By: Diane Ring
New legislation has just been introduced in the Senate that creates a “safe harbor” for independent contractor status. The proposed legislation provides that if a worker relationship satisfies certain criteria, then that worker can bypass the sometimes messy, multi-factor test for distinguishing between employees and independent contractors, and will be classified as an independent contractor for tax purposes. What prompted action now to address what has been a decades-old classification challenge for workers, businesses and the IRS alike? The gig economy. (Hence, the not-so-catchy title for the legislation: The New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (S. 1549).)
The legislation’s sponsor, Senate Finance Committee member John Thune, (R-S.D), described the impetus for the legislation as follows: “My legislation would provide clear rules so that these freelance style workers can work as independent contractors with the peace of mind that their tax status will be respected by the IRS.”
Is this really what gig workers are worrying about? . . .
At the heart of the sharing or gig economy is a raging debate over whether certain prototypical gig workers should be treated as employees or independent contractors across various legal contexts, including labor law, tort law, tax law, and anti-discrimination law. Part of that conversation is being explored indirectly through litigation under existing law, as I have previously discussed. But it is also being tackled in a more direct, forward-looking manner through debates over the possibility of a third worker category, the real nature of gig work, and the needs of workers in the new economy.
There is significant disagreement on the “right” answer. That is not surprising, as businesses have obvious incentives to avoid employee classification for a large group of workers, which would create increased tax and benefits obligations for the businesses. On the flip side, some workers may vastly prefer employee classification in light of the labor law and other protections it provides. Still other workers may prefer independent contractor classification: as my co-author (Shu-Yi Oei) and I have noted in previous and forthcoming work, under current tax law—which limits deductibility of businesses expenses for employees—it is not at all clear that gig workers would benefit from a shift from independent contractor to employee status.
The proposed legislation, presented as a move that brings “peace of mind” to gig workers, in fact does two things. First, it glosses over the fact that tax classification uncertainty is the tail not the dog. The real issue in the gig economy is what theory of the worker-business relationship should undergird our classification scheme, not the precise execution of that scheme under the law. Second, in the midst of this conceptual uncertainty, the proposed legislation tips the balance towards a particular classification for tax purposes: independent contractor status. Moreover, it does so under the guise of providing clarity to the historic line-drawing problem. But the legislation obviously does much more: It stakes out a firm theoretical vision of workers, business, and society, and tilts the scale towards independent contractor classification. To the extent the legislation provides “peace of mind,” it’s peace of mind with a potentially heavy normative price tag.
What we need is thoughtful resolution of the fundamental worker classification question from a policy perspective that reflects the competing needs and concerns of workers, businesses, and society. This will not be simple — in part, because a forward-looking approach opens up the possibility that we could significantly re-think what benefits and burdens are attached exclusively to employment status. Furthermore, the worker status question runs through a wide range of state and federal legal regimes. It’s not at all obvious that tax should be the first arena in which this debate is resolved.
To be clear, the proposed legislation does attempt to tackle a number of sharing economy issues that my co-author (Shu-Yi Oei) and I identified (and for which we suggested similar fixes). These include: (1) lowering the information reporting thresholds for certain gig businesses and workers (and thus increasing the likelihood of third-party reporting); (2) providing greater clarity on Form 1099-K reporting in the gig economy; and (3) offering relief for workers struggling to meet quarterly reporting, payment, and filing obligations on their own. But in light of the fundamental questions posed by worker status in the sharing economy, society now needs to direct its attention to the genuine and serious tradeoffs and possibilities imbedded in the worker debate—and make a reasoned and conscious decision. We must pay attention to the employment relations dog, and not the tax tail.