Opponents say Kleczka bill would worsen independent contractor situation for firms

The often ambiguous determination of whether a worker is an independent contractor or an employee appears to be headed for clarification … or not, depending on which side of the issue you’re on.
Rep. Jerry Kleczka of Milwaukee’s South Side has co-sponsored the Independent Contractor Clarification Act (HR 1525) with Rep. Amo Houghton (R-NY) which attempts to simplify the classification of independent contractors from a 20-factor formula to a three-point test.
Under the proposal, a person would be classified as an independent contractor if: the employer does not control the manner in which the individual completes assigned tasks; the individual may undertake other business opportunities; and the individual incurs entrepreneurial risk.
Kleczka’s office says the bill is the result of over 20 years of ambiguity in worker classification law. As a result, Kleczka says, workers have lost benefits such as health insurance, Worker’s Compensation and retirement plan payments.
The bill is backed by labor organizations such as the AFL-CIO.
A spokesman for Kleczka’s office noted that the Internal Revenue Service estimated in a 1987 report that 3.7 million workers were illegally reported as independent contractors. The IRS estimated the underpayment of Social Security and unemployment taxes was $2.3 billion in 1987 and $3.3 billion in 1992. A study by the former Coopers & Lybrand accounting and consulting firm (now PriceWaterhouseCoopers) projected the number of misclassified workers to be 5 million by 2005.
Simplification and clarification are needed, agrees Nancy Anderson, vice president of federal programs for the Independent Business Association of Wisconsin, but not as proposed by Kleczka.
“Kleczka’s bill leaves the door open for government interference,” says Anderson, who with her husband Terry co-owns Omni Tech in Pewaukee.
The IBA specifically objects to the language in the bill that states, “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.”
Section 530, included in the 1978 tax bill and permanently extended by Congress in 1982, created a safe harbor for employers to treat a worker as an independent contractor for tax purposes regardless of the true nature of the worker-employer relationship. The safe harbor had to have a reasonable basis such as a prior determination by the IRS or long-standing industry practice.
Anderson says the Kleczka bill leaves a huge loophole for the IRS to change the rules of the game, making it counter-productive for any size business.
“All small businesses will be affected by it,” Anderson says. “We want to alleviate the burden on small business. The Kleczka bill complicates things.”
Brian Reardon, a manager of federal public policy for the National Federation of Independent Business (NFIB), agrees with Anderson. NFIB also has come out opposing the Kleczka-sponsored bill, saying that the bill would set business back 30 years.
“It makes it more complex for people to determine whether they’re independent contractors or not,” Reardon says. “We think the bill operates from the wrong assumption – that everyone starts out as an employee – and then requires you to prove that you are not [an employee].”
Kleczka contends the misclassification of workers hurts some employers because they are put at an unfair disadvantage by competitors who misclassify their workers.
“The Sheet Metal and Air Conditioning Contractors’ National Association, which represents 4,500 construction firms in support of my bill, says misclassification is ‘epidemic’ in the construction industry and a severe threat to degrade the quality of the workforce and service,” Kleczka says.
“Odds are slim that the bill will make it to the president’s desk,” Reardon of NFIB says. “If all the people that have co-sponsored the bill stand behind it in the Ways and Means Committee, it may make it out of committee. It may even pass in the House. We can certainly stop it in the Senate, but we don’t want it to go that far.”