On September 15, 2010, Senator John Kerry (D-Mass.) and Representative Jim McDermott (D-Wash.) introduced The Fair Playing Field Act of 2010 (S. 3786, H. 6128), which seeks to address employer misclassification of employees as independent contractors and close a so-called “loophole” under the current tax regime.
Since the Democrats have taken control of Congress and many state legislatures, they have worked hard to crack down on employers who misclassify employees as independent contractors. Prior to this new legislation, their most notable effort has been the Employee Misclassification Prevention Act that, among other things, seeks to create a cause of action under the Fair Labor Standards Act for misclassification and to require employers to keep records of hours worked by independent contractors.
The Internal Revenue Code currently provides a safe harbor provision for employers to avoid penalties or at least suffer lighter penalties when they misclassify employees as independent contractors as long as there is a reasonable basis for the classification. According to Senator Kerry’s website, the proposed legislation will reduce the use of the safe harbor provided by the IRS Code by:
- Ending the moratorium on IRS guidance on worker classification issues and requiring the Secretary of Treasury to issue prospective guidance;
- Amending the tax code provisions to clarify that the reduced penalty is not available where employers fail to comply with IRS/Treasury guidance;
- Requiring business owners who use independent contractors to provide each contractor a written statement regarding the contractor’s tax obligations, the labor and employment law protections that do not apply to independent contractors, and the right of the contractor to seek a status determination from the IRS; and
- Requiring the Secretary of Treasury to issue annual reports on worker misclassification.
The White House quickly gave its strong endorsement to the proposed legislation. The proposal of The Fair Playing Field Act of 2010, along with the White House’s heightened interest in misclassification issues, underscores the need for employers to closely examine their independent contractor relationships and, to the extent necessary, take corrective action now before they find themselves the subject of a government investigation or a private lawsuit.