H.R. 2642 -- Legislation to Clarify the Standards for Determining Whether a Worker is an Employee or an Independent Contractor

Introduced by Rep. Pete Visclosky (October 8, 1997)

Cosponsors: Lipinski, Jackson, Sanders, DeLauro

Referred to: House Committee on Ways & Means

H.R. 2642 is designed to clarify the distinction between employees and independent contractors. My legislation will tighten and simplify the definition of "independent contractor" in order to prevent employers from inappropriately classifying their employees as independent contractors.

The Internal Revenue Service (IRS) currently uses a complex and ambiguous 20-point common law test to determine whether a worker should be classified as an employee or an independent contractor. The main problem with this test is that it isn't really a test at all. It is simply a set of guidelines that companies and the IRS refer to when determining whether workers should be classified as employees or independent contractors. Because the test is so ambiguous, different companies, IRS inspectors, and courts can -- and have -- classified the same type of workers differently.

In recent years, employers have increasingly exploited the test's ambiguity, or purposely misinterpreted the test, in order to designate many of their present employees as independent contractors. Doing so cuts down on employers' costs, but it hurts workers because employees and independent contractors are treated very differently under federal law. Those who are classified as employees are covered by worker safety standards, have the right to bargain collectively, and are eligible to receive unemployment compensation. Independent contractors, on the other hand, are not covered by the same stringent worker safety standards, do not have the right to bargain collectively, and are not entitled to receive unemployment benefits.

The practice of improperly designating workers as independent contractors has negatively affected tens of thousands of workers, including those who work in the construction, service, agriculture, and garment industries. The problem is particularly troublesome in the trucking industry, where it is relatively easy to classify owner-operators as independent contractors. As a result, there are thousands of workers in Indiana's First Congressional District, and throughout the country, who have been -- or fear that they soon will be -- classified as independent contractors.

Although I opposed the measure, the House of Representatives came dangerously close to forcing thousands of employees to become independent contractors when, on June 26, 1997, it approved a provision to expand the definition of independent contractor as part of omnibus tax legislation. Fortunately, this provision was not included in the final version of the legislation, P.L. 105-34, but it further convinced me of the need to address the standards for determining whether a worker is an employee or an independent contractor.

H.R. 2642 would replace the current 20-point test with the following 8-point test, which is simpler and stronger:

The Internal Revenue Code of 1986 shall be amended to clarify the standards for determining whether an employer-employee relationship exists.

An individual who performs services for any person (in this section referred to as the "service recipient") shall be presumed to be an employee of such person unless all of the following requirements are met:

1. The individual makes comparable services available to the general public on a regular and consistent basis and represents himself as an independent contractor with respect to such services.
2. The individual has performed, or is available to perform, services for more than one recipient at the same time.
3. The service recipient does not have the right (and does not attempt) to control the manner or means of the individual's performance of such services.
4. The individual controls the means of performing the services, including setting the sequence and hours of work.
5. The individual operates under contracts to perform specific services for specific amounts of money, the rate of which is negotiated for every service performed.
6. The individual may realize a profit or suffer a loss under contracts to perform work or services.
7. The individual is responsible for the satisfactory completion of the work that the individual contracts to perform and is liable for a failure to complete the work.
8. The individual incurs significant unreimbursed capital expenses (not typically incurred by employees) in carrying on the business activity in which such services are performed.

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