I

105TH CONGRESS

1ST SESSION H. R. 771

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

FEBRUARY 13, 1997

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) DEFINITION AND SPECIAL RULES.—

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

24 this subsection, the term ‘employment tax’
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1 means any tax imposed by this subtitle, includ2 ing any interest, penalty, or additional amount

3 with respect to such tax.

4 ‘‘(B) NO REFUND OR CREDIT OF OVERPAY5 MENT.—No refund or credit of any overpay6 ment of an employment tax resulting from the

7 application of paragraph (1) shall be allowed,

8 notwithstanding that the period for filing a

9 claim for refund or credit of such overpayment

10 is not barred on the effective date of this sub11 section.

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

13 apply if the closing agreement referred to in para14 graph (1)(E) is entered into more than 1 year after

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

16 (2) MONITORING OF CLOSING AGREEMENT RE17 QUIRED.—The Secretary of the Treasury or his dele18 gate shall monitor compliance with each closing

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

20 the Internal Revenue Code of 1986 (as added by

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

22 such agreement is entered into. Such monitoring

23 shall include not only monitoring the payments made

24 to the individuals specified in the agreement but also
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1 the aggregate wages paid to employees and the ag2 gregate payments to independent contractors for

3 services.

4 (b) MODIFICATIONS TO SAFE HARBOR FOR CLASSI5 FICATIONS OF INDIVIDUALS AS NONEMPLOYEES.—

6 (1) REQUIREMENT OF REASONABLE BASIS.—

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

8 of 1978 (relating to controversies involving whether

9 individuals are employees for purposes of the em10 ployment taxes) is amended by striking ‘‘unless the

11 taxpayer had no reasonable basis’’ and inserting the

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

13 (2) ONLY RECENT EMPLOYMENT TAX AUDIT IS

14 REASONABLE BASIS.—

15 (A) IN GENERAL.—Paragraph (2) of sec16 tion 530(a) of the Revenue Act of 1978 is

17 amended—

18 (i) by striking the paragraph caption

19 and inserting the following: ‘‘REASONABLE

20 BASIS FOR NOT TREATING INDIVIDUAL AS

21 EMPLOYEE.—’’,

22 (ii) in the matter preceding subpara23 graph (A)—

24 (I) by striking ‘‘in any case’’, and
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1 (II) by inserting ‘‘only’’ before

2 ‘‘if the taxpayer’s’’, and

3 (iii) by striking subparagraph (B) and

4 inserting the following new subparagraph:

5 ‘‘(B)(i) an Internal Revenue Service audit

6 of the taxpayer—

7 ‘‘(I) was conducted solely for employ8 ment tax purposes not more than 3 years

9 before such period, and

10 ‘‘(II) included an examination for em11 ployment tax purposes of individuals hold12 ing positions substantially similar to the

13 positions held by the individual involved,

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

15 taxpayer was notified in writing by the Internal

16 Revenue Service that the treatment for employ17 ment tax purposes of the individuals referred to

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

19 ‘‘(iii) such notification is not revoked be20 fore such period; or’’.

21 (B) CONFORMING AMENDMENT.—Subpara22 graph (A) of section 530(e)(2) of the Revenue

23 Act of 1978 (as amended by section 1121 of the

24 Small Business Job Protection Act of 1996) is

25 repealed.
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1 (c) TERMINATION OF TREATMENT OF CERTAIN

2 TECHNICAL PERSONNEL.—Subsection (d) of section 530

3 of the Revenue Act of 1978 is repealed.

4 (d) AUTHORITY FOR REGULATIONS AND RULINGS ON

5 EMPLOYMENT STATUS.—Subsection (b) of section 530 of

6 the Revenue Act of 1978 is repealed.

7 (e) PAYORS TO NOTIFY SERVICE PROVIDERS OF

8 CONSEQUENCES OF EMPLOYMENT STATUS.—

9 (1) Section 6041 of such Code (relating to in10 formation at source) is amended by redesignating

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

12 after subsection (d) the following new subsection:

13 ‘‘(e) ADDITIONAL INFORMATION REQUIRED TO BE

14 INCLUDED ON STATEMENTS COVERING PAYMENTS FOR

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

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

17 such statement shall be treated as not satisfying the re18 quirements of subsection (d) unless such statement in19 cludes the following information:

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

21 being an employee and the payee may be liable for

22 self-employment tax.

23 ‘‘(2) If the payee believes that he should prop24 erly be treated as an employee, an explanation of the
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1 procedure for obtaining Internal Revenue Service re2 view of his status.

3 ‘‘(3) The payee will not be eligible for any em4 ployee fringe benefits and may lose protections or

5 benefits under Federal laws relating to fair labor

6 standards, occupational health and safety, civil

7 rights, unemployment insurance, and worker’s com8 pensation.

9 ‘‘(4) An explanation of tax benefits to the self10 employed such as retirement plans and deduction for

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

12 (2) Section 6041A of such Code (relating to re13 turns regarding payments of remuneration for serv14 ices and direct sales) is amended by redesignating

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

16 after subsection (e) the following new subsection:

17 ‘‘(f) ADDITIONAL INFORMATION REQUIRED TO BE

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

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

20 treated as not satisfying the requirements of subsection

21 (e) unless such statement includes the information speci22 fied in paragraphs (1) through (4) of section 6041(e).’’

23 (f) EFFECTIVE DATES.—

24 (1) IN GENERAL.—Except as provided in para25 graph (2), the amendments made by this section
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1 shall take effect beginning on the date which is 120

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

3 (2) MODIFICATIONS TO SAFE HARBOR; TERMI4 NATION OF TREATMENT OF TECHNICAL PERSON5 NEL.—The amendments made by subsections (b)

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

7 date which is 120 days after the date of the enact8 ment of this Act.

9 SEC. 3. CLASSIFICATION OF INDIVIDUALS AS EMPLOYEES

10 FOR PURPOSES OF UNEMPLOYMENT COM11 PENSATION PROGRAM.

12 (a) UNIFORM FEDERAL AND STATE DEFINITION OF

13 EMPLOYEE.—Subsection (a) of section 3304 of the Inter14 nal Revenue Code of 1986 (relating to requirements for

15 approval of State unemployment compensation laws) is

16 amended by striking ‘‘and’’ at the end of paragraph (18),

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

18 by inserting after paragraph (18) the following new para19 graph:

20 ‘‘(19) the determination of whether an individ21 ual is an employee of another person shall be made

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

23 (b) EFFECTIVE DATE.—

24 (1) IN GENERAL.—Except as provided in para25 graph (2), the amendments made by this section
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1 shall take effect on the 180th day after the date of

2 the enactment of this Act.

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

4 the legislature of which has not been in session for

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

6 between the date of the enactment of this Act and

7 such 180th day, the amendments made by this sec8 tion shall take effect 30 calendar days after the 1st

9 day on which such legislature is in session on or

10 after such 180th day.

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