Democrats might rewrite contractor law

Critics say the law allows companies to skimp on benefits and dodge tax obligations by classifying workers as independent contractors.

A bolstered Democratic majority and the incoming Obama administration might be poised to rewrite a 30-year-old law critics say lets companies skirt billions of dollars in taxes, while depriving workers of benefits like overtime pay, family and medical leave and the right to join a union.

President-elect Obama introduced a bill last fall to crack down on companies' ability to classify workers as independent contractors rather than employees. The IRS for years has tried to claw back revenues from companies they say have "misclassified" workers as contractors, which can save employers up to 30 percent on payroll taxes. Estimates of federal revenue loss attributed to worker misclassification have ranged as high as $4.7 billion a year.

The Obama bill would amend the 1978 law that protects the tax status of companies employing independent contractors by removing an exemption for firms that designate workers as such based on long-standing practice in that industry. Critics argue that standard is too easy to meet, and a Joint Committee on Taxation report last year said the law is "construed liberally in favor of taxpayers."

The bill also would enable the IRS to determine if workers should be "reclassified" as employees; allow the agency to write regulations on how workers should be classified, and require companies to notify contractors of their right to seek a determination of whether they should be designated employees.

"Every day, millions of Americans go to work and play by the rules, teaching our children the values of hard work and responsibility," Obama said in a statement when the bill was introduced. "And most employers treat their workers fairly, paying them a decent wage and providing the benefits they deserve. But we must fix the system to stop those few employers from breaking the rules and exploiting this tax loophole at the expense of taxpayers and our workers' safety and security."

Transportation, construction and financial services firms like FedEx, D.R. Horton Inc. and Ameriprise Financial Inc. that rely heavily on contractors could take a hit, as would smaller companies in a range of industries and self-employed workers like travel agents, plumbers, nurses, bicycle couriers and freelance writers, critics say.

The bill would continue to exempt real estate agents and direct sellers of products like books and cosmetics, who are considered inherently contractors under current law.

Groups like the U.S. Chamber of Commerce and National Federation of Independent Business are leading the opposition, as are affected companies such as FedEx, which has already been sued in 20 states for its use of contract delivery drivers. FedEx employs roughly 15,000 drivers as contractors, who don't receive health, pension and other benefits and have to pay for their own trucks, but can set their own schedules and hire employees for their contracted FedEx delivery routes.

"We have always believed our independent contractors are not employees and legal review processes are addressing the fundamental question of whether it should be illegal to work for oneself. We say it should not," said FedEx spokesman Maury Lane. He said there were an estimated 10 million independent contractors across a wide range of industries, adding "these small business owners are the backbone of this country's economy and further unnecessary regulation will only lead to more nationwide economic dislocation."

Various union groups, including the Teamsters -- who have battled for years to organize FedEx drivers, as they have at rival UPS -- are urging Democrats to act early next year. "We definitely think it can happen in that kind of time frame," said AFL-CIO legislative representative Kelly Ross.

He said the existing law is prone to abuse, and the bill would only target companies that were unfairly taking advantage of a loophole. "It's really about enforcing current law, and trying to go after people who are cheating," Ross said.

Obama has powerful allies, including co-sponsors like Senate Majority Whip Dick Durbin, D-Ill., and Health, Education, Labor and Pensions Committee Chairman Edward Kennedy, D-Mass.

House Ways and Means Income Security Subcommittee Chairman Jim McDermott, D-Wash., and Select Revenue Measures Subcommittee Chairman Richard Neal, D-Mass., held a joint hearing on the subject in May 2007, and introduced similar legislation this year backed by House Education and Labor Chairman George Miller.

The House bill would go even further, levying an additional $10,000 fine per misclassified worker. With the economic downturn hurting workers' paychecks, McDermott said he would try to push the measure early next year, as one of the first orders of business after a stimulus package.

"In a time of a collapsing economy, the absence of healthcare benefits for many American workers and collapsing pension programs, this issue is even more important than it was before and it will be one of my top priorities in the next Congress," McDermott said.

However, Small Business Legislative Council President John Satagaj said the legislation could crush companies' ability to hire at all. "Right now, if you're a small business, you're looking at survival tactics," he said.