Thomas A. Robinson on Misclassification of Employees as Independent Contractors and Deliberate Avoidance of Employment Relationships
The American capitalist economy is founded, at least in part, upon the freedom of firms and individuals to bind themselves to legal contracts without significant interference from outsiders, particularly the government. The freedom to contract does not exist within a vacuum, however. For example, should a purported employer be able to subdivide its business, hire out important core elements of its operation to so-called “independent contractors” and, accordingly, avoid the payment of employment taxes, overtime wages, fringe benefits, unemployment compensation, and workers’ compensation medical care and disability benefits?
The stakes in the tug of war regarding the use of independent contractors and the misclassification of employees are high. The discussion is also intensely political. Labor groups, which see the cause of the American worker as having been harmed by the exportation of manufacturing jobs (through NAFTA and the unrelated yet concomitant expansion of the Chinese manufacturing sectors) and the out-sourcing of help-desk, publishing, and information technology jobs to India and other countries, see successful resolution of the employee misclassification issues as crucial to their survival. State governments, many strapped for cash and reluctant to raise taxes on an already burdened tax base, see the elimination of many independent contractor classifications as a rainbow with a proverbial pot of gold at its end.
Some academics see the employee misclassification debate as a proxy for a more serious discussion of immigration policy, pointing out that it is no coincidence that much of the state legislation enacted so far affects the construction industry—the employment sector allegedly employing the highest number of illegal aliens. Employer and industry groups counter that the debate and legislation cannot be viewed within a vacuum, that increased regulation is exactly what has already driven so many jobs from our economy, that the legislative changes proposed by many labor groups and legislators may not cause an export of jobs—it is impossible to outsource to another country’s work force the construction of an office building, a shopping mall, or a house—it will nevertheless result in higher costs that must be passed on to the consumer.
This commentary, written by Thomas A. Robinson, analyzes the sometimes conflicting tests currently utilized by the IRS, the Department of Labor, and the various state jurisdictions, including the Common Law Control Test, the ABC Test, the Economic Realities Test, and the IRS Twenty Questions Test.
Robinson also examines Senate Bill 2044, the Independent Contractor Proper Classification Act of 2007, authored by Senator Barack Obama (D. Illinois), which, if passed by Congress and signed by the President, would establish a detailed enforcement scheme involving a number of federal administrative agencies, including the Internal Revenue Service and the Department of Labor. In its current form, the ICPCA would require employers to notify potential independent contractors of their federal tax obligations, the legal protections that do not apply to them if they are classified as independent contractors, and their right to seek a status determination from the IRS.
Robinson further explores recently enacted (and pending) state legislation on the issue, and indicates that pressures will continue to rise to close (or at least narrow) what some perceive as the independent contractor “loophole.” Robinson states that purported employers will no doubt be required to maneuver even more carefully in the future regarding the use of independent contractors.
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