Friday, January 8, 2010

A health reform bill of sorts

It wasn’t all about healthcare reform in the Senate last month. Senator John Kerry took up another issue that’s been generating considerable ink over the past year when he introduced legislation on December 15 to tighten a tax loophole that enables employers to misclassify workers as “independent contractors.”

The measure is not completely unrelated to healthcare, of course. As Senate Dems closed rank around a reform bill that would leave the employer-provided health insurance model essentially intact, whether a worker has health insurance may well continue to hinge on whether he or she is deemed an employee or an independent contractor. (Employment status also determines whether that individual enjoys such protections as workers’ comp, Social Security, Medicare, overtime, unemployment compensation, and the minimum wage.)

Kerry’s bill, the Taxpayer Responsibility, Accountability, and Consistency Act of 2009, (S. 2882) would modify the Internal Revenue Code rules for classifying workers as independent contractors for employment tax purposes. Specifically, the bill would amend Section 530 of the Revenue Act of 1978, commonly referred to as the “safe harbor” provision, which grants employers some leeway to treat a worker as an independent contractor. S.2882 significantly increases penalties for employers that do so improperly. A similar measure (H.R. 3408) was introduced in the House last summer.

Section 530 allows an employer to designate a worker an independent contractor for tax purposes regardless of what the worker’s actual status would be under the common law test, unless the employer has “no reasonable basis” for doing so. The Senate bill tightens the “reasonable basis” standard. It provides that an employer will be deemed to have a reasonable basis for classifying a worker as an independent contractor only if two criteria are met:

1) The employer must have reasonably relied on a written determination as to the employment status of that worker, or of another individual working in a substantially similar position (as determined based on FLSA criteria) for the employer. Alternatively, the employer must have reasonably relied on a concluded examination of whether the worker (or a similarly employed worker) should be treated as an independent contractor, in which there had not been a determination that the individual (or similar worker) should be treated as an employee. But an employer may not rely on an examination or written determination if the employer had misrepresented the controlling facts and circumstances that formed the basis for determining employment status; if those facts and circumstances have changed; or if the Secretary subsequently issues relevant guidance to the contrary; and

2) The employer (or a predecessor employer) has not treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after December 31, 1977.

S.2882 also allows workers to petition for a determination of their employment status (and, for those in transient or seasonal employment such as construction work, to receive a determination within 90 days). A worker also will be entitled to appeal a determination that he or she is not an employee.

Some prognosticators say true “employee” status is a dying relic—one that will give way, increasingly, to contingent and temporary work arrangements as market forces unfold. At that point we may well have to revisit the employer-based health insurance model that looks to remain entrenched for now. But in the meantime, let’s call an employee an employee. It’s a modest, but meaningful step toward healthcare reform.

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