[Congressional Record Volume 141, Number 44 (Thursday, March 9, 1995)]
[Extensions of Remarks]
[Pages E566-E567]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


            H.R. 510, THE MISCLASSIFICATION OF EMPLOYEES ACT

                                 ______


                            HON. TOM LANTOS

                             of california

                    in the house of representatives

                        Thursday, March 9, 1995
  Mr. LANTOS. Mr. Speaker, I rise today to say a few words about the 
job classification of workers, and to urge my colleagues to support 
H.R. 510, the Misclassification of Employees Act.
  Small business men and women have contacted many of us to explain 
some of the important reasons why Congress should take another look at 
how workers are classified for Federal income and employment tax 
purposes, as well as for many non-tax purposes. We know that confusion 
with employee classification rules can lead to costly disputes with the 
IRS with devastating effects on small businesses. These costs include, 
among others, assessments of back taxes, interest and penalties for 
businesses which misclassify workers as independent contractors, as 
well as the legal costs involved with coming into compliance with or 
defending against an IRS audit.
  There are other issues relating to the misclassification of workers 
that arise out of the current procedures for determining who is an 
employee and who is an independent contractor, including the effect of 
misclassification on the unsuspecting worker, the effect of 
misclassification on the honest businessman trying to compete with a 
competitor who has misclassified his workers, and the effect of 
misclassification on the Federal budget deficit. H.R. 510 would remedy 
some of the unintended effects that arise out of the current procedures 
for determining who is an employee and who is an independent 
contractor.
  I would like to make clear from the outset, however, that I agree 
with and recognize the appropriate and valuable roles of those who work 
as independent contractors. This country has benefited greatly from the 
spirit and independence of the self-employed individual and 
[[Page E567]] I do not think
 there is anyone who wants to stifle the creativity of these 
individuals. It is the misuse of the independent contractor status and 
its serious adverse effect on both employer and worker that concerns 
me.

  My colleague, Chris Shays, and I became interested in the 
classification of workers several years ago when we served together on 
the Employment and Housing Subcommittee of the Government Operations 
Committee. We found that the current means of determining employment 
status has had several negative effects: First, it results in similarly 
situated employers being treated very differently under tax law; 
second, it allows--and actually encourages--businesses to undercut 
competitors through unfair practices; third, it leaves some workers 
exploited and unprotected; and fourth, it deprives the Federal 
Government of significant revenue.
  Under current law, workers are classified as either employees or 
independent contractors in one of three ways. First, some workers are 
explicitly categorized as either employees or independent contractors 
by statute. Second, workers may be classified as independent 
contractors under statutory ``safe harbors'' enacted in section 530 of 
the Revenue Act of 1978. Third, if a worker is not classified 
statutorily, and cannot be classified under the statutory ``safe 
harbor,'' then the worker is classified by applying a very subjective 
common law test. Most workers fall under this third category.
  Current law allows some employers to misclassify workers if they have 
a ``reasonable basis'' for classifying employees as independent 
contractors. Thus, an employer may rely upon a prior IRS audit, 
including audits not made for employment tax purposes, in holding a 
reasonable basis for classifying workers. It makes no sense to permit 
the wrongful classification of workers based on a previous audit which 
may have had nothing to do with the issue of worker classification. Our 
legislation eliminates the ``safe harbor'' provisions which allow the 
misclassification of employees to continue. We thus restore a level 
playing field and eliminate the unfair competitive advantages which 
arise due to the misclassification of workers.
  Because the common law test is extremely subjective, employers have 
trouble in properly determining worker classification, and revenue 
agents often classify workers differently even where the underlying
 circumstances of their employment are the same. Since a large part of 
the misclassification of workers is due to a lack of understanding of 
the laws, clearer rulings and definitions will eliminate a tremendous 
amount of uncertainty in this area. Our legislation eliminates the 
restrictions on the IRS to draft regulations and rulings on the 
employment status of workers for tax purposes.

  Employers who have unintentionally misclassified workers should be 
given the incentive to come into compliance. Therefore, our legislation 
offers a 1-year amnesty to employers who have misclassified workers on 
the basis of a good faith interpretation of common law or of section 
503. This provision removes the devastating possibility of large 
assessments for back taxes, interest and penalties and insures 
compliance in the future.
  Misclassification can have a devastating effect on the unsuspecting 
worker. As a contractor, he or she may receive a higher take-home pay 
and may be allowed to deduct more business expenses from income taxes. 
But the loss of financial benefits and of the many protections which 
are provided to employees can be catastrophic in cases of illness, 
unemployment and retirement. For example, there is no unemployment 
compensation for the independent contractor to fall back on between 
jobs. Health insurance is an individual responsibility and is usually 
far more costly than an employer's group policy. In the case of work-
related injury or illness, there is no worker's compensation available. 
Our legislation would require prime contractors to notify legitimate 
independent contractors of all their tax obligations and other 
statutory rights and protections.
  Mr. Speaker, our investigation found that the economic incentives for 
businesses to misclassify workers as independent contractors are huge. 
An employer who misclassifies a worker as an independent contractor 
escapes many obligations, including paying social security taxes, 
unemployment taxes and workers compensation insurance, withholding 
income taxes and providing benefits such as vacation, sick and family 
leave, health and life insurance, pensions, et cetera. Most employers 
are honest, but the law abiding employer is put at a serious 
disadvantage since he or she cannot compete on a level playing field 
with those who illegally cut their labor costs. Law abiding employers 
will not be able to compete fairly until we provide more clear, 
objective standards by which businesses and the Government can 
determine whether an individual is an employee or an independent 
contractor.
  Lastly, Mr. Speaker, billions of dollars in Federal and State tax 
revenues are being lost as a result of the intentional 
misclassification of workers. This is one of the few remaining areas 
where we can help balance the Federal budget deficit without further 
cutting Government services or levying new taxes. A recent Coopers and 
Lybrand study found that at least $35 billion in legitimate tax revenue 
over the next 9 years will be lost by the Federal Government due to the 
misclassification of employees. At a time when critical services are on 
the chopping block, we can no longer allow this waste and abuse to 
continue. We must take steps to curb the continued misclassification of 
employees.


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