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Will Independent Contractors Be Reclassified Out of Existence?

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IRS initiative may threaten some Louisiana businesses

An initiative by the Internal Revenue Service and the Obama Administration’s Labor Department to reclassify thousands of workers as salaried employees rather than independent contractors could have profound effects on many key industries in Louisiana.

Independent contractors are different than a typical payroll employee. According to the IRS, they are  “individuals who are in an independent trade, business, or profession in which they offer their services to the general public.” However, the IRS gives itself wide latitude in making this classification, asserting on its website that, “whether these people are independent contractors or employees depends on the facts in each case.” The Wall Street Journal reported in 2010 that between 20% and 30% of the U.S. workforce are freelancers, consultants or other independent workers – and those numbers are projected to continue rising.

The flexibility of independent contracting provides many benefits in today’s rapidly changing marketplace. Employers like the ability to pay for performance and reduce fixed costs. The ability to hire independent contractors encourages businesses to put more people to work despite the traditional risks that come with business expansion right now.

Fishermen, musicians, software engineers and other independent contractors are key elements of Louisiana’s economy. Contracted employees like the autonomy that comes with such arrangements – the ability to set their own schedule, be their own boss and build a small business of their own. The Department of Labor’s own 2006 statistics showed that 82 percent of independent contractors prefer their status to traditional employment.

A slew of new and confusing regulations designed to challenge their autonomy and independent status can only act as a brake on economic activity. But tax authorities and labor unions prefer a one-size-fits-all approach that bolsters their efforts to gain and consolidate power.

The federal government’s campaign against independent contractors began in earnest in September 2011. That is when the Labor Department and the IRS established a program through a “memorandum of understanding” to engage in “enhanced information sharing” about employer-employee relationships. This would facilitate easier prosecution of those whom bureaucrats deem to have been misclassified as independent contractors rather than payroll employees.

The proposed Labor Department budget for fiscal year 2013 includes money for 35 new investigators to dig through business records and go after employers and employees who contract independently.  Although the U.S. Senate failed to pass a new budget in recent years, the danger that this budget item could pass remains. Powerful unions support this crackdown on small business and the free market.

Independent contractors – who get paid for their performance, not the time clock – are proving that they typically can get the job done at lower cost than competitors burdened by higher overhead, which is one key reason this sector is thriving and creating new jobs.

Nonetheless, the assault continues on several fronts. The past two sessions of the Louisiana legislature featured failed attempts to pass legislation designed to reclassify many independent contractors by subjecting them to more classification tests and regulations. To avoid suffocating in red tape, small businesses and independent workers will have to push back in both Baton Rouge and Washington as the debate continues.

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