With both houses of Congress moving forward with tax-cut bills, the high-tech industry has its gaze on a House provision that could redefine the status of independent contractors.
Crafted by Representative Jon Christensen (R-Nebraska), the independent-contractor provision would unravel the tangle of 20 common-law factors that have long allowed the Internal Revenue Service to audit companies, reclassify independent contractors as employees, and go after the employers for unpaid taxes.
Long criticized by everyone from the Black Congressional Caucus to conservative Senate Majority Leader Trent Lott (R-Mississippi) to liberal Senator Daniel Patrick Moynihan (D-New York), the provision represents the first time Congress has looked at the issue in nearly a decade.
Officials with the AFL-CIO and other unions say the provision will make it easier for companies to reclassify bona fide full-time workers as contractors and dodge minimum-wage, sexual-harassment, and other workplace laws.
Harvey Shulman of the DC-based National Association of Computer Consultant Businesses said those arguments don't hold up against the high-tech industry.
"Look, we have an exploding industry where there's a skill shortage," said Shulman. "High-tech workers can name their price. Moreover, a lot of them would prefer to be self-employed rather than chained to some employer."
He said workers in the industry have labored under a 1986 law that denied high tech two safe-haven provisions that, since 1971, have allowed other industries to avoid the 20-factor common-law employment test and more easily classify workers as contractors.
A 1990 report by the House Government Operations Committee said the 20 common-law factors used in the IRS test are "extremely subjective and are often inconsistently applied." And a subsequent Treasury Department report noted that the application of the 20 factors was "difficult, in particular" in the case of high-tech employees affected by the 1986 law. In practice, subjectivity often meant that the IRS came down hard on employers who hired contractors, frequently auditing the companies and demanding back taxes.
The bottom line, Shulman said, is that fears of IRS audits made employers skittish about hiring contractors, even those who were most qualified for skilled positions. The result, he said, is that highly skilled workers who want to go out on their own as contractors often find doors barred.
"You had situations where the employer wanted and needed a specific person, the person needed and wanted the work, and no one was willing to budge. It was ridiculous," Shulman says.
Christensen's independent-contractor provision reduces the factors used to determine employee status from 20 to three and effectively declaws the 1986 statute.
The bill defines contractors as workers who:
Can earn profits or incur losses or unreimbursed expenses and who agree to work for some clearly demarcated period of time.
Use their own equipment and either work out of the employer's office or pay rent for space in the employer's office.
Have a written contract that states the hiring company will not withhold federal taxes.
Domenick Bertelli, a labor activist with Working Partnerships USA, criticized the Christensen provision. However, he said "some kind of wage floor on the law" might make it acceptable. "Otherwise, you've still got a lot of low-level employees in the high-tech industry who could be converted into contractors under this law. If that happened, they'd lose all kinds of workplace protections."
As for whether the provision will make it into the joint version of the bill that will hit President Clinton's desk later this summer, Shulman said he is hopeful.
"Both the majority leader in the Senate and the chair of the Finance Committee have written letters supporting the repeal of the 1986 law. That gives us a fair shot at getting it into the bill," he said.
