Independent contractors are a major component of the U.S. economy and the construction industry. Construction companies, particularly smaller companies, rely on independent contractors to meet project-based or short terms needs.
Some policy makers have expressed concern that employers are intentionally misclassifying employees as independent contractors. ABC and its members believe that any company that intentionally fails to comply and correctly classify an employee as required by the Internal Revenue Code should face stiff penalties. Unfortunately, however, a number of law-abiding contractors misclassify workers as independent contractors unknowingly because the Internal Revenue Service (IRS) and state guidelines for classifying a worker as an independent contractor are ambiguous and inconsistent. In 1978, Congress addressed this problem by enacting the “Section 530” safe harbor. The safe harbor protects businesses that have a reasonable basis for treating service providers as independent contractors. Any business that selects Section 530 must comply with Form 1099 reporting requirements to the IRS.
ABC supports preservation of Section 530. Attempts to repeal it will place uncertainty and new overhead in front of entrepreneurship, with the heaviest burdens falling on the low-capital start-ups from which many successful small businesses originate.
In the 111th Congress, Representative Jim McDermott D-WA) introduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408) and Senator John Kerry (D-MA) introduced the Senate companion bill, S. 2882. Both H.R. 3408/S. 2882 seeks to repeal Section 530 of the Revenue Act of 1978, a safe-harbor provision that protects qualifying taxpayers against the Internal Revenue Service reclassifying covered workers as employees for federal employment tax purposes.
Additionally, Representative Lynn Woolsey (D-CA) introduced H.R. 5107, the Employee Misclassification Prevention Act of 2010, and in the Senate, Senator Sherrod Brown (D-OH) introduced the companion bill, S. 3254. The legislation seeks to amend the Fair Labor Standards Act by requiring worker classification reporting. On June 17, 2010, the Senate Health Education Labor and Pension Committee held a hearing on S. 3254.
On September 15, 2010, the Fair Playing Field Act of 2010 was introduced in both the House and Senate, H.R. 6128 and S. 3786 respectively. The bill provides for a gradual repeal of Section 530 of the Revenue Act of 1978 (also known as the “safe harbor” provision) and replace the safe harbor provision with worker-status determinations governed by U.S. Department of Treasury guidance. Additionally, it restricts the application of Code Section 3509, requires a new independent-contractor disclosure document, and requires new annual reports on worker classification.
To date no further action has occurred on legislation regarding worker misclassification.
Studies:
Employee Misclassification: Improved Outreach Could Help Ensure Proper Worker Classification, Government Accountability Office, May 8, 2007
Present Law and Background Relating to Worker Classification For Federal Tax Purposes, Joint Committee on Taxation, May 7, 2007