Photo Credit: Image by Shutterstock, Copyright (c) Roman Tiraspolsky
The Republican tax bill now in Congress would imperil many of the last century’s hardest-won labor rights for workers by building a new legal wall between businesses and so-called gig economy workers that absolves management of many obligations owed to employees, according to law school professors tracking the bill.
“There is an important battle going on right now in labor and employment law over the appropriate classification of workers in the gig/platform/sharing economy,” wrote Boston College’s Shu-Yi Oei and Diane M. Ring for TaxProf Blog from Pepperdine University School of Law. “At stake in the fight are the rights of workers to collectively bargain, and to overtime pay, minimum wage, child labor laws, and family and medical leave. The battle also holds implications for application of health and safety regulations and anti-discrimination laws. Employee classification confers many of these protections. Independent contractor classification does not.”
The GOP’s tax reform legislation doesn’t just reconfigure tax brackets, tax rates and tax breaks; its fine print contains provisions long sought by various industry sectors. One of these is language lifted from a prior House bill called the New Economy Works to Guarantee Independence and Growth Act, or NEW GIG Act. That legislation, which the Congress’ Joint Committee on Taxation last week suggested was added to the Senate draft of the tax bill, clarifies “worker classification” and income-reporting responsibilities in five major ways, the TaxProf Blog said.
First, it creates some tests easily met by any company hiring independent contractors that says these workers are not employees. Next it says anyone making more than $1,000 has to file a 1099 tax form reporting that income. Third, it requires the company hiring the contractors to withhold 5 percent of the income paid—which is new, akin to what full-time employers now do, but less than the current federal self-employment tax. Fourth, it limits the Internal Revenue Service from reclassifying contractors as employees. But fifth, it allows workers to sue in tax court.
“From a purely tax point of view, we would readily admit that the proposals can make life simpler and less confusing for workers and help somewhat with tax compliance and enforcement,” the authors wrote for TaxProf Blog. “The problem is that it’s not just about tax.”
That assessment is an understatement, and the Boston College professors explain in detail as they pinpoint larger issues and what to worry about.
“Our worry is that tax clarification of independent contractor status is a strategic step designed to win this broader (non-tax) regulatory war over worker classification,” they write. “Our specific concern is that ‘forced clarity’ in tax can tilt the direction of the worker classification debate in a way desired by the platform businesses, industry lobbyists and the legislation’s supporters.”
The authors quote a report by Eric Boehm at the Libertarian outlet Reason.com, which said, “The platforms themselves want this clarification included in the law as a way to short-circuit lawsuits, like one already launched by Uber drivers in California, aimed at forcing them to treat workers as employees.” Boehm explains:
“In return for clarifying that gig economy workers are contractors, Congress appears to be saying, those platforms will have to collect income taxes from those same workers. By doing that, Congress guarantees that more taxes will be paid—rather than the current system, which relies on individual contractors to correctly calculate and pay their own taxes, something that likely shortchanges the IRS to the tune of several billion per year, according to Caroline Bruckner, managing director of American University’s Kogod Tax Policy Center.”
The TaxProf Blog points out that putting the NEW GIG bill’s language into the GOP tax reform bill would essentially pre-empt state and local legislative efforts to adopt legal protections for gig economy workers—who are essentially freelancers who often work exclusively and full-time for employers, but aren’t considered traditional employees under state and federal law.
“As the worker classification fight has developed, one of the tactical moves we have seen employed by both sides is to back reforms that grant piecemeal incremental protections for workers. For example, the City of Seattle passed an ordinance granting rideshare drivers the right to collectively bargain. Others have proposed creation of a third category of worker in between employee and independent contractor,” they write. “It’s important to note that even though the NEW GIG legislation was promoted as clarification for gig economy workers, nothing in the text of the proposed NEW GIG legislation or the JCT-prepared [Joint Committee on Taxation] description [of the GOP tax reforms] limits this legislation to gig workers.”
That’s the larger point. There is much to grumble about with this narrow area of the GOP legislation. It grants the legal presumption to employers that any worker management wants to treat as a contractor is designated as such under law. It further cements that pro-management position by limiting the IRS’ ability to reclassify contractors as employees. These provisions would absolve owners and management from many employer responsibilities for full-time employees, including the rights of workers to organize unions, earn minimum wages, outlaw child labor, and guarantee family and medical leave. They also call into question the applicability of anti-discrimination laws and health and safety regulations.
“If one is going to sign off on this type of legislation, one should at least be aware of what the far-reaching consequences may be in order to make a conscious determination that it’s still worth doing despite these wide-ranging non-tax risks and costs,” co-authors Oei and Ring write. “Or, if one’s underlying normative goal is to harness tax reform in order to dilute worker protections in pursuit of business growth, one should be transparent about that too.”
At the very least, gig economy workers and contractors ought to be aware that the GOP Congress is considering legislation that would skim 5 percent off their earnings—to be withheld for federal taxes by their employers. That’s in addition to contractors itemizing their expenses, which are deductible.
In other words, Republicans in Congress are poised to rewrite key labor and tax law in a manner that puts corporate interests above workers, erodes long-standing workplace protections, and withholds earnings as employers currently do for employees—yet legally, these workers would not be considered employees.