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White House endorses Kerry plan to crack down on employee misclassification

The White House has endorsed legislation introduced by Senator John Kerry (D-Mass.) and Representative Jim McDermott (D-Wash.) in the Senate and House respectively, aimed at protecting workers from the negative effects of employee misclassification. The Fair Playing Field Act of 2010 will end the tax loophole that currently allows for workers to be misclassified as “independent contractors.” According to Kerry, the current loophole harms both businesses that abide by the rules and workers.

“This reform is pro-worker and pro-business,” said Sen. Kerry. “Today a tax loophole is being abused to deny workers basic protections and benefits.”

Businesses that engage in employee misclassification gain a competitive and financial advantage over their law-abiding counterparts, through their failure to pay FICA and unemployment taxes, fringe benefits and workers compensation premiums. Workers subjected to the practice are often liable to pay the employer’s half of the FICA tax, called self-employment tax. For these reasons, said McDermott, the practice has to end.

“For too long, the misclassification of employees has put an unnecessary financial strain on American businesses and workers,” said Rep. McDermott. “Having a distinction between independent contractors and full-time employees is a good thing, but the current law is leading to significant abuse. Companies that misclassify workers have an unfair advantage over companies who play by the rules.”

The current law allows employers to treat their workers as not being an employee for employment tax purposes, unless the employer can provide no reasonable basis that treatment. According to Kerry, the new bill will require the Secretary of the Treasury to issue prospective guidance that will clarify workers’ employment status for federal employment tax purposes and to issue annual reports on worker misclassification. The bill will also amend the Tax Code’s currently reduced penalties for a business’ failure to deduct and withhold income taxes and a worker’s share of the FICA taxes. Lastly, the bill will allow the IRS to also issue guidance on worker classification.

In announcing the White House’s backing of the measure, Vice-President Joe Biden cited the cost to the federal government of employee misclassification.

“When employees are classified as independent contractors, whether by design or because the rules are unclear,” Biden said, “they are denied access to critical benefits and protections, at significant cost to government at all levels.”