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Independent Contractor Rules: Proposed Changes to the Internal Revenue Code

Independent Contractor Rules: Proposed Changes to the Internal Revenue Code

Date Published: 2010-12-01
Author: Christina Harris Schwinn

Last month’s article focused on the Employee Misclassification Prevention Act (“EMPA”) which, if passed, will amend the Fair Labor Standards Act. This month’s article focuses on the Fair Playing Field Act of 2010 (“FPFA”) which was introduced into Congress on September 16, 2010. If passed, the FPFA will amend the Internal Revenue Code of 1986 (“IRC”) and authorize issuance of advisory opinions relative to whether an individual is actually an employee or qualifies as an independent contractor under the IRC.

Why Change the Existing Classification Rules?

Why is the government interested in changing the rules relating to independent contractors under the IRC? First, Congress states that the FPFA is needed to level the playing field and address inequities that exist in the competitive positions of businesses under Federal and State law when workers are improperly classified as independent contractors. Second, like EMPA, to ensure the proper collection of taxes and that employees receive the benefits that they are entitled to, including unemployment compensation benefits, workplace health and safety protections, retirement benefits and other protections available to employees under Federal and State anti-discrimination laws. Third, to provide clear guidance (we’ll see) under the IRC upon which businesses and taxpayers may rely and to require the Secretary to issue annual reports regarding worker misclassification. And, lastly, to authorize the Internal Revenue Service to issue advisory opinions regarding classification status, i.e. employee vs. independent contractor.

If the FPFA passes, persons and entities that contract on a regular basis for the services of independent contractors will have to provide a written statement to each independent contractor “notifying such independent contractor of the Federal tax obligations of an independent contractor, that the labor and employment law protections do not apply to independent contractors and the right of such independent contractors to seek a status determination from the Internal Revenue Service.” Note that the FPFA imposes an obligation on the Secretary of the Treasury to provide a status determination letter to any independent contractor or person or entity that requests a status determination within a reasonable period of time. Presumably, the accompanying regulations that will be passed to enforce the FPFA, if passed, will provide further guidance regarding to what is meant by the term “reasonable time.”

Impact of the FPFA on Employers.

If the FPFA passes it will require employers to:

Review their practices regarding independent contractors;
Keep track of detailed information relating to the services performed by independent contractors;
Provide independent contractors with a written notice that indicates the independent contractor’s status and that employment law protections do not apply to the independent contractor;
Advise the independent contractor that it is required to submit and pay income taxes and other employment taxes that become due on the amounts paid to the independent contractor;
Provide information to independent contractors that they have the right to contact the IRS for a status determination.
Whether EMPA or the FPFA will ultimately pass and become law remains to be seen. However, what is clear is that both the Internal Revenue Service and the Department of Labor have announced that they plan to increase worker classification audits to determine compliance with existing law and neither agency has to wait and see whether these proposed laws pass before proceeding with worker misclassification audits. The audits have already begun.

A note to the reader: This article is intended to provide general information and is not intended to be a substitute for competent legal advice. Competent legal counsel should be consulted if you have questions regarding compliance with the law.

Questions regarding the content of this column or past columns may be e-mailed to Christina Harris Schwinn at christinaschwinn@paveselaw.com. To view past columns written by Ms. Schwinn please visit the firm’s website at www.paveselaw.com. Ms. Schwinn is a partner and an experienced employment and real estate law attorney with the Pavese Law Firm, 1833 Hendry Street, Fort Myers, FL 33901; Telephone: (239) 336-6228; Telecopier: (239) 332-2243.