Hunton Employment & Labor Perspectives

Our prior posts have chronicled recent attempts by Congress and state legislatures to crack down on employers who misclassify employees as independent contractors, the most notable of which was the Employee Misclassification Prevention Act that, among other things, seeks to create a cause of action under the FLSA for misclassification and to require employers to keep records of hours worked by independent contractors.  On September 15, Congress took yet another step in the enforcement direction when 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 close a so-called “loophole” under the current tax regime.

Currently, the Internal Revenue Code provides a safeharbor 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.  And, given the IRS’s current moratorium on issuing guidance on worker classification issues, employers can almost always provide a rationale for their classification decision because the absence of substantial guidance allows employers to be creative in developing their reasonable basis defense.  According to Senator Kerry’s website, the proposed legislation will reduce the use of the safeharbor 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.  According to Vice President Biden, “[S]topping worker misclassification is a priority for the President’s Middle Class Task Force. . . . The legislation is timely, as misclassification is an increasing problem, one that puts employers who properly classify their workers at a disadvantage in the marketplace and costs the government billions of dollars in unpaid taxes.  I urge the Congress to stand up for workers and create a level playing field for law-abiding businesses by supporting this bill.”

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.