Independent Contractor Compliance Blog - by Collabrus™

Yet another legislative bill targeting businesses who employ independent contractors is being proposed.

Last week I reported on HR 6111, part of a growing trend by the federal government to make it more risky to misclassify workers as IC’s. Well, I found another bill sitting in committee that may be even harder on businesses. On September 12, 2007, Senators Obama, Durbin, Kennedy, and Murray introduced the Independent Contractor Proper Classification Act of 2007 (S. 2044), which addresses what the sponsors view as weaknesses in the current laws regarding independent contractors. It is very much like HR 6111 but adds some additional teeth that should concern every business that utilizes IC’s.

Senate Bill 2044:

1. Grants the IRS the authority to force employers to reclassify workers if the IRS determines they are misclassified as IC’s.
2. Authorizes the IRS to issue regulations and revenue rulings establishing standards for properly classifying workers as IC’s.
3. Eliminates a major protection provision of the IRS’ Safe Harbor. It would eliminate the ability of employers to rely on industry practices as a reasonable basis for classifying workers as independent contractors. Industry Practices has been a major blocking point for the IRS in the past to conducting employment tax audits. If this provision passes it would give the IRS a powerful tool, significantly raising the stakes.
4. Similar to HR 6111 sets up a procedure by which workers can challenge their classification as independent contractors.
5. It provides protections against retaliation for workers who take advantage of the challenge procedure.
6. Requires the IRS to report employers to the Department of Labor (DOL) if an audit found misclassified workers. This leads to HR 6111’s proposed DOL penalty (up to a $10,000 penalty for each violation-by the way, traditionally, a violation is one worker misclassified-how many IC’s do you employ?)
7. Requires DOL to investigate industries that are revealed by IRS data to have high rates of misclassifications (Again, think $10,000 per violation).
8. As HR 6111, this bill requires DOL to create a poster that must be posted by businesses to inform workers of their right to challenge their classification as independent contractors (Note: This encourages workers to challenge their classification and ask for an IRS audit of the company).
9. Again, like HR 6111, SB 2044 requires businesses to notify independent contractors of their federal tax obligations and of their right to obtain a determination of their independent contractor status from the IRS. The notice must also inform IC’s of the labor and employment law protections that apply only to employees-not to IC’s.
10. This bill also requires employers to keep detailed records relating to independent contractors (hours, days worked, rate of pay, etc) for three years.

This bill is currently sitting in the Senate’s Finance Committee.

A nightmare Scenario.

It doesn’t take much imagination to see the Senate version “hooking up” with the House version.  The new “comprehensive bill” gets passed. This would create a nightmare scenario for businesses that rely on independent contractors. It is worth noting that if a business is correctly classifying the IC’s then this may only be a minor annoyance. You may get a few challenges (remember, no retaliation), but you would prevail and things should settle down in a year or so after passage. On the other hand, if your company is incorrectly classifying workers as IC’s you could be in trouble. These bills are meant to plug all the loop-holes.

It’s a growing trend

I’ve reported before that IC’s are disliked by those who would regulate the business world. In general, most government bureaucrats don’t like the free, uncontrolled nature of an IC in the business world. Independent contractors are more difficult to tax and taxes are what sustain the government. This bill is meant to stop the businesses that are employing the shoot-from-the-hip-I-won’t-get-caught-and-if-I-do-I’ll-beat-it-or-just-pay-up-and-keep-doing-as-I-please, tactic. The more that employers abuse the IC model, to gain an unfair advantage over their competition, the more ammunition they are giving the would-be regulators to argue for irresistible authority and unlimited money to “crack down” on misuses of the IC model.

Maybe the time has come

With this growing trend to crack down on misclassifications by both state and federal law makers, it’s time to minimize your risks. The statute of limitations are generally three years for these issues, so the sooner you fix any misclassified workers the sooner you will be free of the risk.  Even if these bills are not passed, others are sure to follow. Both state and federal tax agencies are ramping up their audit programs to close the “Tax Gap.” All this increases the risk of misclassifying your workers. Using IC’s is still a legal and proper way to do business, but you need to protect yourself now more than ever before. You need to be sure you have properly classified your IC’s and can document that decision if challenged.