[Congressional Record Volume 145, Number 56 (Thursday, April 22, 1999)]
[Extensions of Remarks]
[Pages E759-E761]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


          THE INDEPENDENT CONTRACTOR CLARIFICATION ACT OF 1999

                                 ______
                                 

                         HON. GERALD D. KLECZKA

                              of wisconsin

                    in the house of representatives

                        Thursday, April 22, 1999

  Mr. KLECZKA. Mr. Speaker, Congressman Amo Houghton and I today are 
introducing the Independent Contractor Clarification Act of 1999. This 
bipartisan legislation attempts to solve one of the more troublesome 
aspects of the tax code--the proper classification of workers. I am 
pleased that Representatives Stark (CA), Johnson (CT), Matsui (CA), 
English (PA), Levin (MI), Weller (IL), Coyne (PA), Foley (FL), 
McDermott (WA), Lewis (GA), Boehlert (NY), Evans (IL), King (NY), 
Barrett (WI), Quinn (NY), and Forbes (NY) are original cosponsors of 
the bill.
  The bipartisan spirit of this legislation cannot be underestimated. 
Congress has struggled with this issue since 1978. Unfortunately, 
legislation introduced in recent years has tended to favor employers 
and only served to polarize the debate on this issue. Congressman 
Houghton and I have worked with groups representing both employers and 
employees for most of the past year to develop the legislation we are 
introducing today.
  The current 20 point test used to determine an individual's 
employment classification and the section 530 safe harbor are 
burdensome and unworkable. The 20 point test is a series of tests that 
provide employers with a general guideline as to how they are supposed 
to classify their workers. However, these tests do not provide 
employers with a clear definition of who is an independent contractor 
and who is an employee. This lack of clarity has led to countless 
workers being misclassified.
  For example, one of the criteria used in the 20 point test is the 
level of training of the worker. Some have interpreted a level of 
training to be a college degree while others would argue it is a 
person's general work experience. Another criteria is furnishing 
significant tools and assets. For a computer programmer, significant 
equipment and assets might be an expensive computer system whereas in 
the case of a laborer an employer might deem a significant investment 
to be some basic tools.
  With the increased enforcement of the employment tax laws beginning 
in the late 1960s, controversies developed between the IRS and 
businesses as to whether the businesses were properly classifying 
certain workers as independent contractors. As a result, Congress 
included section 530 in the 1978 tax bill, which created a safe harbor 
by which employers could treat a worker as an independent contractor 
for employment tax purposes regardless of the true employment status of 
the worker. To be eligible for the section 530 safe harbor, an employer 
simply had to have a ``reasonable basis'' such as a prior audit by the 
IRS, a private letter ruling from the IRS, or have relied on a long-
standing recognized industry practice. Although it was intended to be a 
temporary solution, section 530 was permanently extended by Congress in 
1982.
  Furthermore, section 530 has prohibited the IRS from issuing 
regulations and guidance to employers to bring about the proper 
classification of workers. The inability of the IRS to issue rulings on 
employment status has prevented the IRS from clarifying the 20 point 
test.
  As a result of the lack of clear direction, many businesses have 
misclassified their workers as independent contractors. Such 
misclassifications have resulted in workers being denied essential 
benefits such as health coverage, a retirement plan, or the employer's 
share of FICA taxes. Workers who are actual employees and who work at 
the direction of and under the supervision of a superior are entitled 
to these benefits as part of their employment.
  The Independent Contractor Clarification Act would replace the 
current 20 point test with a simple, easy to understand 3 point test. 
An individual would be classified as an independent contractor if the 
employer does not control the manner in which the individual completes 
his or her assigned tasks; the individual is able to solicit and 
undertake other business opportunities; and the individual encounters 
entrepreneurial risk. The last point would include the ability of the 
independent contractor to generate a profit or bear the risk of 
financial loss.
  However, any person that has a statutory exemption would maintain 
that exemption under this legislation. For example, current law says 
that real estate agents and direct sellers such as newspaper delivery 
persons are independent contractors, and they would maintain that 
status under the Independent Contractor Clarification Act.
  The Independent Contractor Clarification Act would also repeal 
section 530 thereby allowing the Department of Treasury to issue 
guidance to employers so they can properly classify their workers.
  However, businesses that are currently eligible for the Section 530 
safe harbor will be covered by a transitional rule which would continue 
the current safe harbor protections until 2003 or until the IRS issues 
additional guidance. In addition, if the IRS requests a 
reclassification of any section 530 worker after

[[Page E760]]

the date of bill's enactment but before 2003, the employer must make 
the change prospectively but will not be held liable for back taxes.
  The single largest hurdle to employers reclassifying their workers as 
employees is the fear the IRS is going to take the reclassification as 
an admission of wrongdoing and, as a result, assess retroactive 
employment taxes. Under this legislation, the IRS would be prohibited 
from collecting back taxes if an employer meets the following criteria: 
The business had consistently treated the individual, and all other 
persons in similar positions, as an independent contractor; the tax 
returns filed by the employers are consistent with the treatment of the 
workers as independent contractors; and the employer has a reasonable 
basis for the classification of the worker such as a prior audit or a 
letter ruling from the IRS.
  The effective date of this legislation is January 1, 2001. This is 
designed to give businesses a reasonable amount of time to implement 
the changes in the independent contractor statutes. Furthermore, any 
business that is told to reclassify its workers would have 60 days 
after final notification from the IRS to implement the change.
  Mr. Speaker, this legislation is a bipartisan solution to a difficult 
and longstanding problem. The Independent Contractor Clarification Act 
attempts to balance the interests of employers and their workers. If 
enacted, this legislation will provide employers the guidance they need 
to properly classify their workers. It will also serve the interests of 
hard-working Americans and their families. It is for these reasons I 
urge the adoption of this legislation.

                                 H.R.--

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Independent Contractor 
     Clarification Act of 1999''.

     SEC. 2. DETERMINATION OF EMPLOYEE AND EMPLOYER STATUS.

       (a) In General.--Subsection (c) of section 7701 of the 
     Internal Revenue Code of 1986 is amended to read as follows:
       ``(c) Employee and Employer.--
       ``(1) In general.--For purposes of this title, except as 
     otherwise expressly provided in this title--
       ``(A) an individual (hereinafter in this subsection 
     referred to as the `service provider') performing services 
     for another person (hereinafter in this subsection referred 
     to as the `service recipient') shall be treated as an 
     employee of the service recipient, and
       ``(B) the service recipient shall be treated as the 
     employer of such service provider, unless the requirements of 
     each of the subparagraphs of paragraph (3) have been 
     satisfied.
       ``(2) Repeal of common law tests.--The rules of this 
     subsection shall apply in lieu of any common law rules which 
     would otherwise apply.
       ``(3) Requirements.--
       ``(A) Lack of control by service recipient.--The 
     requirements of this subparagraph are met only if the service 
     provider has the right, to the exclusion of the service 
     recipient, to control and direct the manner of, and the means 
     used in, the service provider's performance of services for 
     the service recipient.
       ``(B) Availability of service to others.--The requirements 
     of this subparagraph are met only if the service provider--
       ``(i) makes substantially similar services available to 
     others, and
       ``(ii) is not precluded by the service recipient from 
     soliciting business opportunities that involve providing 
     substantially similar services for other persons during the 
     period that the service provider is providing services for 
     the service recipient.
       ``(C) Entrepreneurial risk.--The requirements of this 
     subparagraph are met only if--
       ``(i) in the service provider's overall business 
     activities, the service provider has the potential to 
     generate profit and bears risk of loss and the extent to 
     which profit is generated or loss is sustained depends on the 
     service provider's efforts and decisions other than as to the 
     amount of work performed, and
       ``(ii) in the event the service provider fails to perform 
     the work in accordance with the service recipient's 
     requirements, the service provider is either subject to 
     liability to the service recipient for damages arising from 
     claims sounding in contract or would be subject to such 
     liability but for a waiver by the service recipient.
       ``(4) Person.--For purposes of this subsection, the term 
     `person' includes any governmental unit (and any agency or 
     instrumentality thereof).''
       (b) Repeal of Section 530 of Revenue Act of 1978.--Section 
     530 of the Revenue Act of 1978 is hereby repealed.
       (c) Conforming Amendments.--
       (1) Paragraph (2) of section 3121(d) of such Code is 
     amended to read as follows:
       ``(2) any individual who is treated as an employee under 
     section 7701(c); or''.
       (2) Paragraph (2) of section 210(j) of the Social Security 
     Act is amended to read as follows:
       ``(2) any individual who is treated as an employee under 
     section 7701(c) of the Internal Revenue Code of 1986; or''.
       (3) Subsection (a) of section 7701 of such Code is amended 
     by inserting after paragraph (33) the following new 
     paragraph:
       ``(34) Includes and including.--The terms `includes' and 
     `including' when used in a definition contained in this title 
     shall not be deemed to exclude other things otherwise within 
     the meaning of the term defined.''
       (d) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to services 
     performed after December 31, 2000.
       (2) Repeal of limitations on regulations and rulings.--The 
     repeal made by subsection (b), insofar as it relates to 
     section 530(b) of the Revenue Act of 1978, shall take effect 
     on the date of the enactment of this Act; except that 
     regulations and Revenue Rulings permitted to be issued by 
     reason of such repeal may not apply to services performed 
     before January 1, 2001.

     SEC. 3. LIMITATIONS ON RETROACTIVE EMPLOYMENT TAX 
                   RECLASSIFICATIONS.

       (a) General Rule.--Chapter 25 of the Internal Revenue Code 
     of 1986 (relating to general provisions applicable to 
     employment taxes) is amended by adding at the end the 
     following new section:

     ``SEC. 3511. LIMITATIONS ON RETROACTIVE EMPLOYMENT TAX 
                   RECLASSIFICATIONS.

       ``(a) General Rule.--If--
       ``(1) for purposes of employment taxes, the taxpayer treats 
     an individual as not being an employee for any period after 
     December 31, 2000, and
       ``(2) for such period, the taxpayer meets--
       ``(A) the consistency requirements of subsection (b),
       ``(B) the return filing requirements of subsection (c), and
       ``(C) the safe harbor requirement of subsection (d),

     for purposes of applying this subtitle for such period, the 
     individual shall be deemed not to be an employee of the 
     taxpayer for such period. The preceding sentence shall cease 
     to apply to periods beginning more than 60 days after the 
     date that the Secretary notifies the taxpayer in writing of a 
     final administration determination that the taxpayer should 
     treat such individual (or any individual holding a 
     substantially similar position) as an employee.
       ``(b) Consistency Requirements.--A taxpayer meets the 
     consistency requirements of this subsection with respect to 
     any individual for any period if the taxpayer treats such 
     individual (and all other individuals holding substantially 
     similar positions) as not being an employee for purposes of 
     the employment taxes for such period and all prior periods 
     after December 31, 1978.
       ``(c) Return Filing Requirements.--The taxpayer meets the 
     return filing requirements of this subsection with respect to 
     any individual for any period if all Federal tax returns 
     (including information returns) required to be filed by the 
     taxpayer for such period with respect to such individual are 
     filed on a basis consistent with the taxpayer's treatment of 
     such individual as not being an employee.
       ``(d) Safe Harbors.--
       ``(1) In general.--The taxpayer meets the safe harbor 
     requirement of this subsection with respect to any individual 
     for any period if the taxpayer establishes that it treatment 
     of such individual as not being an employee for such period 
     was--
       ``(A) in reasonable reliance on a written determination (as 
     defined in section 6110(b)(1)) issued to the taxpayer that 
     addressed the employment status of the individual or an 
     individual holding a substantially similar position with the 
     taxpayer;
       ``(B) in reasonable reliance on a concluded Internal 
     Revenue Service audit of the taxpayer in which the employment 
     status of the individual or any individual holding a 
     substantially similar position with the taxpayer was examined 
     and the taxpayer was notified in writing that no change would 
     be made to such individual's employment status; or
       ``(C) supported by substantial authority.

     For purposes of subparagraph (C), the term `substantial 
     authority' has the same meaning as when used in section 
     6662(d)(2)(B)(i); except that such term shall not include (i) 
     any private letter ruling issued to a person other than the 
     taxpayer, and (ii) any authority that does not address the 
     employment status of individuals holding positions 
     substantially similar to that of the individual.
       ``(2) Special rules.--
       ``(A) Applications to pre-2001 determinations, etc.-- 
     Paragraph (1) shall apply without regard to whether the 
     determination, audit, or the authority referred to therein 
     was before January 1, 2001.
       ``(B) Subsequent authority--The taxpayer shall not be 
     considered to meet the safe harbor requirement of paragraph 
     (1) with respect to any individual for any period if the 
     treatment of such individual as not being an employee is 
     inconsistent with any regulation, Revenue Ruling, Revenue 
     Procedure, or other authority--
       ``(i) which is published by the Secretary at least 60 days 
     before the beginning of such period and after the date of the 
     determination, the conclusion of the audit, or the 
     substantial authority referred to in paragraph (1), and
       ``(ii) which applies to the type of services performed by 
     such individual or the industry or business in which such 
     services are preformed.
       ``(3) Transitional rule.--Except as provided in paragraph 
     (2)(B), the taxpayer shall be considered to meet the safe 
     harbor requirement of paragraph (1) with respect to services 
     performed by an individual during

[[Page E761]]

     2001 or 2002 if the taxpayer would be treated under section 
     530 of the Revenue Act of 1978 (as in effect on the day 
     before the date of the enactment of this section) as having a 
     reasonable basis for not treating such individual as an 
     employee.
       ``(e) Other Special Rules.--
       ``(1) Notice.--An officer or employee of the Internal 
     Revenue Service shall, before or at the commencement of any 
     audit inquiry relating to the employment status of one or 
     more individuals who perform services for the taxpayer, 
     provide the taxpayer with a written notice of the provisions 
     of this section.
       ``(2) Availability of safe harbors.--Nothing in this 
     section shall be construed to provide that this section only 
     applies where the individual involved is otherwise an 
     employee of the taxpayer.
       ``(f) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Employment tax.--The term `employment tax' means any 
     tax imposed by this subtitle.
       ``(2) Employment status.--The term `employment status' 
     means the status of an individual as an employee or as an 
     independent contractor (or other individual who is not an 
     employee).
       ``(3) Taxpayer.--The term `taxpayer' includes any person or 
     entity (including a governmental entity) which is (or would 
     be but for this section) liable for any employment tax. Such 
     term includes any predecessor or successor to the taxpayer.
       ``(4) Substantially similar position.--The determination as 
     to whether an individual holds a position substantially 
     similar to a position held by another individual shall 
     include consideration of the relationship between the 
     taxpayer and such individuals.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations as may be appropriate to carry out the purposes 
     of this section.''
       (b) Clerical Amendment.--The table of sections for chapter 
     25 of such Code is amended by adding at the end the following 
     new item:
       ``Sec. 3511. Limitations on retroactive employment tax 
     reclassifications.''
       (c) Effective Date.--The amendments made by this section 
     shall apply to all periods beginning after December 31, 2000.

     SEC. 4. STATUTE OF LIMITATIONS ON ASSESSMENT OF EMPLOYMENT 
                   TAXES TO RUN BEGINNING ON DATE CERTAIN 
                   INFORMATION RETURNS FILED.

       (a) In General.--Subsection (b) of section 6501 of the 
     Internal Revenue Code of 1986 (relating to limitations on 
     assessment and collection) is amended by adding at the end 
     the following new paragraph:
       ``(5) Certain information returns to begin limitation 
     periods on employment taxes.--For purposes of this section, 
     if--
       ``(A) a return is filed under section 6041 or 6041A which 
     specifies an amount of payments made to any individual for 
     services performed by such individual, and
       ''(B) such payments are not taken into account in 
     determining the taxes imposed by chapters 21 and 24,

     then, notwithstanding the last sentence of subsection (a), 
     such return shall be treated as the return referred to in 
     subsection (a) for purposes of determining the period of 
     limitations with respect to such taxes on such services.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to payments made after December 31, 2000.