Bill Introduced to Close Independent Contractor "Loophole"

The White House has endorsed legislation by Senator John Kerry (D-Mass.) and Representative Jim McDermott (D-Wash.) to protect workers from losing benefits and protections as the result of a tax loophole.

According to press material issued by Senator Kerry's office, the Fair Playing Field Act of 2010, which Kerry and McDermott introduced on September 15, will close a tax loophole currently allowing businesses to misclassify workers as “independent contractors,” thereby creating an unfair environment for businesses that play by the rules and an unfair environment for workers. The bill is cosponsored in the Senate by Senators Kirsten Gillibrand (D-N.Y.), Patty Murray (D-Wash.), Sherrod Brown (D-Ohio), Al Franken (D-Minn.), Daniel Akaka (D-Hawaii), Chuck Schumer (D-N.Y.), and Patrick Leahy (D-Vt.)

Current law provides a “safe harbor” loophole allowing employers to treat a worker as not being an employee for employment tax purposes, regardless of the worker’s actual status under the common law test, unless the employer has no reasonable basis for such treatment or fails to meet certain requirements.

If passed as currently written, the Fair Playing Field Act of 2010 would:

  • end the moratorium on Internal Revenue Service (IRS) guidance addressing worker classification;
  • require the Secretary of Treasury to issue prospective guidance clarifying the employment status of individuals for Federal employment tax purposes;
  • 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;
  • require persons who contract independent contractors on a regular and ongoing basis to provide a written statement to each independent contractor of the Federal tax obligations of independent contractors, 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; and
  • require the Secretary of the Treasury to issue annual reports on worker misclassification.

Identical legislation was introduced in the House.

Worker misclassification has recently received increased attention by both the Administration and Congress. The President’s budget for the 2011 fiscal year includes provisions that target the misclassification of employees as independent contractors and are estimated to raise more than $7 billion in revenue over 10 years.