July 27, 2015 Weekly Legislative Update
HIGHWAY FUNDING SHOWDOWN
In an unusual Sunday session, the United States Senate agreed on a six year transportation bill that is funded for three years. Two amendments were considered:
1. An amendment to repeal Obamacare was defeated;
2. An amendment to attach the Export-Import Bank reauthorization to the highway bill passed.
This week the Senate will consider germane amendments to the bill, which includes the tire registration language that TIA opposes.
Last week the U.S. House of Representatives passed a 6-month extension to the Highway Trust Fund. The House bill provides $8 billion, which would last until December 18, 2015. The House bill does not include the tire registration language.
Because the House will adjourn Thursday and will not reconvene until September, and because the Highway Trust Fund is funded only through July 31, this will be a crucial week on this issue.
TIRE INDUSTRY ASSOCIATION, TIRE RETAILERS AND SAFETY ADVOCATES JOIN TO SUPPORT MEANINGFUL TIRE RECALL REFORM
On July 21, the Tire Industry Association, national tire retailer The Tire Rack, and non-profit advocacy organizations The Safety Institute and Families for Safer Recalls jointly called on Congress and the National Highway Traffic Safety Administration to support meaningful tire recall reform that includes a requirement for uniform electronic scan-ability of tires to ensure successful recall campaigns.
Under the current system, the Tire Identification Number (TIN) – the unique code used to identify recalled tires is manually transmitted to manufacturers by consumers or tire service professionals. In the event of a recall, neither have tools that can quickly, easily and accurately determine whether tires are part of a recall. Recent efforts to reform the 40-year-old system are underway, but proposed legislation focuses on tweaking a pencil-and-paper system. The coalition of the TIA, which represents tire dealers, the Tire Rack and safety advocates are challenging policymakers to require a viable automated solution that will ensure motorist safety by making it easy to identify recalled tires and remove them from service.
Tire registration is a laborious process of hand translating the TIN, a small black-on-black 13 character alpha-numeric code, from the side of a tire to a computer. The system is prone to error and labor-etched QR codes are readily available, in use, and cost-effective, but they are not found on most consumer tires. Automating tire registration means that even if tire ownership changes, service professionals can still identify a recalled tire with a quick scan.
On July 15, the Senate Committee on Commerce, Science and Transportation has passed a combined transportation funding and safety bill that includes a provision to re-establish mandatory tire registration by dealers and for NHTSA to provide a TIN-based recall lookup on its website. The bill, supported by the Rubber Manufacturers Association (RMA) continues to shift the burden associated with recall tires from those that created it – the manufacturers – to dealers, consumers and NHTSA.
“Tire dealers aren’t objecting to tire registration” says TIA Executive Vice President, Roy Littlefield. “The problem is that the latest proposals put all of the burden on dealers and provides no realistic way for service providers to do the job right. In order for any tire recall system to work, we must automate tire registration and the retrieval of the TIN. At the end of the day, the consumer is going to benefit.”
Sean Kane, founder and President of the board of directors of the Safety Institute, and a long-time advocate of tire recall reform said “Consumers and service professionals deserve a 21st century solution to a long-broken system. The only way the system works to ensure that tires are easily identified in recalls is when they can be electronically scanned.”
MOVEMENT ON EXTENDER ITEMS
Last week, the Senate Finance Committee voted (23 to 3) in favor of moving forward a bill that would extend fifty-two of the fifty-five temporary tax provisions that expired at the end of 2014 (the “extender items”).
Each of the extender items covered in the bill would be extended for two years (i.e. through the end of 2016) and includes all of the extender items that we have previously identified as having the greatest impact on small businesses, including Section 179 expensing, bonus depreciation, the research and development credit and the reduced recognition period for S Corporation built in gains taxes.
Notably, the bill voted out of the Finance Committee does more than simply extend some of these items. The bill would amend the Section 179 expensing limits so that, for the first time, the maximum deduction and phase will be indexed for inflation. SBLC has been advocating for the limits to be indexed for several years. Additionally, the bill would expand the Research and Development Credit and amend it so that qualifying start up business can claim the credit against employment taxes as well as income taxes.
It is estimated that the bill would cost approximately $96 billion over 10 years. The bill does not include any pay fors and none are expected to be added.
There was originally talk of attaching the extenders to the transportation funding bill, however, Senate Finance Committee Chair Orrin Hatch (R-UT) spoke out against this idea, and it appears to have fallen by the wayside.
On the other side of the Hill, the House Ways and Means Committee has, thus far, been taking a more piecemeal approach to the extender items, considering and passing a few at a time. Despite this, Ways and Means Committee Chairman Paul Ryan (R-WI) has indicated that he intends for his committee to consider a larger extender package when the Members return from August recess.
NONBINDING DEADLINE FOR REPUBLICAN RECONCILIATION BILLS TO PASS WITHOUT ANY PROPOSALS
As we previously reported, both the House’s and the Senate’s 2016 budget resolutions included reconciliation instructions aimed at repealing or scaling back the ACA. The joint budget resolution set Friday, July 24, 2015, as the nonbinding deadline by which the reconciliation bills were to be proposed.
With the deadline approaching this week, members in both chambers have indicated that, while they expect reconciliation bills to be introduced, they will not be rolled out by the deadline. Because the deadline is non-binding, it will not prevent reconciliation bills from being introduced later, most likely after the August Recess.
Had the Supreme Court ruled against the Administration in the case of King v. Burwell, the Republicans in Congress might have utilized the reconciliation instructions to address the loss of subsidies and implement an alternative to, or a path out of, the ACA. In the wake of the decision, it appears that Congressional Republicans have not yet determined how they will approach the reconciliation instructions in light of the Court’s ruling.
WHAT WE’VE BEEN UP TO
On July 22, 2015, TIA participated in a roundtable with the Department of Labor and the U.S. Small Business Administration on the DOL’s newly proposed overtime rules. TIA will submit written comments on these rules (deadline is September 4, 2015).
On June 20, 2015, TIA signed on to a letter in support of the Small Business Healthcare Relief Act (S. 1697/H.R. 2911) which would reverse IRS guidance and allow small employers to continue to provide their employees with pre-tax dollars to purchase health insurance on the individual market. Currently, we are following up with the members who introduced this legislation with some additional legislative language which would make the legislation even better for small businesses.
On more esoteric issues, we have participated in a SBA pension roundtable with DOL with respect to the new DOL fiduciary rule which we think will adversely affect small business. We have also been working with the SBA’s Office of Advocacy to assist them in preparing their comments on how the new DOL Fiduciary Rule could negatively impact retirement plans sponsored by small businesses and their ability to be represented fully by financial brokers. We are also currently working with the US Chamber Employee Benefits Committee on their tax reform white paper having provided them with a comprehensive memo on IRS code section 409A which sets forth the time bomb waiting to hit small businesses under this stealth IRS code section.
DEPARTMENT OF LABOR TAKES ACTION ON INDEPENDENT CONTRACTORS
The issue of when a worker can be properly classified as an independent contractor (rather than an employee) is certainly not a new issue. However, we anticipate a publication from the Department of Labor (DOL) last week to have a significant impact on how businesses of all sizes handle independent contractors.
On July 16, 2015, the U.S. Department of Labor (DOL) Wage & Hour Division Administrator issued “Administrator’s Interpretation 2015-1” (AI) on the application of the Fair Labor Standards Act (FLSA) for identification of workers who are misclassified as independent contractors.
The new AI, which states that most workers qualify as employees under the FLSA, could cause significant misclassification problems for businesses, leading to more DOL investigations and enforcement actions and increased private litigation. Commentators are already disagreeing about whether the AI restates an existing precedent or breaks new ground. FWIW, we think it is breaking new ground. It is clear, however, that the AI is a one-sided review of the law. While it remains to be seen how courts will interpret this AI, its very issuance is a strong wake up call for businesses that use independent contractors, as undoubtedly more DOL enforcement and private litigation will be on the horizon. This issue becomes even more important as we see IRS being starved by Congress and DOL moving into the vacuum.
In 2011, the Administration began an initiative to rein in the use of independent contractors and improve the wages of working Americans. As we previously reported, at the end of June, the DOL issued a Proposed Rule and Request for Comment on certain exemptions from the FLSA’s overtime requirements.
Now, the DOL has issued this AI which will sharply limit many businesses’ use of independent contractors, transforming these workers into W-2 employees covered by Social Security, Medicare, benefits, FMLA and other rights.
In its recent budget request, the DOL asked for about $32 million to hire 300 full-time-equivalent enforcement employees and support staff. However, as outlined in our July 9 Alert, both the House and Senate labor, health and human services, and education appropriation bills currently under consideration would make significant cuts to last year’s budget and be significantly lower than President Obama’s 2016 budget request.
The 15-page WHD interpretation on the independent contractor issue makes the Department’s animosity to the use of independent contractors very clear. As indicated above, the AI states the DOL’s unequivocal opinion that “most workers are employees.” It then relies on the FLSA’s definition of “employ” which includes “suffer or permit to work,” to assert the broadest possible reach for the FLSA. It goes on to articulate the narrowest possible view of the dividing line between an employee and someone who is running his or her own business, relying on the court cases most favorable to its position. Keep in mind that the new WHD Administrator who signed this AI came to office in 2014 after writing a book on the evils of corporate outsourcing. He has made it clear that he wants to create ripple effects throughout the employer community from the DOL’s enforcement efforts against individual companies.
Of note, unlike with the newly proposed overtime rules, the DOL did not issue the AI guidance through the usual notice and comment rule-making process. It will not lead to changes in regulations. It is, rather, non-binding guidance articulating DOL’s interpretation of the FLSA. However, given the Supreme Court’s 2015 decision in Perez v. Mortgage Bankers Association, which gave the DOL a green light for such non-binding guidance and then relied upon it to rule in the DOL’s favor in an exempt/nonexempt classification case, there is a real risk that courts will, at least to some degree, defer to the AI despite its one-sided nature and lack of opportunity for comment.
While stating repeatedly that no one factor is determinative, the AI focuses on “economic independence”, a phrase it uses throughout. It proposes to look primarily at whether the worker is truly in business for himself or herself or is economically dependent on the employer for which he or she provides services. The AI also goes out of its way to observe that the control factor which courts have traditionally used as a key test should not be given undue weight. It unambiguously states that the agreements or titles used by employers and independent contractors are wholly “irrelevant” to the determination.
The AI uses the most restrictive cases out there to narrow the scope of the economic realities test. A summary of the DOL’s analysis of the six factors follows:
- The extent to which the work performed is an integral part of the employer’s business. According to the AI, this factor is central to the analysis. If the work is integral to the business of the employer, it is more likely that the worker is economically dependent on the employer. The scope of the impact on businesses using independent contractors for core business functions and on the emerging on-demand business model remains to be determined, but DOL’s intent is clear.
- The worker’s opportunity for profit or loss depending on his or her managerial skill. The AI flatly rejects the ability to control one’s own hours as an indicator of such an opportunity, but looks instead to whether the worker exercises managerial skills which require the use of judgment or initiative to affect the opportunity for profit or loss. It describes the lack of the ability to schedule assignments, solicit additional work from other clients, advertise services, or endeavor to reduce costs as factors that are inconsistent with independent contractor status.
- The extent of relative investments of the employer and the worker. The AI describes the investment of a real independent contractor as one which furthers the independent contractor’s capacity to expand, reduce its cost structure or extend the reach of the market for its business. It states that investing in tools and equipment does not necessarily indicate that the worker is an independent contractor where the tools and equipment are only needed to do the work. It then requires that the worker’s investment must be significant in nature and magnitude relative to the employer’s investment. Notably, in one example, it dismisses the investment of $35,000 to $40,000 by a worker as inconsequential where the employer invests hundreds of thousands of dollars in each work site. It flatly rejects using a comparison between the worker’s investment and the company’s investment in the particular job being performed.
- Whether the work performed requires special skills and initiative. The AI seems to reject this factor outright, emphasizing instead that a worker’s business skill, judgment and initiative will help determine if the worker is economically independent. Technical skills, in the view of the AI, are not indicative of any independence or business initiative.
- The permanency of the relationship. The AI assumes that if an independent contractor wants more than one assignment from a company, then he or she must be eschewing independence. It describes this factor as a worker who typically works one project for an employer and does not necessarily work continuously or repeatedly for that employer. This assumes, with no basis, that an entrepreneurial independent contractor would not want more work from a good client.
- The degree of control exercised or retained by the employer. According to the AI, control should be analyzed in light of the ultimate determination whether the worker is economically dependent or not. The worker must control meaningful aspects of the work to view the worker as conducting his or her own business. Here too, the guidance sharply restricts the usefulness of what many have considered a key factor in the analysis. According to the AI, the employer’s reasons for exercising some control are irrelevant even if due to the nature of the business or regulatory requirements. If there is control, the worker is an employee. Moreover, even where there is no control, the FLSA covers workers who are economically dependent.
The examples given in the AI present situations where there are clear-cut distinctions between independent contractors and employees. Unfortunately, the AI gives no examples or meaningful guidance for the grey areas. Against this uncertainty, the risks for businesses are significant if they improperly classify workers as independent contractors instead of employees. The liability can be enormous and changes to business models incredibly disruptive.
If independent contractors are to be treated as employees, many things change. These include compliance with the FLSA (record keeping, minimum wage and overtime), tax withholding, payroll taxes for Social Security/Medicare, unemployment compensation, and workers’ compensation. Others include inclusion in group health insurance plans and ACA issues, ERISA-covered retirement plans, eligibility for FMLA, leave and other benefits, calculation of leave entitlement, eligibility for meal and rest breaks, reimbursement for business expenses, immigration compliance, plus statutes such as Title VII, ADEA, the ADA, other anti-discrimination laws, and a host of state and local laws that traditionally do not cover independent contractors. One significant issue that will require ongoing analysis is that, even if employers change their use of independent contractors, the risk of various liabilities from prior practices still remains.
The DOL has emphatically warned employers: the DOL is making currently exempt employees eligible for overtime with its modification of the salary basis test and is going to turn most independent contractors into employees, many of whom will be eligible for overtime under the proposed new guidance.
The AI has left employers with many unknowns and yet employers need to start analyzing their workforces and risks to come to decisions regarding classification of current non-employee workers. For some employers, no action will be necessary. For others, large portions of their workforce could be subject to misclassification claims.
This process of assessment should begin now. In many companies, hiring and out-sourcing of independent contractors is not part of the human resources department, but instead managed by the purchasing or finance department for example. All those with responsibility for engaging independent contractors need to be working together, along with the law department or outside counsel.
Some of the factors that businesses would be well advised to consider in assessing the independent contractor issue are:
- How the business currently use independent contractors.
- How the independent contractors manage their businesses and the extent to which an independent contractor is running a business.
- Whether the business can defend its past independent contractor classifications.
- Whether the business can defend the retention of these classifications after the issuance of the AI.
- The cost of converting independent contractors to employees versus the risk of keeping them classified as independent contractors.
There is a timing element to all of these considerations. If the employer converts any questionable independent contract early, it starts running the statute of limitations on past practices. In contrast, waiting exposes the company to more damages, but the courts may provide some clarification as they grapple with the amount of deference to give to the AI. Watching the enforcement actions the DOL takes will also provide further clues.
Unfortunately for companies that are concerned that some in their workforce will now be deemed employees, the safest course of action is to work with legal counsel to figure out how to navigate the situation.
Thanks to Hope Eastman and Jim Hammerschmidt from Paley Rothman’s employment law department for their assistance in this Alert.
Attached is a message sent to all veterans organizations by Frank Wickersham, a committed leader on employment issues impacting veterans. We are indebted to Frank for calling veterans’ attention to the need for personal visits to representatives during the August recess because the job of passing WOTC, including the VOW To Hire Heroes Act veterans credits, in a tax extenders bill is far from over. Veterans should urge their representatives in the House to co-sponsor H.R. 2754, a bill to make WOTC and the VOW To Hire Heroes Act credits permanent, and call upon Ways and Means Chairman Paul Ryan to pass a tax extenders bill renewing WOTC and VOW Act credits for 2015 and 2016 as the first order of business when Congress returns from August recess. Senators should be asked to co-sponsor the bi-partisan tax extenders bill approved on July 21 by the Senate Finance Committee, and work for its passage in the Senate.
Thank you, Frank Wickersham, Semper Fi, W3!
WORK OPPORTUNITY TAX CREDIT COALITION
FACT SHEET ON VETERANS EMPLOYMENT USING THE WORK OPPORTUNITY TAX CREDIT
In 1981, the first tax credit for private employers who hire veterans and other chronically unemployed workers was signed into law by President Reagan. Because higher unemployment is the lot of those who, by virtue of an actual or perceived limitation, such as disability or few skills, they have less chance than most people of being hired. This lack of equal opportunity in the labor market is contrary to our country’s principles and can lead to wasted lives and a burden on public funds, which explains why Congress enacted a hiring incentive to increase job opportunities for veterans, the disabled, and others with persistently higher unemployment.
In designing the present-day Work Opportunity Tax Credit, Congress took care to ensure the credit functioned through the private marketplace, where workers could be regular employees at regular wages and have the same opportunity as others to learn and advance. Congress also capped its contribution to the labor cost of each new hire, so the Treasury loses no more than approximately $1,000 per hire on average, according to Joint Committee on Taxation data—the lowest cost of any Federal jobs program; the employer pays the remainder of compensation for the entire duration of the job. Congress also mandated that each worker’s status as a veteran or other target group be certified by the State Workforce Agency using valid documentation verified by IRS during audits of the employer’s tax return. Because of these safeguards, there has never been a significant instance of fraud or abuse in WOTC.
In Fiscal Year 2011, WOTC resulted in 1,160,523 jobs for members of all target groups, of which welfare and food stamp recipients comprise the largest. Of these nearly 1.2 million WOTC jobs, Department of Labor data show veterans accounted for about 42,235, of which 3,117 were disabled veterans. Most of these are Gulf War era veterans who have the highest number unemployed of any era, 405,000 in 2011—this number would have been 42,235 higher without WOTC but Congress wanted to do better and so, in the VOW to Hire Heroes Act in 2011, Congress increased the maximum credit for hiring an unemployed veteran who had been out of work six months or more from $2,400 to $5,600, and for hiring a disabled veteran from $4,800 to $9,600.
As in past wars, recently returning veterans suffer the highest unemployment rates. In December 2012, of the 2.5 million Gulf War Era II veterans (those who served from 9/11 to the present), 1,874,000 were employed and 226,000 unemployed, with an unemployment rate of 10.8 percent. Of these unemployed, 180,000 are men with an unemployment rate of 9.9 percent and 46,000 are women with an unemployment rate of 15.7 percent. (About 17 percent of post-9/11 veterans are women, compared to 3 percent of other eras.) Blacks and Hispanics comprise 28.5 percent of these veterans—black veterans with a 14.3 percent unemployment rate and Hispanics with a 17 percent unemployment rate. Sixty-four percent of post-9/11 veterans are under age 35, with young male veterans ages 18-24 having unemployment of 29.1 percent, and young women 36.1 percent. Clearly, women, minority, and younger veterans of Gulf War era II who want to work are having serious difficulty finding jobs.
Moreover, between 2011 and 2012, 200,000 post 9/11 veterans were released from service and almost all entered the workforce. This number accelerated due to withdrawal from Afghanistan and budgetary stringency at DOD. It’s estimated 1 million more veterans were added in 2012-2014, so the challenge of finding suitable jobs is huge.
In a special survey made in August, 2011, BLS found that 26 percent of post 9/11 veterans had a service-connected disability, compared to 14 percent for all other veterans. Of those with a disability, 80 percent were in the workforce actively looking for jobs, but of the more severely disabled—veterans having a disability rating of 60 percent or more—58 percent were in the workforce, compared to 88 percent for those with a lower disability rating. The overall unemployment rate of all post-9/11 veterans with a disability was 12.1 percent in 2011, but allowing for the large number of disabled veterans who have given up looking for work, the actual unemployment rate is much higher.
WOTC is important to these disabled veterans because two out of three veterans find jobs in the private sector. They would have more opportunities if WOTC were more aggressively promoted to a wide range of employers, especially private non-profit employers in such fields as health and education, because the larger the job mix, the greater the opportunity for a job match.
Most small and medium size enterprises (SME’s) aren’t participating in WOTC because of uncertainty of its availability as Congress allows it to lapse, then renews it later. Firms cannot plan hiring with WOTC when it’s on-again, off-again. If WOTC were made permanent, promoted to SME’s, and expanded to private non-profit employers such as hospitals and colleges, a world of well-paying jobs would open up to veterans in healthcare, life sciences, business services, education, and communications, where participation is low because most SME’s cannot change their hiring practices to reach out to veterans if the program is short-term. The short life of WOTC limits employers’ participation and the number and mix of occupations open to veterans—it’s time after three decades for WOTC to be made a permanent part of the tax code so SME’s will embrace it and open more diverse occupations to veterans.
We strongly recommend the Veterans Affairs Committee of both Houses adopt a resolution calling for permanent extension of the Work Opportunity Tax Credit, including the VOW Act credits for veterans incorporated in WOTC, and forward it over the signature of committee members to House and Senate leaders and chairmen of the tax writing committees.
Data sources: BLS, “The Employment Situation—December 2012,” Table A-5; News Release USDL-12-0493, “Employment Situation of Veterans—2011,” March 20, 2012; “Disability, Employment, and Income: Are Iraq/Afghanistan Era U.S. Veterans Different?,” Monthly Labor Review, August, 2012; U.S. Department of Labor, “WOTC Certifications By Recipient Group Regional and National Details For Fiscal Year 2011.”