Employment Law Report
Congress May Close Independent Contractor/Employee Loophole
The Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408), a bill seeking to remove a loophole allowing employers to bypass the Internal Revenue Service’s test of whether a worker is an employee or an independent contractor, was reintroduced in the House on July 30, 2009, by Representative Jim McDermott (D-WASH). The bill will make it more difficult for employers to avoid employment tax liability if they have misclassified a worker as an independent contractor and, more importantly, significantly increase employer penalties in the event of misclassification.
The Bill also adds a new section to the Internal Revenue Code to allow employers to avoid employment tax liability only if they are able to demonstrate that they had a “reasonable basis” for classifying the independent contractor as an employee. This new section will repeal the safe harbor provisions of the current Code, and provides that the “reasonable basis” standard will be met if: (1) the employer classified the worker as an independent contractor based on either written documentation that it received addressing the employee’s status of either the worker in question or another individual holding a substantially similar position with the employer or a concluded employment tax examination stating whether the individual (or one holding a substantially similar position) should be treated as an employee; and (2) the employer or its predecessor has not treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after December 31, 1977. The determination as to whether an individual holds a position substantially similar to a position held by another individual would be made in accordance with the Fair Labor Standards Act.
Interestingly, the bill also provides that an individual who performs services for a taxpayer may petition either personally or through a designated representative or attorney for a determination of the individual’s status for employment tax purposes. Thus, the bill allows for employees to take steps to determine their own status for employment tax purposes. Penalties under the new bill will increase from the current minimum $50.00 fine to $250.00, and up from the currently $250,000 maximum to $3,000,000 per year. If enacted the bill will apply to information returns required to be filed after December 31, 2009.