State Senator Kevin Mullin (R) in Vermont has introduced s.220 which proposes a terrific idea to help businesses and workers deal with the uncertainty of the classification of a worker as an employee v. independent contractor classification. While some businesses may choose to classify workers as independent contractors to avoid costs associated with having employees — including withholding and unemployment taxes and workers compensation insurance — most businesses want to do the right thing and classify workers appropriately and benefit from the special skills and services offered by many independent contractors.
The classification/misclassification dilemma pits two competing American traditions — protecting workers from being exploited by unscrupulous companies and the American dream of entrepreneurship; setting out on one’s own and starting one’s own business. The IRS, Department of Labor and many state agencies are increasing their scrutiny of the classification of workers to ensure employers are paying appropriate taxes and following applicable labor laws. At the same time, the number of American workers who want to “take this job and shove it” and start their own business is increasing with more Americans choosing to be free-lancers, self-employed or independent contractors.
The bill in Vermont attempts to address both of these traditions. It creates a state board that reviews and authorizes legitimate independent contractors. The board reviews various criteria and then authorizes a worker to be a Sole Contractor. This creates a presumption that the worker is an independent contractor. By creating a presumption of independence, companies who want to engage with the worker are able to with some degree of certainty — they can sign a contract with the Sole Contractor with some level of comfort that they are classifying the worker appropriately. Of course the bill provides that companies cannot take advantage of this provision and hire Sole Contractors to position where they are clearly employees. The bill also provides that failure to have the state authorization does not prohibit someone from being an independent contractor, there just would not be a presumption. The approach of creating a presumption of independence is a useful way to balance the need to protect employees and the desire of some to start their own independent business. It allows companies to engage with authorized independent contractors with less worry that their classification will be overturned in an audit.
Regulatory agencies at all levels should provide greater prospective guidance. Many of the tests for classification as an employee or independent contractor require weighing various factors to determine, based on the totality of the circumstances, whether the company exercised (or had the right to exercise) sufficient control over the method and means of doing the work. This compels companies to look at a variety of competing factors and come to a conclusion. Regulators could look at the same factors and weigh them slightly differently, arrive at a different conclusion and impose fines and penalties on a company for misclassifying employees. Creating a process in which the independent contractors and/or companies can get a presumption before the engagement starts is a giant step forward.
More states and the federal government should adopt an approach similar to the one in S.220
Hat tip to VTDigger.org for posting Independent Contractors Seek Clearer Employment Status.