In September 2007, Senator Barack Obama — and five other Democratic Senators, including Hillary Rodham Clinton — introduced the Independent Contractor Proper Classification Act of 2007 (“ICPC”, S. 2044). If passed, the ICPC would accomplish two goals. First, the ICPC would permit the IRS to issue regulations and revenue rulings establishing standards for classification of workers as independent contractors. Second, the ICPC would repeal the Internal Revenue Code’s Section 530 “safe harbor” provisions — effectively eliminating an employer’s ability to rely on industry practices as a reasonable basis for classifying workers as independent contractors.
A tremendous amount is at stake. By classifying workers as “independent contractors” as opposed to “employees”, employers can avoid paying Social Security, Medicare and unemployment payroll taxes, as well as compensation premiums. Likewise, under the current system, it is possible for employers to exclude independent contractors from health and pension benefits, and avoid the need to withhold income taxes. All told, an employer currently can reduce its payroll costs by 30% or more by classifying a worker as an “independent contractor” instead of an “employee” and issue a Form 1099 instead of a W-2 to the IRS.
The sponsors of the bill — including the two current front-running Democratic candidates in this election year — argue that the issue needs uniform standards and enforcement mechanisms. They cite a 2006 University of Missouri study of employee misclassification in Illinois that found that, between 2001 and 2005, the percentage of misclassified employees in the state increased from 5.5% to 8.5% — a 55% jump. The study also estimated that misclassification of employees resulted in tens to hundreds of millions of dollars in lost unemployment insurance taxes, income taxes, and workers’ compensation premiums. There are other studies in New York, Massachusetts, and Maine with similar findings.
The issue of employee classification is being debated around the country — not only in Washington, D.C. Recently, New York and New Jersey indicated that they are stepping up enforcement against employers who misclassify their workers as independent contractors. In September, New York Governor Eliot Spitzer signed an Executive Order that facilitates greater coordination among state agencies responsible for employee classification enforcement. Additionally, New York created a Joint Enforcement Task Force which seeks to strengthen enforcement against independent contractor violations. In July, New Jersey Governor John Corzine signed into law new penalties that apply to construction industry employers that misclassify their employees as independent contractors.
If passed, the ICPC would have a profound impact on several key sectors of the labor force — including the construction and travel agent industries. Currently, the Senate bill has been referred to the Committee on Finance for review and debate. To be sure, this issue will continue to be of great interest to employers and labor unions — all the moreso in an election year.