Independent Contractor Alert: Pending Legislation

There are two pieces of legislation pending in Congress that have a high likelihood of passing before the end of this 2010 calendar year. Both of these pieces of legislation regard Independent Contractors and the way in which a company recognizes them and deals with them. If you are a company that deals with independent contractors you need to be prepared to deal with this legislation if it passes.


The first bill is The Fair Playing Field Act of 2010. This legislation will amend the Internal Revenue Code to eliminate a “loophole” that has allowed companies to avoid paying penalties for improper classification of independent contractors. The so-called loophole that the Fair Playing Field Act seeks to close is Section 530 of the Revenue Act of 1978. (You can read more about Section 530 by clicking here.)That law currently affords businesses a safe harbor to treat workers as independent contractors for employment tax purposes if the company has had a reasonable basis for such treatment and has consistently treated such employees as independent contractors by reporting their compensation on Form 1099s.

Going forward, the Fair Playing Field Act would eliminate the continued use of the Section 530 safe harbor. It would require the Treasury Secretary to issue regulations or other prospective guidance clarifying the employment status of individuals for federal employment tax purposes. The act would also prohibit the IRS from making retroactive assessments for past unpaid taxes in cases in which the business consistently treated the worker involved as an independent contractor and filed Form 1099s each year for the worker, unless the business had “no reasonable basis for not treating such individual as an employee.”

One major provision of the Act would require businesses who use independent contractors “on a regular and ongoing basis” to provide them with a written statement informing them of their federal tax obligations, notifying them of the employment law protections that do not apply to them, and telling them how they can seek a determination of their status from the IRS.

The second piece of pending legislation is Employee Misclassification Prevention Act. It would amend the Fair Labor Standards Act (FLSA), the federal law mandating the payment of minimum wage and overtime for employees who work more than 40 hours in a work week, creating a new labor law offense: misclassification of an employee as an independent contractor. EMPA would also impose strict record-keeping and notice requirements upon businesses with respect to workers treated as independent contractors, expose such businesses to fines of $1,100 to $5,000 per employee for each misclassification, and double the liquidated damages provisions under the FLSA for violations of the minimum wage or overtime provisions.

The paperwork burden and monetary fines associated with both these pieces of legislation can be significant. It is recommended that companies that use independent contractors make a concerted effort to reevaluate those relationships and determine how things might need to be changed.

Free Agent Workers: "Everyone is going to be self-employed"

The title of the article was "Everyone is going to be self-employed." For someone who has been that way for almost 20 years it was an instant eye-catcher. I am a big fan of 'free agents" in the workplace so I read the article with interest. It was an interview in the October 17, 2010 issue of the Atlanta-Journal Constitution (no link available) of Jagdish Sheth, a consumer psychology expert and Emory University professor. When asked about his forecast for the future of the economy his response was :

"I forecast that by 2020 we will have 5 million employees in a 'company' which I have dubbed Self Inc. Everyone is going to be self-employed.... people want to work on contracts or free-lance, be their own boss. At that same time, companies are going to switch over from employees to contractors because the biggest expense becomes health care benefits. So, it is not that jobs are going to be revitalized, but the work is going to be revitalized."

I like the idea. I have liked the idea for a long while, ever since Fast Company and Tom Peters have been talking about Me Inc. and You, Inc. and a free-agent nation. I am not sure everyone would like to be self-employed however, but a large number might be. The roadblock that I see to this occuring is a little organization called THE FEDERAL GOVERNMENT. Both the Internal Revenue Service and the U.S. Department of Labor both have rules and regulations that make it extremely difficult for businesses to use independent contractors on a widespread basis. And in fact they are currently stepping up the efforts to make this even more difficult. (If you want to know more I have written about it several times. Put in independent contractor in the search window to the right and you will find them.) Much of this is driven by revenue. It is easier for the government to collect taxes from companies than it is to collect them from individuals. Of course they will tell you it is for the protection of the worker. But there has been public acknowledgement of the need to generate more revenue.

I asked Attorney-at-Law David Long-Daniels, of Greenberg Traurig LLP, who was presenting, at the SHRM Atlanta conference, on the pitfalls of having contingent workers and independent contractors if he thought we would ever see the Feds allow the widespread use of independent contractors. His answer was a very difinitive "NO." And I agree with him as things exist today.

However, in the online version of Time Magazine from October 29th the following article appeared: Could the Courts Outlaw the Minimum Wage? Written by Adam Cohen, it details the political campaigns of two Republican senatorial candidates, John Raese, the Republican candidate for Senator in West Virginia and Joe Miller, the candidate in Alaska. Both of these men are saying that while the minimum wage is an ok idea it is fundamentally unconstitutional and they want the U.S. Supreme court to rule on the constitutionality of the Fair Labor Standards Act. I am not going to go into the details here because of length, you can read it by clicking the link above. But the conclusion is that would be a major uphill battle to over turn the FLSA.

But the idea has started. And it could gain steam if the forecast of Dr. Sheth starts to materialize. If more people want to be free agents and more companies want to use free agents there may be a drive to unregulate those relationships. And overturning the FLSA would certainly do that. I sincerely doubt that will happen but the move may cause more people to reexamine how we work in this country. Dr. Sheth had an interesting conclusion to his interview that may add some fuel to the movement. He said:

"America is has a survival instinct, and we foster entrepreneurship. It is a nation of ideas, and entrepreneurshisp is the best form of egalitarianism- better than democracy. Entrepreneurship does not discriminate by religion, gender, ethnic backgroun. To me that is the most powerful."

So there is some thought for you to chew on. What do you think? Do we have a chance to become a nation of Free Agents? Will entrepreneurship win over government?