Today's New York Daily News reports on the filing of a class action lawsuit against a chain of gentlemen's clubs. The lawsuit challenges the club's practice of skimming 10 cents off every dollar the dancers earn from a lap dance, paying less than minimum wage, and cheating employees out of overtime. The article quotes one of the club's dancers, "We're independent contractors. If a girl doesn't like it, she can go somewhere else." Another girl added, "I had no idea it was happening, I thought they were taking out taxes and stuff like that." (Insert your own joke here). The first girl is correct. If the dancers are independent contractors, then the club most likely has no liability, and certainly has no liability for any minimum wage and overtime violations. The wage and hour laws only apply to employees; they do not reach independent contractors.
If Senator Barack Obama has his way, though, the scope of who qualifies as an independent contractor will narrow. The Senator introduced the Independent Contractor Proper Classification Act of 2007. Currently, Section 530 of the Internal Revenue Code has a safe harbor for employers who have classified workers as independent contractors. That safe harbor requires the IRS to excuse misclassifications and allow an employer to continue reporting employees as 1099 independent contractors if the employer (1) has been treating similarly situated workers as independent contractors, (2) has been consistently reporting the workers as independent contractors to the IRS and has been issuing 1099s to the workers, and (3) has a reasonable basis to classify employees as contractors. An employer has a reasonable basis if it relied on a long-standing practice of a significant segment of the industry or relied on a revenue ruling or court decision. The bill seeks to amend Section 530 by requiring employers to reclassify workers that had been misclassified as independent contractors, and by prohibiting employers from relying upon industry practice as a justification for misclassifying employees.
Independent contractor classifications have not necessarily been on the Department of Labor's radar up to now. The enforcement provisions of the Act, would place employee classifications squarely in the DOL's cross hairs. The Act directs the IRS to develop a process for workers to request an evaluation of their classification, requires the IRS to inform the DOL of discovered misclassification practices, and requires the DOL to conduct investigations in industries with high misclassification rates. The Act would also require each employer to notify any independent contractors of their federal tax obligations, that labor and employment law protections that do not apply to them, and their right to seek a classification determination from the IRS. Finally, the Act safeguards against employer retaliation and provides for the payment of attorney's fees to employees who successfully challenge their classification.
As with most other Democratic legislative initiatives coming out of the current Congress, it is unlikely the President would sign this bill into law even if Congress were to pass it. Nevertheless, the Independent Contractor Proper Classification Act is another good reminder that companies should not classify a worker as an independent contractor without first considering all of the risks, consulting with employment counsel, and putting in place a written agreement outlining the terms of the relationship.