On February 9, 2016, President Obama released his Administration’s budget proposal for Fiscal Year 2017. The following identifies the provisions that we believe are most relevant to companies that do business with independent contractors. The proposal descriptions are taken verbatim from the budget proposal. Any commentary is reflected in underlined italics.
1. Internal Revenue Service
Repeal Section 530
Improve Compliance by Businesses: Increase certainty with respect to worker classification.—
Under current law, worker classification as an employee or as a self-employed person (independent contractor) is generally based on a common-law test for determining whether an employment relationship exists. Under a special provision (section 530 of the Revenue Act of 1978), a service recipient may treat a worker who may actually be an employee as an independent contractor for Federal employment tax purposes if, among other things, the service recipient has a reasonable basis for treating the worker as an independent contractor. If a service recipient meets the requirements of this special provision with respect to a class of workers, the IRS is prohibited from reclassifying the workers as employees, even prospectively. The special provision also prohibits the IRS from issuing generally applicable guidance about the proper classification of workers. The Administration proposes to permit the IRS to issue generally applicable guidance about the proper classification of workers and to permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification is prohibited under the special provision. Penalties would be waived for service recipients with only a small number of employees and a small number of misclassified workers, if the service recipient had consistently filed all required information returns reporting all payments to all misclassified workers and the service recipient agreed to prospective reclassification of misclassified workers. It is anticipated that after enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not be clear.
Analytical Perspectives, Page 192.
Increase of $530 Million in Funding for the IRS
In FY 2016, IRS funding remains $911 million lower than its FY 2010 level despite an increasing workload resulting in part from new legislative mandates. The FY 2017 Budget provides the IRS with $11.8 billion in base discretionary resources, an increase of $530 million (4.7 percent) from FY 2016, restoring the resource levels necessary to maintain the integrity of the tax system, fairly enforce the tax code, and provide adequate levels of taxpayer services. With these investments, the IRS will increase staffing for traditional taxpayer services, bolster defenses against stolen identify refund fraud, and provide assistance to taxpayers who call the IRS for assistance. In addition, the Budget invests in new IT architecture that will enable the IRS to modernize and secure its online services and provides taxpayers with an experience comparable to what they have come to expect from financial institutions.
Treasury Fact Sheet, Page 3.
Require Certain Contractors to Provide Clients with their TIN and Permit Contractor to Require Clients to Withhold Federal Taxes
REDUCE THE TAX GAP AND MAKE REFORMS
Expand Information Reporting / Voluntary IC Tax Withholding
Improve information reporting for certain businesses and contractors.—The Administration proposes to require a contractor receiving payments of $600 or more in a calendar year from a particular business to furnish to the business (on Form W-9) the contractor’s certified TIN. A business would be required to verify the contractor’s TIN with the IRS, which would be authorized to disclose, solely for this purpose, whether the certified TIN-name combination matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business would be required to withhold a flat-rate percentage of gross payments.
Contractors receiving payments of $600 or more in a calendar year from a particular business could require the business to withhold a flat-rate percentage of their gross payments, with the flat-rate percentage of 15, 25, 30, or 35 percent being selected by the contractor.
Analytical Perspectives, Page 191.
2. Department of Labor
$10 Million to Improve State Efforts to Detect and Remedy Worker Misclassification
The FY 2017 Budget request for UI State Administration is $2,592,019,000…. This level of UI State Administration funding also includes $10,000,000 to improve state efforts to detect and remedy misclassification of workers as independent contractors….
DOL Budget in Brief, Page 20; see also DOL Congressional Budget Justification, Employment and Training Administration Overview, Page 4.
The Budget includes $10,000,000 to continue a high-performance award program to improve state efforts to detect and remedy misclassification of workers as independent contractors. Modeled on a successful Supplemental Nutrition Assistance Program enterprise, this initiative provides a “high performance bonus” to the states most successful at detecting and prosecuting employers that fail to pay their proper share of UI taxes due to worker misclassification and other illegal tax schemes. States can use these incentive grants to upgrade misclassification detection and enforcement programs. As part of this initiative, states must capture and report outcomes and cost/benefit information to enable the evaluation of new strategies. While funding has only been available for FYs 2014 and 2015, data show a spike of 14 percent in the number of identified as misclassified employees from 290,420 in FY 2013 to 332,411 in FY 2015.
DOL Congressional Budget Justification, Employment and Training Administration, Page 29.
Funding for this initiative was available for fiscal years 2014 and 2015, but not 2016. The Coalition was instrumental in the successful effort to eliminate funding for this program in 2016. It is our goal to eliminate funding for this program again for fiscal year 2017.
$277 Million to Wage and Hour Division to Increase Enforcement Activities
The Budget provides $277 million for the Wage and Hour Division (WHD) to enforce laws that establish the minimum standards for wages and working conditions in many of the workplaces in the United States, particularly in industries where workers are most at risk. The Budget also expands funding for efforts to ensure that workers receive back wages they are owed and cracks down on the illegal misclassification of some employees as independent contractors, a practice that deprives workers of basic protections like UI, workers’ compensation, and overtime pay.
DOL Budget in Brief, Page 4; see also DOL Fact Sheet, Page 5.
For FY 2017, the WHD budget request is $276,599,000 and 1,694 FTE. An additional 367 FTE will be funded by the H-1B L Fraud account. The budget request includes increases totaling $49,099,000 and 318 FTE to continue positive momentum towards building a stronger and more effective enforcement program. The majority of this request is for an increase of $29,419,000 and 300 FTE for additional enforcement staff and support. Additional resources dedicated to active enforcement would allow the agency to develop corporate and enterprise-wide solutions to systemic compliance problems – data show that using resources toward planned enforcement activities achieves better results for low-wage workers who are less likely to complain. Additionally, the budget includes $5,800,000 for a new, integrated case management system to replace the current outdated system, which impedes WHD’s ability to conduct strategic enforcement; $2,200,000 and 6 FTE for Back Wage Collection and Payments, including 4 forensic accountants with the remaining 2 FTE to assist with improvements to the back wage collection process; and $3,000,000 and 12 FTE to build data analytic capabilities for strategic enforcement and the creation of data tools and products to allow WHD to take a data-driven informed approach, leveraging internal and publicly available data sources for enforcement priorities.
Only through the strategic and planned use of resources can the agency begin to change the types of behaviors that drive non-compliance. These additional resources would be dedicated to directed investigations that are strategically selected and executed to solve the most important compliance challenges that include protecting workers in industries that employ business models that are at high risk of wage and hour violations. These resources would also allow WHD to increase and strengthen the analytic capacity to conduct evaluations and other analyses to inform decisions about how best to use the agency’s limited resources, including directing more resources toward evidence-based practices and strategies.
DOL Fact Sheet, Page 30.
WHD enforcement efforts will target the following areas:
Detecting Worker Misclassification
Modernizing Key Enforcement Initiatives: WHD will continue refining and strengthening its strategies in priority industries with an emphasis on detecting the various forms of misclassification found in today’s workplaces, where workplace arrangements and business structures are more complex.
DOL Congressional Budget Justification, Wage and Hour Division, Page 19.
Addressing the Fissured Workplace
Addressing the Fissured Workplace: WHD is modernizing its approach in key enforcement areas in industries where complex employment relationships exist. In FY 2017, WHD will continue to use its directed investigations to increase WHD presence in high risk industries, such as those industries with high minimum wage and overtime violations that employ vulnerable worker populations particularly those who do not typically report violations, either because they fear retaliation or because they do not understand the law and complaint process. WHD will continue to focus on industries characterized by a high degree of subcontracting, use of temporary labor providers, and other third-party managers. These industries are often fiercely competitive and, unfortunately, that can lead some unscrupulous employers to cut corners in an effort to gain a competitive advantage over employers who follow the law and protect their workers. If laws are not vigorously enforced, more and more employers can start to violate worker protection laws in an effort not to be under-bid. This results in a growing population of workers subject to illegal practices, including workers who are misclassified or who do not receive the wages they earned and were required to be paid by law. WHD will continue to use its directed investigations to make an impact on not just the investigated employer, but on the behaviors of employers across an entire industry and promote compliance across networks of business organizations.
WHD also conducts directed investigations to secure compliance for other workers at a higher risk of exploitation such as: workers with disabilities, young workers, agricultural workers, and workers with no private right to pursue remedies on their own behalf.
DOL Congressional Budget Justification, Wage and Hour Division, Page 19-20.
The foregoing suggests that DOL intends to significantly increase the sophistication and breadth of its enforcement efforts on issues including worker classification.
The mandatory Paid Leave Partnership Initiative is $2,213,000,000 to help up to five states set up paid leave programs and assist with benefit payments for the first three years. Currently, too many American workers must make the painful choice between caring for the families they love and earning the paycheck they need. Although the Family and Medical Leave Act (FMLA) allows workers to take job-protected unpaid time off to care for a new baby or sick child, or tend to their own health during a serious illness, most families cannot afford unpaid leave, and still lack access to the kind of leave policies that meet the evolving needs of today’s families.
DOL Budget in Brief, Page 3, 30.
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