 90 days of enactment, allowing any individual who performs services for a taxpayer to petition the government for a review of his or her employment status. This petition may be done personally or through a designated representative or attorney. These procedures must provide for (1) a determination of status within 90 days of filing in industries where employment is transient, casual, or seasonal (e.g., the construction industry), (2) an administrative appeal, (3) the award of expenses (including expert witness fees and reasonable attorneys’ fees) for the individual against the taxpayer in any case where the individual achieves reclassification, and (4) the assessment of expenses against the taxpayer by the Secretary of the Treasury. This provision would be effective on the date of enactment.
- Adding a provision that would prohibit retaliation (discharge, refusal to contract, or otherwise discriminate against an individual with respect to compensation, terms, conditions, or privileges of the services provided) because the individual has filed a reclassification petition with the government. Other state, federal, and collectively bargained rights would not be diminished by this provision. This provision would be effective on the date of enactment.
- Adding a provision that would address the results of a misclassification determination. If a determination is made that a worker has been misclassified, the Secretary of Treasury would, if necessary, perform an employment tax audit of the taxpayer, inform the Department of Labor about the misclassification, notify the individual of any eligibility for the refund of self-employment taxes, and assess liability against the employer under Internal Revenue Code section 3509. This provision would be effective on the date of enactment.
- Adding a provision that would require the Secretary of the Treasury and the Secretary of Labor to issue annual reports on worker misclassification. The reports would include information on (1) the number and type of enforcement actions against and audits of employers who have misclassified workers, (2) the relief obtained from actions against, and audits of employers who have misclassified workers, (3) an overall estimate of the number of employers misclassifying workers, (4) the number of workers affected and the industries involved, and (5) the aggregate number of worker misclassification cases with respect to which each agency provided information to the other agency and the outcome of any actions taken. The report would also include information on the outcomes of petitions filed under Section 530 with the Secretary of Labor, including information on the outcomes of complaints and actions, and the investigations required under the new law.
- Adding a provision that would set out the enforcement activities to be undertaken by the Secretary of Labor, including identifying and tracking complaints and enforcement actions, and investigations of industries in which worker misclassification is present as determined by information received from the Secretary of the Treasury and other relevant sources (e.g., reports from other federal agencies, state workforce, labor, and revenue agencies, but not return information).
- Adding a provision that would create a notice to employees and independent contractors. The Secretary of Labor would provide for the placement of information on any poster required under the Fair Labor Standards Act informing workers of their right to seek a status determination from the IRS. Each employer would be required to notify any individual hired as an independent contractor of the federal tax obligations of an independent contractor, the labor and employment law protections that do not apply to independent contractors, and the right of the individual to seek a status determination from the IRS. The Secretary of Labor and Secretary of the Treasury would develop model materials for providing the notice.
- Adding a provision on the maintenance of information regarding independent contractors. Each employer would be required to maintain for three years a list of independent contractors retained by the employer, including name, address, Social Security number, and federal tax identification number, and the information must be made available for inspection during investigations.
The legislation has been referred to the Senate Finance Committee. At this time, a companion bill has not been introduced in the House.
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