Rep. McDermott Leads Legislative Drive to End Misclassification of Workers

Abuse Hurts American Workers and U.S. Businesses and Costs the Treasury Billions

For Immediate Release, Tuesday, April 15, 2008

Rep. Jim McDermott, chairman of the Income Security and Family Support Subcommittee, joined by Rep. John Tierney and Subcommittee Chairman Richard Neal, introduced The Taxpayer Responsibility, Accountability, and Consistency Act today. The legislation would level the playing field for honest businesses that abide by the rules, ensure that employees receive the workplace benefits to which they are entitled, and make certain that every business properly pays its fair share of taxes to the Treasury.

“Today, millions of American workers are incorrectly or deliberately misclassified as independent contractors, and the shock wave of abuse that ripples through the economy harms everyone and everything in its path, from an innocent worker to the honest business to the U.S. Treasury,” Rep. McDermott said.

Key Members of the Ways and Means Committee joined McDermott in co-sponsoring the legislation, including Subcommittee Chairman Richard E. Neal and Rep. John Tierney.

“The GAO estimated that our federal treasury lost $4.7 billion in one year alone from the misclassification of workers. This legislation will help clarify the set of rules to help employers, workers, and the IRS in properly classifying workers,” said Congressman Richard E. Neal, Chairman, Subcommittee on Select Revenue Measures.

“Workers misclassified as independent contractors are unfairly prevented from receiving benefits and protections – such as overtime pay, workers’ compensation or employer-provided health insurance – to which they are entitled under the law,” Congressman John F. Tierney (D-MA) said. “Further, employers that play by the rules are at a competitive disadvantage against the businesses that misclassify employees and do not pay the same labor costs. Such misclassification allows some employers to avoid their tax obligations and, as a result, billions of dollars in potential revenues are not being collected by the government.”  

Under current law, a business is required to pay taxes and withhold income tax on the wages of all of its employees. But there is no such requirement for services a business receives from a person considered an independent contractor. The financial hit to the economy is dramatic.

The Internal Revenue Service found in its most recent comprehensive review that 15% of employers misclassified 3.4 million employees as independent contractors. This misclassification cost the Treasury billions in lost revenue, but the damage is much more severe. Misclassification dishonestly and artificially lowers costs for an unscrupulous business and puts all the honest businesses that abide by the rules at a competitive disadvantage. Furthermore, misclassification deprives workers access to the workplace protections and benefits they are entitled to under the law.

“Dishonest and unscrupulous businesses are gaming the system and hurting decent, hard working Americans and honest businesses in the process, and it is time the cheaters either play fairly or face the consequences,” Rep. McDermott said.

The Taxpayer Responsibility, Accountability, and Consistency Act would revise and amend relevant sections of the Internal Revenue Code and the Revenue Act of 1978 to ensure that a misclassification of workers could only occur as a result of cheating and the bill would increase the penalties imposed by the IRS on a business found to be cheating.

Rep. McDermott concluded: “Certainly, some innocent mistakes have been made, but when over three million workers are classified as independent contractors, there is no doubt that some businesses are trying to inflate their bottom line by depriving workers of what they have earned and that hurts us all.”

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A copy of the legislation is attached as is a comprehensive summary.