Russ Hollrah is a partner in a Washington, DC-based law firm that represents employers in conflict with regulatory authorities and has over two decades’ experience in litigating challenges to independent contractor status. He is also the executive director of the Coalition to Preserve Independent Contractor Status (www.iccoalition.org), of which FRA is a founding member.
FRA’s Director of Communication, Neil Ward, asked Russ to characterize the climate of legal threats to independent contractor status today, what’s behind recent challenges, and how small businesses can preserve their right to independence.
NW: Russ, you’ve stressed that, in spite of the relief that the Section 530 safe harbor has created for the protection of independent contractor status since its enactment 32 years ago, the tide of policy has been pushing against independent contractors for several years now. Can you give me some examples of changes you’ve observed?
RH: Certainly. During the past several years, many individual states have enacted laws that make it more difficult to establish individuals as independent contractors and that impose harsh penalties on companies that are found to have misclassified service providers. During the same period, the U.S. Congress enacted a new federal income-tax withholding regime that will apply to government contractors. The State of California, which is always worth watching, has come very close on a number of occasions to enacting a law that would require the withholding of California income tax from payments made to all independent contractors doing business in the state.
Meanwhile, the U.S. Department of Labor has significantly intensified its enforcement efforts aimed at companies that misclassify workers as independent contractors, and this February the Internal Revenue Service commenced its National Research Program, through which it will conduct employment-tax audits of 6,000 U.S. companies over a three-year period.
What does all this activity mean in the real world? In my view, it is having an impact. Recent statistics suggest that these government policies are beginning to cause companies that do business with independent contractors to reduce their exposure to this growing regulatory risk by doing less business with independent contractors.
So the number of independent contractors is shrinking. The most recent Bureau of Labor Statistics data indicate that the number of self-employed individuals in the U.S. plummeted to a 12-month low of 8.68 million in August 2010, which is down from 8.78 million in the prior month of July 2010, and down from 9.03 million a year ago in August 2009.
NW: That doesn’t sound quite like “economic recovery,” does it? Would you say this trend is new with the shift in congressional leadership in 2006, or the election of a Democratic administration in 2008?
RH: Opposition to Section 530, and to independent contractors generally, existed before 2006. For example, anti-independent-contractor provisions were contained the Health Security Act, which was promoted by then First Lady Hillary Clinton during her husband’s first term as President.
Opposition has greatly intensified during the Obama Administration. We are now witnessing a confluence of several anti-independent-contractor groups joining efforts; for instance, the Democrat party generally, organized labor, “workers’ rights” groups, environmentalists, and employee-based companies that compete with companies using independent contractors.
NW: You mentioned the IRS conducting a National Research Program, entailing 6,000 employment-tax audits over the next three years. What are the implications of that program for independent contractor status determinations?
RH: The principal implications are twofold. IRS officials have indicated that because of its significant resource allocation to the NRP audits, the probability of a company being subjected to a normal IRS employment-tax audit during the three-year period will be reduced.
For those 6,000 U.S. companies selected for an NRP employment-tax audit, however, the examination will be extensive. While in the case of a normal employment-tax audit, a worker-classification examination will end once a company establishes Section 530 protection, in the case of an NRP audit, IRS officials have indicated that IRS will examine Section 530-protected companies to determine whether the covered workers also qualify as independent contractors under the common-law test. The rationale for this more expansive NRP examination of Section 530-protected companies is that IRS seeks information on the extent to which Section 530-covered service providers also qualify as independent contractors under the common-law test, so it can measure the extent to which Section 530 permits companies to “misclassify” workers as independent contractors.
NW: So it’s a matter of gathering ammunition for repealing Section 530 sometime in the future, presuming that none of the current legislative proposals now before Congress succeeds in doing so.
Many observers are anticipating a major shift in Congressional power with November’s elections. Would a Republican Congress put an end to the assault on the right to contract freely?
RH: While it is difficult to say that a Republican Congress would put an end to any anti-independent-contractor legislative proposals (the government-contractor tax withholding law was enacted during the Bush Administration while Republican Bill Thomas was Chairman of the Ways and Means Committee), it would be a significant improvement over the current congress, which is certainly the most hostile toward independent contractor status of any in my lifetime.
NW: FRA is concerned about the ability of logging, trucking, and forestry contractors to operate under independent status. Russ, how do these contractors’ exposure compare with those of other contractor sectors you have experience with?
RH: Loggers and forestry contractors are probably not a specific target, but they are an indirect target as a consequence of the pending bills that would repeal Section 530. It is my understanding that many loggers and forestry contractors rely on Section 530 to obtain the prospective certainty that their business model will withstand IRS scrutiny. This certainty is important to them for many reasons—it helps them obtain credit and to make business commitments into the future. If Section 530 were repealed and IRS were to issue guidance setting forth demanding criteria for establishing loggers as independent contractors, these contractors and the industries they serve could be severely damaged.
Some sectors—specifically direct sellers and realtors—currently have their independent status guaranteed under the law. Most sectors—the logging industry included—do not have any specific statutory protection, apart from the general protections of the Section 530 safe harbor.
Trucking, on the other hand, is a direct and major target of current anti-contractor initiatives, due principally to the sensationalized media coverage of the lawsuits brought against FedEx Ground and the actions taken by the Los Angeles and Long Beach ports to ban independent-contractor drayage drivers in an effort to reduce air pollution. The assault on FedEx Ground is a perfect illustration of an attack by multiple anti-independent-contractor groups—namely, organized labor, an employee-based competitor (UPS), and plaintiff attorneys. The actions taken by the ports resulted from joint efforts of organized labor, workers’ rights groups, and environmental activists.
NW: You just now mentioned IRS “guidance.” I understand Section 530 currently prevents IRS from issuing such guidance. What kind of process do you anticipate IRS would set up to issue “guidance” to industries, such as wood supply businesses, if Section 530 were repealed? Best case? Worst case?
RH: The best case would be a collaborative process, similar to the process that IRS followed when developing industry guidance for taxi cabs, moving van drivers and emergency physicians. Importantly, however, that guidance was developed under the protective shield of Section 530. If Section 530 were repealed, there is a risk that the process for issuing new guidance would shift to somewhere between that best case and what I would characterize as a worst case. A worst case process would involve IRS and Treasury viewing the Congressional action of repealing Section 530 as an invitation to develop stringent criteria for establishing independent-contractor relationships and effectively imposing those criteria on affected industries.
NW: Everybody is in favor of “small business.” Is there a distinction between small business and the micro-entrepreneurs who function as sole-proprietor service providers in the minds of Congress and the agencies?
RH: While the micro-entrepreneurs who function as sole-proprietor service providers are the quintessential small businesses that create substantial value to our economy, I believe many policymakers view independent contractors as more closely resembling employees than small businesses. Sadly, I believe many in Congress and in government agencies view independent contractors simply as misclassified employees or as naïve individuals who need government protection against larger enterprises seeking to take advantage of them economically.
NW: And, in fact, at a recent Congressional hearing, I heard testimony from a business owner who used an employee-based model testifying against the rights of his competitors to use service contractors, even though he, himself, decades ago, launched his business as a sole-proprietor service contractor. We tend to forget where we come from, and where our success comes from.
Do you have any advice about how we—FRA, our members, contractors, and businesses that use contractors—can make our case for our economy’s and our society’s need for independent contractors, for individuals whose personal life goals include willingness to expose themselves to business risk?
RH: Yes; I believe FRA already is pursuing the best strategy, which is to coordinate lobbying efforts with other industries that share FRA’s passion and commitment to defending a person’s right to do business as, or with, an independent contractor. The leading role that FRA has assumed in the Coalition to Preserve Independent Contractor Status, e.g., by having its industry explicitly addressed in an economic study soon to be released and actively guiding the coalition’s legislative strategy, will certainly help protect its industry.
Also, the unique characteristics of logging contractors make a compelling case for the need for legitimate independent contractors. The independent-contractor logging contractors work autonomously; there is no practical means to supervise their work. Moreover, the need for their services is often unpredictable, due to the uncertain availability of harvestable timber and fluctuating demand for the product. In addition, there is a long, proud tradition of independence and autonomy among logging contractors that would be destroyed if they were forced to become employees of their clients.
FRA members should educate the elected representatives from their respective states on the importance of the independent-contractor business model to the forest-products industry. They also should emphasize the critical necessity of the prospective certainty Section 530 provides that their business model is valid for federal employment-tax purposes, so they can plan for the future and obtain essential capital to fund operations.