The "independent contractor" versus "employee" controversy has a potentially damaging reach of significant proportion, and well beyond just the obvious tax considerations. And from a national policy standpoint, the IRS' focus on this area is extremely unfair. There are states such as Nevada for which a determination that an independent contractor is or should be an employee has minimal impact. For businesses in California, on the other hand, a determination of employee status for a businesses work force can rachet the employer into unwanted inclusion in laws affecting larger employers and create significant liability. Five randomly chosen California laws triggered by the existence and number of employees include: 1. A requirement for plant closings, layoffs, and relocations of 50 or more employees regardless of percentage of workforce 2. California Fair Employment and Housing Act anti discrimination rules which prohibit sexual harassment kicks in at 25 employees. 3. Pregnancy discrimination laws are triggered by a 5 employee level rather than the federal 15. 4. California's AB 1825 requires any employer with more than 50 employees to provide "supervisors" with a minimum two hours of harassment training. 5. California's Prop 65 requires a "clear and reasonable" warning before knowingly and intentionally exposing an employee to a listed chemical kicks in at 10 employees. There are many dozens more at the state level and still more at the federal level. Are the goals of these laws societally good? Yes. However, the drafters believed that they knew that these rules were not "good enough" to apply to all employers or else the application threshold would have been wholly absent. The lawmakers realized that it would be unfair to restrict contracts by requiring independent contractors to be subject to these laws at all, and that small employers should not be burdened with such laws.
In their paternalistic estimation, a startup company should take on additional burdens each time a new hire adds to the employee total. Each added employee will be celebrated and business will be stopped for a week while management can learn, digest, and contemplate its new social responsibility by virtue of the new laws applied to it. With all of the laws and financial constraints which inhibit new business, its no wonder that a below average citizen often considers a completely illegal means of livelihood as their only alternative. Society says that it wants more jobs and employment, but the legislature passes a patchwork of laws and rules that only the largest employer can handle. In the space between zero employees and 100 employees, the typical business needs a sizeable capital infusion to bring it up to speed on all of the laws with which it must comply. This inhibits entry into the market, stifles new business or kills it off and helps eliminate the pursuit of happiness for those who want to be happy in their own business. Government can deal much more securely with businesses than individuals, yet uses restrictive laws to inhibit the formation and growth of business. Outside the taxing agencies, even more laws generally depend upon a finding of independent contractor v. employee. Independent contractors can compete and owe no duty of loyalty to those they contract with. Employees create liability for their employers for torts, for representations and for their negligence, and much more. So, when one of the most powerful arms of government decides to create a "sea change" in the equilibrium between independent contractor and employee status, it will do more harm than good, especially at a time where business formation and growth is most keenly needed. Federally, things on the "independent contractor" versus "employee" front had been generally calm for the past two decades or so. The states, such as California, with a high state tax rate have always been aggressive about "herding" anyone they could into employee status. However, states with their individualized fiefdoms and own dangerous peculiarities in trying to thrust the equilibrium of human relationships toward that of "employee" are bad enough but they are at least isolated. However, an IRS shift produces a corresponding amplifying forcing function at the state level. For years, the IRS used a 20 factor list with no weighting considerations between the factors and left it to the taxpayer to sort out the propriety of the chosen category. Later in time, the IRS focussed on a super-grouping of three main factors, including (1) behavior, (2) financial relationship, & (3) relationship. Control is the watchword for the first two, and the latter opens itself up to a more intensive factual exploration. The grouping into three overall categories of grouping the earlier factors is somewhat an indication of the perceived importance of the first two against the third category which can contain a number of narrower miscellaneous factors. Another prior "calming" aspect of the "independent contractor" versus "employee" controversy was a safe harbor with an unusual, if not tautological forgiveness factor in that "even if classified wrong, its OK if you did it reasonably and/or consistently." The motive may have been an assumption that consistent, widespread classification would probably occur at ambiguous dividing lines within different types of industries. The extent to which all of the foregoing calmness has been a reassurance to employers, that calm was upset last fall when the IRS announced "Limited Amnesty Program for Employee Misclassifications" to enable employers who wanted to voluntarily "adopt" their independent contractors as "employees" and pay a fee for the privilege. (Continued at part 2)