In July, the New York State Assembly introduced a new, tougher independent contractor or 1099 compliance bill (A11649). The proposed law would:
- Significantly increase the penalties for "knowing and intentional" independent contractor (IC) misclassification.
- Establish a private right of action for an individual misclassified as an IC.
- Allow a misclassified individual to be awarded triple civil damages if a court finds that the employer "knowingly and intentionally" misclassified the worker as an IC. ("Knowingly and intentionally" is in the eye of the State of New York).
- Set the standard for IC compliance to be determined according to the standards of the Federal Fair Labor Standards Act (29 U.S.C. 201 to 219).
- Specify that the burden of proof is on the party for whom the work is performed to show IC status "by clear and convincing evidence." ("Clear and convincing" is in the eye of the State of New York).
So end users of contingent labor, beware. IC independent misclassification is increasingly on the radar of federal and state governments. At the federal level, Sen. John Kerry, D-Mass, and Rep. Jim McDermott, D-Wash, have both introduced almost identical bills this year that would, among other things, significantly increase penalties against companies that misclassify workers and require 1099 reporting of payments made to corporations.
Both bills would also revise the "safe harbor" provision of the Revenue Act of 1978, which currently allows employers to designate workers as independent contractors regardless of the worker's actual status under the common law test, unless the employer has no "reasonable basis" for such treatment or fails to meet certain other requirements.
The 1099 requirement for corporations is now law. Businesses are required to submit a Form 1099 for every contractor paid at least $600 for services during a calendar year. It was a provision of the Heath Care Law passed earlier this year. The IRS is already working on how it will enforce this new requirement.
Users of contingent labor should keep on top of current laws in all states in which they have operations to ensure compliance with state and federal law. Further, unless they have in-house expertise or do not use independent contractors, it makes good business sense to work with a third-party compliance provider.
Staffing firms or third-party providers should work with their clients to ensure that they are aware of the risks of misclassification and help strategize measures to become and remain legally compliant. Regular and in-depth auditing of IC positions is recommended.