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Dec
2012
20

Confusion Abounds in Minnesota’s Game of Employee Misclassification Legislation Hot Potato

Republican Rep. Erik Paulsen of Minnesota has introduced a new bill, the Independent Contractor Tax Fairness and Simplification Act or H.R. 6653, that aims to punish businesses for misclassifying workers as independent contractors.

The bill, though, is similar to the Fair Playing Field Act (H.R. 4123) which has had little success moving forward since being introduced in March by 33 Democrats. Both bills give retroactive safe harbors to those companies who voluntarily change their ways, but the new bill will change the term “employment status” to allow some of the dirtier misclassification methods to continue according to analysis by Pepper Hamilton LLP,

    While both bills expressly state that the term “employment status” shall mean the classification of an individual as an employee or IC “under the usual common law rules,” H.R. 6653 (unlike the Democrats’ bill) would codify a new form of “safe harbor” if the worker meets all four of the following factors:
• incurs significant financial responsibility for providing and maintaining equipment and facilities
• incurs unreimbursed expenses or risks income fluctuations because remuneration is “directly related to sales or other output rather than solely to the number of hours actually worked or expenses incurred”
• is compensated on such factors as percentage of revenue or scheduled rates and not solely on the basis of hours or time expended, and
• “substantially controls the means and manner of performing the services” in conformity with regulatory requirements, or “the specifications of the service recipient or payor and any additional requirements” in the parties’ written IC agreement.

The shoddy language in the new bill could end up leaving out highly skilled hourly wage workers like accountants and architects as well as those with few expenses such as freelance writers. Neither bill changes the Fair Labor Standards Act, though, which governs how independent contractorship is determined:

The scope of both bills is also limited. Neither bill would have any impact on whether a worker is an IC or employee under the federal Fair Labor Standards Act (FLSA), which governs minimum wages and overtime. The determination of whether a worker is an IC or employee under that labor law is based on a variation of the common law standard frequently referred to as the “economic realities” test. Thus, a worker that may qualify for IC status under H.R. 6653 may not qualify for IC status under the FLSA.

Further analysis shows that the bill may have an “escape clause” previously untested in courts.

In the fourth factor, a service recipient may direct the service provider by inserting into the parties’ IC agreement its “specifications” or “any additional requirements” without creating an employment relationship. Generally, requirements imposed by the service recipient as to how the work is to be performed are taken into account in determining if the hiring party exercises control or direction over the means and manner by which the services are performed. Such direction and control is indicative of employee status. In contrast, specifications and requirements as to the end-product of the services, i.e., what the services the individual is being hired to perform, are not indicative of employee status inasmuch as all ICs must be told what they are being retained to do.

Rampant employee misclassification has a very negative impact on workers and local economies. H.R. 6653 does not appear to be the piece of legislation that will lift Minnesota out of this predicament.

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