No More Independent Contractors – Senators Seek to Make Everyone Employees

What would happen if your company could no longer utilize independent contractors, but had to make everyone an employee?  What would be the impact on your bottom-line?  It would go beyond increasing the number of people on your weekly payroll.  What else would be impacted? Think about the ripple effects.

  • Workers compensation insurance
  • Employee benefits
    • Health insurance
    • Vacations
    • Sick leave
    • Retirement plans
  • Regulatory compliance (FMLA, etc.)

Why am I asking you to think about this?  Well, the Senate introduced legislation in September 2007 to eliminate the ability of companies to classify workers as “independent contractors” – instead they must be “employees”. The motivation – taxes.  The legislation was introduced by Democratic Senators Obama, Durbin, Kennedy, and Murray.

Why Now – The Tax Gap

Historically, improper worker misclassification as an independent contractor versus an employee has been an issue. This misclassification has lead to employment taxes not being withheld and not being collected later.  So Congress is saying “Let’s close that loophole.  If there are only employees, then the taxes always get collected.”

It will close the gap.  Taxes will always be collected.  No workers – documented or undocumented – will go without paying taxes.  There will be no debate as to whether someone meets the IRS’s 20 factor test used to determine whether a worker is an employee or not.  (The test is currently available.  Many companies fail to take the time to understand, use, and follow to properly classify workers.  Hence the misclassification.  Then companies with the misclassified workers have tax issues, which include back taxes, interest, and fines.)

New Legislation Synopsis

The new legislation “The Independent Contractor Proper Classification Act of 2007” allows the government to collect the taxes employers owe and permits the IRS to write rules, regulations, and other guidance for employers on how to classify employees.  It also requires greater enforcement cooperation between the Department of Labor and IRS.

As usual, I’m not sure if it takes into consideration the ripple effects it will cause.  The small business that would have to re-evaluate whether or not it can offer employee benefits (because it must offer them to all employees) will be reexamining what it means when there is no such thing as an independent contractor and they are constantly having to flex their workforce.  What will it mean for the company regarding laws and regulations under which compliance is determined by number of employees?  Previously the company would not have met the thresholds; now it must comply.

Temporary and Contract Employment Agencies

No 1099’s here either.  An employee is an employee.  This changes business models all around.  Small businesses may turn to temporary services agencies as answer to flexible workforces and that may be an answer for some at a higher cost.  But what about these agencies themselves, with their on-call talent who are often independent contractor relationships?  What will be the impact and the cost on these business models?

Higher Tech, Professional Service Firms

For companies who utilize the “professional” categories of independent contractors and consultants, the changes will have other ripple effects reaching into the realm of business liability and services.  Lines are drawn regarding if a professional is part of the company or not part of the company.  The ability to have specialized “hired experts” as independent contractors could, under this legislation, be eliminated unless they are companies and not individuals – LLCs and S-corporations owned by single persons for the purpose of providing services would be clear and distinct means of not being an employee.

Who Knows – Introduced Isn’t Passed or Law

At the moment, it is proposed.  It is talk.  It is something that is a possibility.  On the one hand it would make things simpler and taxes would get collected.  If you are an individual working for a company you would be an employee.  Taxes would be withheld and remitted and all the rules which apply to being an employee in a company go with the position you are playing in that company.  Clear cut and easy.  No tax gap.  It doesn’t matter if you are a documented worker or not.  It doesn’t matter whose social security number you are using (yeah it does, but the government is getting its taxes so you know what that means).  Some taxes are being collected and remitted.

On the other hand, it creates the potential for businesses to be burdened with more costs.  More employees means more costs of benefits, insurance, regulations, paperwork, compliance.

If every individual is an employee, then the ability to bring in outside expertise as consultants, changes — the entire business dynamic changes.  The sole proprietor who is truly solo – what happens to him or her?  An employee of every client?

I have lots of questions that I’m not so sure were considered.  But that doesn’t really surprise me. Does it you?

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