[Congressional Record Volume 143, Number 28 (Thursday, March 6, 1997)]
[Extensions of Remarks]
[Pages E398-E399]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 H.R. 769, H.R. 770, AND H.R. 771, THE MISCLASSIFICATION OF EMPLOYEES 
                                  ACT

                                 ______
                                 

                            HON. TOM LANTOS

                             of california

                    in the house of representatives

                        Thursday, March 6, 1997

  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. 769, H.R. 770, and H.R. 771, the Misclassification of Employees 
Act. H.R. 771 clarifies our tax laws with regard to employee 
classification. H.R. 769 and H.R. 770 would require debarment from 
contracting with the Federal Government of any person who has been 
determined to have willfully misclassified a worker. Misclassification 
occurs when an employer wrongfully treats a worker as an independent 
contractor rather than as an employee. I have introduced H.R. 769, H.R. 
770, and H.R. 771 as separate bills because they are referred to 
separate House committees.
  Mr. Speaker, 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 nontax 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. 771 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 benefitted greatly from 
the spirit and independence of the self-employed individual and 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 distinguished colleague and friends, 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 for 
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 harbors, then the 
worker is classified by applying a very subjective common law test. 
Most workers fall under this third category.
  Current law also allows some employers to misclassify workers if they 
have a reasonable basis for classifying employees as independent 
contractors. For example, an employer may rely upon a widespread 
industry practice as a reasonable basis for classifying a worker as 
an independent contractor. In fact, under the recently enacted Small 
Business Job Protection Act of 1996, the industry practice safe harbor 
was liberalized so that it may apply even if less than one-quarter of 
an industry classifies certain workers as independent contractors. Our 
legislation eliminates the safe harbor provisions entirely, since such 
provisions allow and encourage 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 
restriction on the IRS to draft regulations and rulings on the 
employment status of workers for tax purposes.
  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

[[Page E399]]

workers compensation insurance, withholding income taxes and providing 
benefits such as vacation, sick and family leave, health and life 
insurance, pensions, and so forth. 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 by misclassifying workers. 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.
  Mr. Speaker, employers who have unintentionally misclassified workers 
should be given the incentive to come into compliance. 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 also 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, as you know, many Federal entitlement programs hinge on 
the number employees that an employer has on its books. Thus, 
misclassifying employees as independent contractors also can enable 
employers to either escape responsibility for, or allow their workers 
to fall within coverage of, these entitlement programs. For example, 
the Health Insurance Portability Act of 1996 contains a much-heralded 
provision allowing medical savings accounts [MSA's]. However, MSA's are 
not available to an employee unless that employee works for a small 
employer, which is defined as an employer which employed 50 or fewer 
employees during either of the preceding calendar years. Additionally, 
the Health Insurance Portability and Accountability Act only allows a 
total of 750,000 taxpayers to have an MSA. Under liberal worker 
classification proposals, it would not be at all difficult for a 
dishonest employer with 60 employees to reclassify 10 of them as 
independent contractors so that the business now qualifies as a small 
employer. Moreover, by doing so, this type of dishonest employer may 
end up causing the 750,000 MSA participant ceiling to be reached much 
sooner than it otherwise would be, thereby bumping out of the MSA 
Program employees in other small businesses who lawfully would be 
entitled to their own MSA's. H.R. 771 would eliminate such distortion 
of the system by dishonest employers.

  Last, 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 reduce 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.
  The advantages of our legislation over more lax worker classification 
proposals are clear. Our legislation would clarify existing law, while 
other worker classification proposals seek a radical change to the 
worker classification principles that businesses have operated under to 
date. Our legislation would create a level playing field, while other 
worker classification proposals actually encourage unfair competition 
between employers and dishonest employers to cheat millions of 
unsuspecting workers out of employee benefits. Finally, our legislation 
would save the Federal Government billions of dollars in lost revenues, 
while other worker classification proposals would cost the Government 
billions more in lost tax revenues.
  Mr. Speaker, misclassification, and especially intentional 
misclassification, has continued as a festering problem in this country 
for too long, and it is time for Congress to finally do something about 
it. I urge my colleagues to support the Misclassification of Employees 
Act.

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