19 May Lobbying for Legislation to Protect Your Worker Classification
Under current law, there is a presumption that workers are employees, and the IRS will aggressively pursue collection activities against employer-taxpayers that inappropriately classify employees as independent contractors. There is a conspicuous lack of bright line tests, however, for permissible classification variations under both federal tax and labor law standards. Moreover, the states’ varying standards create additional disparities in treatment. The uncertainty and complexity associated with classifying workers subjects the employer to expensive lawsuits, employment taxes, penalties, and interest for misclassification. Class action lawsuits from a misclassified employee can even lead to the bankruptcy of an otherwise emerging business. Thus, the highly subjective and fact-sensitive analysis under common law creates an unnecessary barrier to contract formation and exercising one’s business judgment.
A change in classification also results in a change in the parties’ economic burdens as employers are obligated to pay payroll taxes that would otherwise be borne by the service provider if he or she is an independent contractor. A reclassification of a misclassified employee, therefore, results in the reshuffling of an economic deck that the parties did not intend.
Section 530 is a safe harbor provision meant to prevent the IRS from retroactively reclassifying independent contractors as employees. To qualify for section 530 relief, an employer must have: (1) consistently treated the worker and similar workers as independent contractors, (2) filed all Forms 1099 for these workers treating them as independent contractors, and (3) had a reasonable basis for not treating them as employees. While there is no explicit definition as to what constitutes a “reasonable basis” for purposes of section 530, the legislative history shows that the reasonable basis requirement should be construed liberally in favor of the taxpayer. Regardless, misclassification is a recurring problem despite Congress’ intent that the IRS show deference to the business judgment of service recipients and not aggressively pursue collection activities in this context.
While an employer can fill out an IRS Form SS-8 to document the basis for his worker classification, taxpayers are currently unable to make a binding election. The modern workaround is to sign a written agreement stating the worker is an independent contractor, but even binding contracts are subject to the IRS’ ad hoc reasonable basis determination for worker classification. This is a waste of government and taxpayer resources. Instead, the policy of liberal construction in favor of the taxpayer should be codified by expanding the 530 safe harbor to classes of persons who can be expected to protect themselves from reclassification. The provision of statutory relief, especially through state preemption, will facilitate business deals and economic growth in our communities.
We support legislation that allows for freedom of contract and the ability for parties to agree among themselves as to their respective rights, liabilities, and obligations. We suggest that contractor status be elective, at least for certain types of workers that can be expected to be able to protect their own interests. Such an approach would not result in any threat to the fisc, as the same net amount of taxes would be due, but rather provide contracting parties with greater certainty that their economic deal will not be rearranged by a regulatory agency. Thus, we are advocating for legislation to protect your worker classification.