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Proposed Changes: 1099 Independent Contractor Classification and Misclassification Penalties

Last year the House of Representatives and the Senate introduced two proposals directed at 1099 (Independent Contractor) classification. The legislation, which is backed by the White House, targets current grey areas with Independent Contractor classification, enforcement, and penalties. The following are overviews of the two Acts.

The Fair Playing Field Act of 2010 introduced by both the House of Representatives and  the Senate on September 15, 2010.

, Proposed Changes: 1099 Independent Contractor Classification and Misclassification PenaltiesThe goal of the Act is to level the playing field for companies who abide by the laws for classifying Independent Contractors (ICs) and those companies who use loopholes to mis-classify workers and avoid paying taxes and providing benefits to misclassified workers.

The Act will provide clearer guidelines on the classification criteria and allow for the IRS to enforce these guidelines. The current loopholes, which allow businesses to “intentionally” mis-classify certain workers as ICs, will be closed . Below are three of the Act’s main bullet points:

  • Allow the Secretary of the Treasury to issue regulations, guidance, and the final say on proper employment status (W2 vs 1099).
  • Provide support to the IRS for enforcing the Act.
  • Eliminate companies’ currently reduced penalty for failing to withhold income tax for misclassified workers. The loopholes currently allow employers to treat workers as ICs as long as the company documents and uses consistent classification reasoning.

The Employee Misclassification Prevention Act introduced by the House of Representatives (H.R. 5107) and the Senate (S. 3254) on April 22, 2010.

This Act would amend the Fair Labor Standards Act in the following manner:

  • Enforce strict record-keeping of companies’ ICs and classification policies.
  • Subject companies to a fine of $1,100 to $5,000 per employee who is deemed misclassified.
  • Allow for misclassified workers to recoup double the violations for minimum wage and overtime pay damages.
  • Make it unlawful to retaliate against non-employees who enact their rights under the Act.
  • Mandate a notice to each employee hired which includes the new hire’s classification status and the appropriate labor laws (W2 vs 1099).