Section 530

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. 

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.
 

1. increase DOL’s focus on misclassification of employees during targeted investigations
2. encourage sharing of information regarding misclassification between the DOL’s wage and hour division and OSHA (also within the DOL), and that cases outside of DOL’s jurisdiction should be referred to the relevant agency
3. establish a joint interagency effort between the DOL, IRS, and other federal and state agencies to address the misclassification of employees as independent contractors
4. conduct worker outreach efforts, including the development of a standardized document on worker classification
5. create an IRS forum to regularly collaborate with states to identify and address data sharing efforts relating to the QETP initiative
6. extend the IRS Classification Settlement Program to include employers that volunteer to prospectively reclassify employees. Additionally, the report included discussion of limiting the “industry practice” prong of the reasonable basis test to establish Section 530 safe harbor.