I

104TH CONGRESS

1ST SESSION H. R. 510

To amend the Internal Revenue Code of 1986 and the Revenue Act of

1978 to revise the procedures applicable to the determination of employment status.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 13, 1995

Mr. LANTOS (for himself and Mr. SHAYS) introduced the following bill; which

was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 and the Revenue Act of 1978 to revise the procedures applicable to

the determination of employment status.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Misclassification of

5 Employees Act’’.
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1 SEC. 2. PROCEDURES APPLICABLE TO DETERMINATIONS

2 OF EMPLOYMENT STATUS.

3 (a) WAIVER OF EMPLOYMENT TAX LIABILITY FOR

4 REASONABLE GOOD FAITH MISCLASSIFICATION BASED

5 ON COMMON LAW RULES.—

6 (1) IN GENERAL.—Section 3509 of the Internal

7 Revenue Code of 1986 (relating to determination of

8 employer’s liability for certain employment taxes) is

9 amended by adding at the end the following new

10 subsection:

11 ‘‘(e) WAIVER OF EMPLOYMENT TAX LIABILITY FOR

12 REASONABLE GOOD FAITH MISCLASSIFICATION BASED

13 ON COMMON LAW RULES.—

14 ‘‘(1) IN GENERAL.—For purposes of determin15 ing the liability of any taxpayer for employment

16 taxes with respect to any individual for any period,

17 such individual shall be deemed not to have been an

18 employee of the taxpayer for such period if—

19 ‘‘(A) the taxpayer did not treat such indi20 vidual as an employee for purposes of the em21 ployment taxes for such period,

22 ‘‘(B) the taxpayer’s treatment of such indi23 vidual as not being an employee was based on

24 a reasonable good faith misapplication of the

25 common law rules used for determining the em26 ployer-employee relationship,
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1 ‘‘(C) all Federal tax returns (including in2 formation returns) required to be filed by the

3 taxpayer with respect to such individual for

4 such period were filed on a basis consistent with

5 the taxpayer’s treatment of such individual as

6 not being an employee,

7 ‘‘(D) the taxpayer (and any predecessor)

8 did not treat any other individual holding a

9 substantially similar position as an employee for

10 purposes of the employment taxes for any pe11 riod beginning after December 31, 1977, and

12 ‘‘(E) the taxpayer enters into a closing

13 agreement under section 7121 with the Sec14 retary (in the time and manner determined by

15 the Secretary) agreeing to treat such individual,

16 and any other individual holding a substantially

17 similar position, as employees and to file all

18 Federal employment tax returns with respect to

19 such individuals on a basis consistent with the

20 taxpayer’s treatment of such individuals as em21 ployees.

22 ‘‘(2) DEFINITIONS AND SPECIAL RULES.—

23 ‘‘(A) EMPLOYMENT TAX.—For purposes of

24 this subsection, the term ‘employment tax’

25 means any tax imposed by subtitle C, including
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1 any interest, penalty, or additional amount with

2 respect to such tax.

3 ‘‘(B) NO REFUND OR CREDIT OF OVERPAY4 MENT.—No refund or credit of any overpay5 ment of an employment tax resulting from the

6 application of paragraph (1) shall be allowed,

7 notwithstanding that the period for filing a

8 claim for refund or credit of such overpayment

9 is not barred on the effective date of this sub10 section.

11 ‘‘(3) TERMINATION.—This subsection shall not

12 apply if the closing agreement referred to in para13 graph (1)(E) is entered into more than 1 year after

14 the date of the enactment of this subsection.’’

15 (2) MONITORING OF CLOSING AGREEMENT RE16 QUIRED.—The Secretary of the Treasury or his dele17 gate shall monitor compliance with each closing

18 agreement referred to in section 3509(e)(1)(E) of

19 the Internal Revenue Code of 1986 (as added by

20 this section) for not less than 5 years after the date

21 such agreement is entered into. Such monitoring

22 shall include not only monitoring the payments made

23 to the individuals specified in the agreement but also

24 the aggregate wages paid to employees and the ag-
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1 gregate payments to independent contractors for

2 services.

3 (b) MODIFICATIONS TO SAFE HARBOR FOR CLASSI4 FICATIONS OF INDIVIDUALS AS NONEMPLOYEES.—

5 (1) REQUIREMENT OF REASONABLE BASIS.—

6 Paragraph (1) of section 530(a) of the Revenue Act

7 of 1978 (relating to controversies involving whether

8 individuals are employees for purposes of the em9 ployment taxes) is amended by striking ‘‘unless the

10 taxpayer had no reasonable basis’’ and inserting the

11 following: ‘‘if the taxpayer had a reasonable basis’’.

12 (2) ONLY RECENT EMPLOYMENT TAX AUDIT IS

13 REASONABLE BASIS.—Paragraph (2) of section

14 530(a) of the Revenue Act of 1978 is amended—

15 (A) by striking the paragraph caption and

16 inserting the following: ‘‘REASONABLE BASIS

17 FOR NOT TREATING INDIVIDUAL AS EM18 PLOYEE.—’’,

19 (B) in the matter preceding subparagraph

20 (A)—

21 (i) by striking ‘‘in any case’’, and

22 (ii) by inserting ‘‘only’’ before ‘‘if the

23 taxpayer’s’’, and

24 (C) by striking subparagraph (B) and in25 serting the following new subparagraph:
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1 ‘‘(B)(i) an Internal Revenue Service audit

2 of the taxpayer—

3 ‘‘(I) was conducted solely for employ4 ment tax purposes not more than 3 years

5 before such period, and

6 ‘‘(II) included an examination for em7 ployment tax purposes of individuals hold8 ing positions substantially similar to the

9 positions held by the individual involved,

10 ‘‘(ii) upon completion of such audit the

11 taxpayer was notified in writing by the Internal

12 Revenue Service that the treatment for employ13 ment tax purposes of the individuals referred to

14 in clause (i)(II) was correct, and

15 ‘‘(iii) such notification is not revoked be16 fore such period; or’’.

17 (c) TERMINATION OF TREATMENT OF CERTAIN

18 TECHNICAL PERSONNEL.—Section 530 of the Revenue

19 Act of 1978 is amended by striking subsection (d).

20 (d) AUTHORITY FOR REGULATIONS AND RULINGS ON

21 EMPLOYMENT STATUS.—Section 530 of the Revenue Act

22 of 1978 is amended by striking subsection (b) and by re23 designating subsection (c) as subsection (b).

24 (e) PAYORS TO NOTIFY SERVICE PROVIDERS OF

25 CONSEQUENCES OF EMPLOYMENT STATUS.—
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1 (1) Section 6041 of such Code (relating to in2 formation at source) is amended by redesignating

3 subsection (e) as subsection (f) and by inserting

4 after subsection (d) the following new subsection:

5 ‘‘(e) ADDITIONAL INFORMATION REQUIRED TO BE

6 INCLUDED ON STATEMENTS COVERING PAYMENTS FOR

7 SERVICES.—In the case of a statement required under

8 subsection (d) with respect to any payment for services,

9 such statement shall be treated as not satisfying the re10 quirements of subsection (d) unless such statement in11 cludes the following information:

12 ‘‘(1) The payor is treating the payee as not

13 being an employee and the payee may be liable for

14 self-employment tax.

15 ‘‘(2) If the payee believes that she should prop16 erly be treated as an employee, an explanation of the

17 procedure for obtaining Internal Revenue Service re18 view of her status.

19 ‘‘(3) The payee will not be eligible for any em20 ployee fringe benefits and may lose protections or

21 benefits under Federal laws relating to fair labor

22 standards, occupational health and safety, civil

23 rights, unemployment insurance, and worker’s com24 pensation.
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1 ‘‘(4) An explanation of tax benefits to the self2 employed such as retirement plans and deduction for

3 a portion of the cost of health insurance.’’

4 (2) Section 6041A of such Code (relating to re5 turns regarding payments of remuneration for serv6 ices and direct sales) is amended by redesignating

7 subsection (f) as subsection (g) and by inserting

8 after subsection (e) the following new subsection:

9 ‘‘(f) ADDITIONAL INFORMATION REQUIRED TO BE

10 INCLUDED ON STATEMENTS.—In the case of a statement

11 required under subsection (e), such statement shall be

12 treated as not satisfying the requirements of subsection

13 (e) unless such statement includes the information speci14 fied in paragraphs (1) through (4) of section 6041(e).’’

15 (f) EFFECTIVE DATES.—

16 (1) IN GENERAL.—Except as provided in para17 graph (2), the amendments made by this section

18 shall take effect beginning on the date which is 120

19 days after the date of the enactment of this Act.

20 (2) MODIFICATIONS TO SAFE HARBOR; TERMI21 NATION OF TREATMENT OF TECHNICAL PERSON22 NEL.—The amendments made by subsections (b)

23 and (c) shall apply to periods ending on or after the

24 date which is 120 days after the date of the enact25 ment of this Act.
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1 SEC. 3. CLASSIFICATION OF INDIVIDUALS AS EMPLOYEES

2 FOR PURPOSES OF UNEMPLOYMENT COM3 PENSATION PROGRAM.

4 (a) UNIFORM FEDERAL AND STATE DEFINITION OF

5 EMPLOYEE.—Subsection (a) of section 3304 of the Inter6 nal Revenue Code of 1986 (relating to requirements for

7 approval of State unemployment compensation laws) is

8 amended by striking ‘‘and’’ at the end of paragraph (17),

9 by redesignating paragraph (18) as paragraph (19), and

10 by inserting after paragraph (17) the following new para11 graph:

12 ‘‘(18) the determination of whether an individ13 ual is an employee of another person shall be made

14 in accordance with section 3306(i); and’’.

15 (b) EFFECTIVE DATE.—

16 (1) IN GENERAL.—Except as provided in para17 graph (2), the amendments made by this section

18 shall take effect on the 180th day after the date of

19 the enactment of this Act.

20 (2) SPECIAL RULE.—In the case of any State

21 the legislature of which has not been in session for

22 at least 30 calendar days (whether or not successive)

23 between the date of the enactment of this Act and

24 such 180th day, the amendments made by this sec25 tion shall take effect 30 calendar days after the 1st
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1 day on which such legislature is in session on or

2 after such 180th day.

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