Obama Administration’s Revenue Proposals Address Worker Misclassification

February 16, 2011

Among the many proposals in the Treasury Department’s recently released 2011 “Green Book,” which outlines and explains the Obama Administration’s Fiscal Year 2012 revenue proposals, one proposal addresses the misclassification of employees as independent contractors. This proposal is one of several circulated in recent years (including federal and state proposed legislation) to address worker misclassification, and it highlights the need for employers to ensure that they are properly classifying their workers.

The proposal is designed to accomplish all of the following:

  • Reduce uncertainty about worker classification (particularly given the changes in working relationships between service providers and service recipients since 1978 when Congress imposed a moratorium on the IRS on issuing general guidelines addressing worker classification).
  • Eliminate potential competitive advantages and incentives to misclassifying workers associated with worker misclassifications by competitors.
  • Reduce opportunities for noncompliance by workers classified as self-employed.
  • Maintain the benefits and worker protections associated with an administrative and social policy system that is based on employee status.

The proposal does not contain specific details, but generally is intended to accomplish all of the following:

  • Permit the IRS to issue new guidance regarding the proper classification of workers.
  • Retain the reduced penalties for misclassifications provided under current law, but they only would apply if (1) the service recipient voluntarily reclassifies its workers before being contacted by the IRS or another enforcement agency, and (2) the service recipient had filed all required information returns (Forms 1099) reporting the payments to the independent contractor.
  • Permit the IRS to disclose to the Department of Labor information about service recipients whose workers are reclassified.
  • Permit independent contractors receiving $600 or more per year from a service recipient to require the service recipient to withhold for federal tax purposes a flat rate percentage of their gross payments, with the flat rate percentage being selected by the contractor.

With respect to developing guidance, Treasury and the IRS would be directed to issue guidance interpreting common law in a neutral manner, recognizing that many workers are, in fact, not employees. The guidance should provide for rebuttable presumptions, safe harbors, and be industry- or job-specific.

Although correcting worker misclassification has the salutary effect of protecting workers by ensuring that they receive workers’ compensation, unemployment insurance, and other mandated benefits if they are in fact employees, these proposals have another goal as well. Addressing worker misclassification increases tax revenue to federal and state governments in that it increases the number of individuals subject to mandatory withholding from their paychecks.

These reform efforts may present an area of concern for employers who have designated some of their workers as independent contractors. Such employers should ensure that they have classified their workers correctly, and employers may want to reexamine the classification of their workers as independent contractors if they have any doubt whether the workers qualify as such.

For previous articles on worker misclassification, see:

The Department of Labor and IRS Continue to Examine Worker Classification Issues
White House Backs Worker Classification Bill
Proposed Federal Legislation Seeks to Remedy and Penalize Worker Misclassification
Proposed Legislation Likely to Classify More Workers as Employees
NY Legislation Would Presume Construction Workers are Employees