WATCH LIST: The Independent Contractor Proper Classification Act of 2007
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Summary:
The Independent Contractor Proper Classification Act of 2007 (S. 2044), introduced on September 12, 2007, is aimed at eliminating what the sponsors of the bill view as a "loophole" in the Internal Revenue Code that allows employers to get away with misclassifying workers as independent contractors. In simple terms, this IRC provision bars the IRS from taking action regarding workers classified as independent contractors, even when the IRS determines that the individuals have been misclassified and are really employees, when the employer treats all similarly situated workers as independent contractors, has consistently reported the workers to the IRS as independent contractors and issued 1099 forms to the workers, and has a reasonable basis for classifying the workers as independent contractors. That reasonable basis for the classification can come from a court decision or IRS ruling or from a long-standing practice in the employer's industry.
The new bill would allow the IRS to require employers to reclassify workers misclassified as independent contractors and would authorize the IRS to issue regulations and revenue rulings establishing standards for properly classifying workers as independent contractors. It would also eliminate the ability of employers to rely on industry practices as a reasonable basis for classifying workers as independent contractors. The bill would require the IRS to develop a procedure by which employees could challenge their classification as independent contractors and would provide protections against retaliation for workers who take advantage of that procedure. The IRS would be required to audit employers that have misclassified workers and to report misclassifications to the Department of Labor. DOL would be required to investigate industries that are revealed by IRS data to have high rates of misclassifications. The bill would require the DOL's FLSA poster to inform workers of their right to challenge their classification as independent contractors and would require employers to notify independent contractors of their federal tax obligations, of their right to obtain a determination of their independent contractor status from the IRS, and of the labor and employment law protections that apply only to employees. The bill would require employers to keep certain records relating to independent contractors for three years.