House Tries to Liberate ICs

17 Dec 2003

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Notice how the following article does not mention the fact that ICs sometimes 
neglect to send those quarterly tax payments in on time and this is why the 
Feds dislike them.  It's not going to happen, but it would be fun if it 
did...

July 20, 1997

Item in Tax Bill Poses a Threat to Job Benefits

By STEVEN GREENHOUSE

In Congress and in thousands of workplaces, the nation's business community 
is seeking to change longstanding rules and practices to turn many people 
classified as employees into independent contractors -- a move that could 
cause many Americans to lose health insurance and pension and unemployment 
insurance benefits.

In a little-noticed provision in its tax bill, the House of Representatives 
has approved a new -- and, many experts say, more inclusive -- test to 
determine who is an independent contractor. The Clinton administration is 
fighting the provision, asserting that it would strip millions of workers of 
their basic benefits. But business groups say the legislation is needed to 
clarify the often fuzzy definition of who is an independent contractor.

Outside Capitol Hill, employers ranging from small construction companies to 
giants like Microsoft and Pacific Bell are increasingly hiring new workers as 
independent contractors rather than as traditional employees -- a not 
entirely new practice that is expanding rapidly as employers strain to cut 
costs.

Such a strategy not only gives employers more flexibility to shrink their 
work forces, but it saves them thousands of dollars per worker because 
companies do not have to make Social Security, Medicare, unemployment 
insurance or workers' compensation contributions for independent contractors.

"What's clear is employers are seeking increasingly to have more flexible 
arrangements," said Sara Horowitz, the executive director of Working Today, 
an advocacy group on workplace issues. "But what that means in reality is 
people are working increasingly without benefits. They're working not only 
without health coverage but without the protections of the major labor 
legislation of this century: pensions, minimum wage, occupational safety, 
unemployment insurance, age discrimination. The list goes on."

Opponents of this practice say companies are wrongly lumping people usually 
considered employees, like truck drivers and middle-level managers, into the 
independent contractor category, which traditionally referred to people in 
business for themselves.

At last year's Olympic Games in Atlanta, for example, several hundred 
broadcast technicians hired by the Atlanta Committee for the Olympic Games 
had to sign contracts saying they were freelance independent contractors 
rather than employees, who are protected by overtime and unemployment 
insurance laws.

A Maryland catering company that books 1,000 events a year insists that the 
75 waiters it hires on average for each event are independent contractors, 
not employees.

Texas A&M University recently hired 400 low-wage farm workers for its 18 
agricultural extension programs and classified them as independent 
contractors rather than employees -- a move the IRS found to be illegal.

Pacific Bell laid off hundreds of experienced middle managers several years 
ago and has hired many of them back as independent contractors, but without 
the health insurance, pension plan and unemployment coverage they used to 
have.

Corporate America defends the trend toward hiring independent contractors, 
saying it gives companies the flexibility to cut back easily during 
downturns. Business groups also assert that because this is an age when 
Americans are becoming more entrepreneurial and are increasingly working at 
home thanks to computers, it only makes sense to classify more workers as 
contractors.

The corporate groups that have persuaded the House and are pushing the Senate 
to rewrite the definition of who is an independent contractor contend that 
the legislation is needed because the common-law definition is arcane and 
vague. They say that because many companies fear harsh IRS punishment, 
existing law pushes employers to classify workers as employees when they 
should be considered independent contractors.

Nelson Litterst, manager of legislative affairs for the National Federation 
of Independent Business, a small-business group that is pushing hard for the 
legislation, said: "The interest of small business has never been to find 
loopholes in the law to create wholesale switches of workers to independent 
contractors. Our intention is to clarify the definition so there is less of a 
gray area."

But a senior Treasury Department official argued that the provision passed by 
the House appeared intended to greatly increase the number of independent 
contractors, currently 8.3 million.

"The number of employees who will be shifted will be in the millions," said 
the official, who characterized the House legislation as far broader than 
traditional definitions of independent contractor. "I'm not even sure if I 
would characterize this provision as a sieve. A sieve at least strains things 
out."

Martin Regalia, chief economist for the U.S. Chamber of Commerce, interprets 
the House language far more restrictively, saying it merely defines borders 
instead of opening up new territory. "To allege there will be wholesale 
expansion of independent contractors and that thousands of individuals will 
lose their benefits is pure rhetoric," he said.

The AFL-CIO is working to torpedo the House provision on independent 
contractors, insisting that it would eliminate basic protections for millions 
of workers, creating a cost advantage for many employers that would in turn 
push their competitors to transform their workers into independent 
contractors.

That trend is especially worrisome for organized labor, which is struggling 
to increase its ebbing numbers, because independent contractors are not 
allowed to form or join unions under federal labor law.

"What you have here is another window into the Republican leadership's view 
of the role of government," said Peggy Taylor, the labor federation's 
director of legislative affairs. "In this instance, they're trying to put 
government on the side of those corporations and employers who want to get 
away from any responsibilities for the people who work for them."

Because the House included the independent contractor provision in its tax 
bill, but the Senate inserted no such language in its tax bill, 
administration officials and members of Congress say it is hard to predict 
whether conferees will keep the provision in the final tax bill.

The House language, introduced by Rep. Jon Christensen, R-Neb., sets up three 
tests to determine who is an independent contractor:

First, there should be a written contract between the worker and the company.

Second, the worker has a principal place of business that is not the 
company's, does not work primarily at the company's place of business or 
rents an office at the company. An alternative second test is whether the 
worker is not required to work exclusively for the company and whether the 
worker performed a significant amount of work for other companies the 
previous year.

If a worker meets the first and second tests, satisfying any of the following 
criteria makes a worker an independent contractor: The worker has "a 
significant investment in assets and/or training," the worker is primarily 
paid on commission, the worker has significant unreimbursed expenses or the 
worker's service is for a specific amount of time to complete a specific 
task.

Regalia, the Chamber of Commerce economist, said these criteria would create 
far more certainty than the common-law test, which turns on whether the 
employer controls not just the results of a worker's service but the means a 
worker uses, such as the route a worker drives or how a worker dresses.

But analyses prepared by the Clinton administration and the AFL-CIO indicate 
that the new test will sweep many more workers into the independent 
contractor category. Pizza deliverers could easily become independent 
contractors because they do not work primarily on their company's place of 
business, they own their cars (a significant investment in assets), and they 
obtain most earnings from tips (primarily paid by commissions).

Similarly, carpenters and painters might overwhelmingly be considered 
independent contractors because they own their tools (a significant 
investment in assets), they do no work on their company's premises and they 
might sign a contract to do a specific job over a specific period.

According to the Treasury, many secretaries could become independent 
contractors if companies pay them a little extra and then require them to buy 
their own computers and pay a modest rent for their offices.

Business groups criticize these analyses as ludicrous, insisting that 
corporations will not do wholesale reclassifications of traditional employees 
into contractors.

The AFL-CIO is leading the campaign to kill the provision in conference, 
arguing that when employees are turned into independent contractors, society 
at large will often have to foot the bill for those without health insurance 
or pensions. .

Organized labor and businesses are fighting about independent contractors in 
another forum: the National Labor Relations Board. There, they are disputing 
whether truck drivers for the Roadway Package System and for Dial-a-Mattress 
should be considered independent contractors.

If the board does not find them to be employees, that will be a huge setback 
to organized labor because independent contractors do not have the 
protections of the National Labor Relations Act to form unions and bargain 
collectively.

"We're heading into a two-tiered economy," said Ms. Horowitz of Working 
Today, the advocacy group. "The first tier has a New Deal safety net, 
protected by all the different labor laws. Then there is a second tier that's 
short term, flexible, many of them independent contractors. That tier doesn't 
receive benefits or labor law protections.

"The labor law and social protections are completely out of sync with this 
work force. If the rules of the game are changing and people are going to 
become independent contractors, then we have to have a new safety net that 
serves these people, too."

House Tries to Liberate ICs

Duncan Frissell