President Obama released his FY 2014 budget (available here), which includes a request that Congress continue funding the federal government’s intensifying efforts to combat employee “misclassification” nationwide. This program is described as follows (from p. 126):
When employees are misclassified as independent contractors, they are deprived of benefits and protections to which they are legally entitled, such as minimum wage, overtime, unemployment insurance, and anti-discrimination protections. Misclassification, together with the underreporting of cash income for those paid as independent contractors, also costs taxpayers money in lost funds for the Treasury and in Social Security, Medicare, the Unemployment Trust Fund, and State programs. The Budget includes approximately $14 million to combat misclassification, including $10 million for grants to States to identify misclassification and recover unpaid taxes and $4 million for personnel at WHD to investigate misclassification.
These funding levels are the same as seen in the President’s FY 2013 budget. Of particular interest is the $10 million in state grants, which are doled out by the U.S. Department of Labor as an incentive for states to reclassify independent contractors as employees. The Department of Labor’s FY 2014 budget (summary available here) goes into more detail regarding this program (from p. 25):
The FY 2014 UI State Administration request includes $10,000,000 for states to improve worker misclassification efforts. Modeled on a successful (SNAP) Supplemental Nutrition Assistance Program, this initiative will provide a “high performance bonus” to the States most successful at detecting and prosecuting employers that fail to pay their proper share of UI taxes due to worker misclassification and other illegal tax schemes that deny the Federal and State UI Trust Funds hundreds of millions of dollars annually. States will be able to use these incentive funds to upgrade their misclassification detection and enforcement programs. As part of this initiative, States would be required to capture and report outcomes and cost/benefit information to enable the evaluation of new strategies.
While it remains to be seen what Congress will ultimately enact, the President’s budget demonstrates that the executive branch of the federal government remains focused on combating “misclassification” – and in directly funding state agencies that do so as well. Any company retaining the services of independent contractors (including owner-operators) should be sure to adopt and adhere to contractual and operating procedures which best protect independent-contractor status.
For additional information on the federal government’s attack on so-called “misclassification” or questions regarding the protection of independent-contractor status, contact Greg Feary, or Braden Core in the Firm’s Indianapolis office at (317) 637-1777
The Oregon Employment Department intends to initiate formal proceedings to repeal an administrative rule prohibiting the application of the Oregon For-Hire Carrier Unemployment Tax Exemption to owner-operators that obtain their equipment through motor carrier- and motor carrier affiliate-sponsored equipment acquisition programs, sometimes referred to in the industry as “leaseback” arrangements. A taskforce comprised of industry players, with the advice and guidance of counsel and represented in large part by the Oregon and American Trucking Associations, advanced a vigorous and proactive effort to secure the repeal of the rule. The repeal of the rule is crucial to protect the long standing utilization of leaseback arrangements by Oregon motor carriers and owner-operators. The Employment Department resisted the efforts of the task force, but the Governor’s office ultimately intervened. The formal repeal of the administrative rule is expected to occur at the end of the next legislative session.
The Oregon For-Hire Carrier Unemployment Tax Exemption provides that the term “employment” excludes “transportation performed by motor vehicle for a for-hire carrier by any person that leases their equipment to a for-hire carrier and that personally operates, furnishes and maintains the equipment and provides services thereto.” ORS 657.047(2) (emphasis supplied). The soon-to-be repealed administrative rule defined the term “their equipment” to include only equipment “independently furnished by the service-provider, neither leased nor purchased from the for-hire carrier or from any entity affiliated with the for-hire carrier.” OAR 471-031-0200 (certified as effective on Dec. 13, 2010).
A new study released this week by the National Employment Law Project (“NELP”), a union advocacy coalition, Change to Win, and Rutgers University charges motor carriers with misclassifying more than 110,000 port truck drivers as independent contractors, as opposed to employees. The release of this study comes on the tails of a call to action by the American Trucking Association regarding Senate Bill 3786, the Fair Playing Field Act of 2010, as an offset for the 9/11 Health and Compensation Act. The Bill targets the use of independent contractors and requires the treasury to release guidelines to help clarify the status of individuals as independent contractors or employees for the purpose of federal employment taxes.
The NELP study, based on surveys from drivers at seven major ports, including Seattle, Oakland, Los Angeles, Long Beach, New York and New Jersey, estimated that approximately 82% of port truck drivers are treated as independent contractors. The study criticizes the use of the independent contractor model, claiming, in part, drivers classified as independent contractors earned, on average, 18% less than employee drivers, are asked to use illegal and unsafe equipment, and face health problems imposed by high concentrations of diesel emissions.
The NELP study recommends that (1) policymakers adopt uniform rules requiring motor carriers to employ drivers to operate company owned equipment; (2) Congress pass the Clean Ports Act of 2010 to empower port authorities to attach misclassification; (3) the DOL, IRS, and state agencies take coordinated action to end misclassification; and (4) federal, state, and local governments create incentive funds for diesel emissions reduction contingent on proper classification.
On Thursday, Sept. 23, the U.S. House of Representatives passed the Small Business Jobs and Credit Act – HR5297 – by a vote of 237-187.
The bill includes a $30 billion Small Business Lending Fund and $12 billion in tax relief measures for small businesses. Tax provisions in the legislation will allow businesses to write off half of their new equipment purchasing costs.
The legislation will also extend the elimination of fees for U.S. Small Business lending programs and eliminate a requirement in current tax law that employees pay taxes on the value of certain transmissions they send on employer-provided cell phones.
The U.S. Senate has approved a lending bill designed to give small-business owners a financial boost.
On Thursday, Sept. 16, the Senate voted 61-38 in favor of a small-business lending bill, HR5297, which includes a $30 billion Small Business Lending Fund. The bill also includes $12 billion in tax relief measures for small businesses.
The bill is anticipated to pass through both the U.S. House and the President's office once the Senate passes the bill along.
The bill would also extend the elimination of fees for U.S. Small Business lending programs for SBA 7(a) and 504 loan programs and increase the guarantees on 7(a) loans from 75 percent to 90 percent.
Tax provisions in the bill would allow businesses to write off half of their new equipment purchasing costs that goes into service in 2010. The bill would also eliminate the current tax requirement that employees pay taxes on the value of certain transmissions they send on employer-provided cell phones.
The Fair Playing Field Act of 2010 (the “Act”) was introduced in both the U.S. House of Representatives and Senate and backed by the Whitehouse this week in an effort to end the current moratorium on Internal Revenue Service guidance addressing worker classification. The Act will require the treasury to release guidelines to help clarify the status of individuals as independent contractors or employees for the purpose of federal employment taxes.
If passed, the Act could significantly impact the ability of transportation (and other) companies to seek the protections afforded by Section 530 of the Revenue Act of 1978, as amended, reprinted at 27 U.S.C.A. § 3401 note (2008), a safe harbor provision which was intended to prevent the IRS from forcing expensive reclassifications of workers as employees when companies had, in good faith, based upon prior IRS audits, judicial precedent, or significant industry practice, treated the workers consistently as independent contractors for employment tax purposes.
Among other requirements and potential civil penalties for potential or repeated violations, the Act will compel transportation companies that engage independent contractor drivers to provide the drivers with a written statement detailing federal tax obligations imposed on and labor and employment practices denied independent contractors. The notice must further inform the contractors of the ability to request a status determination from the IRS.
Tax proposals released in conjunction with the Administration's FY 2011 Budget contain provisions relating to the use of Section 530 of the Revenue Act of 1978. The new proposal would permit the IRS to reclassify workers on a prospective basis, and would permit the IRS to issue generally applicable guidance about the proper classification of workers. This is in direct contravention to current Section 530 protections.
New enforcement activity would likely focus on obtaining proper worker classification prospectively, recognizing that in many cases the proper classification of workers may not be clear. Additionally, the proposal provides for reduction or elimination of penalties in the case of small employers where the employer agrees to prospective reclassification.
The fiscal year 2011 budget continues President Obama's efforts to target alleged employer misclassification of employees as independent contractors by characterizing misclassification as an issue that has a budgetary impact as a result of decreased tax collections. As part of the budget, the Departments of Treasury and Labor are pursuing a joint proposal to enhance the ability of both agencies to penalize employers who misclassify, eliminates legal incentives for employers to misclassify, and restores employee protections lost due to alleged misclassification. The budget also includes an additional $25 million for the Department of Labor to hire additional enforcement personnel and to encourage state action regarding the issue.
In addition to the budget proposals, two bills are pending in Congress that would seek to limit misclassification by changing the application of the IRS Section 530 safe harbor provisions and making it more difficult to establish a reasonable justification for using independent contractors. It remains to be seen what impact these proposals will have on the well established use of owner-operators in the trucking industry.
Sen. John Kerry, D-Mass., has introduced legislation aimed at preventing employers in industries, including trucking, from misclassifying workers as "independent contractors" in order to avoid paying taxes or benefits.
The Taxpayer Responsibility, Accountability and Consistency Act of 2009 would amend the Internal Revenue Code to address Section 530 "safe harbor" provisions. Part of the Revenue Act of 1978, these provisions allow workers to be classified as "independent contractors" rather than "employees" in industries where such designations are part of long-standing, recognized practice.
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