Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Senator John Kerry (D-MA) has reintroduced the Fair Playing Field Act of 2012 (S. 2145), legislation that would limit the use of a federal “safe harbor” that allows businesses to treat workers as independent contractors for federal employment tax purposes, regardless of the employee’s actual status under the common law test.
The safe harbor provided under section 530 of the Revenue Act of 1978 protects an employer from liability for misclassifying workers as independent contractors if the employer had a “reasonable” basis for doing so and met other certain conditions. Generally, section 530 provides that an employer has a reasonable basis to classify an employee as an independent contractor if the employer relied on: (a) a past IRS audit with respect to the taxpayer; (b) published rulings or judicial precedent; or (c) long-standing recognized practice in the industry. Moreover, the employer must not have treated the individual as an employee for any period. For any time after 1978, all of the employer’s federal tax returns must reflect that the workers were classified as independent contractors. Similarly, in order to benefit from the safe harbor provision, the employer must not have classified workers performing substantially similar work as employees.
The new bill would direct the Secretary of the Treasury to issue prospective guidance to clarify who qualifies as an independent contractor for federal employment tax purposes. The measure would also amend the provisions of the tax code that provide for reduced penalties for failure to deduct and withhold income taxes and the employee’s share of FICA taxes, and require employers that use independent contractors on a regular and ongoing basis to provide a written statement to each independent contractor regarding their federal tax obligations, the labor and employment law protections that do not apply to independent contractors, and the right of the independent contractor to seek a status determination from the IRS. The bill would exempt certain skilled workers from the application of the proposed new safe harbor rules.
While a similar version of this bill failed to advance in either the House or Senate during the last congressional session, worker misclassification continues to be hot-button topic. The White House’s recently issued proposed budget for 2013 indicates that this issue remains an administrative priority. For example, the budget specifically allocates $14 million to combat the misclassification of employees as independent contractors and strengthen and coordinate federal and state efforts to enforce labor violations arising from misclassification. This request includes $10 million for grants to states to identify misclassification and recover unpaid taxes. Agency efforts to combat misclassification include the Department of Labor’s Misclassification Initiative, an effort to prevent, detect, and remedy instances of misclassification through memorandums of understanding with several state government agencies.
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