President Obama released his proposed budget for fiscal year 2014 on April 10. While it may take a long time to digest the top-level 244 pages and the thousands of pages of supporting documents and tables, at least two pieces of the budget should look painfully familiar to the survey, opinion and marketing research profession. Both present the potential threat of increased costs and regulatory hurdles for research companies using respondent incentives.
On page 126, under the Department of Labor, the White House’s proposed budget targets independent contractors and their purported “misclassification,” with almost identical language and funding to last year’s budget:
Detects and Deters the Misclassification of Workers as Independent Contractors. When employees are misclassified as independent contractors, they are deprived of benefits and protections to which they are legally entitled, such as minimum wage, overtime, unemployment insurance, and anti-discrimination protections. Misclassification, together with the underreporting of cash income for those paid as independent contractors, also costs taxpayers money in lost funds for the Treasury and in Social Security, Medicare, the Unemployment Trust Fund, and State programs. The Budget includes approximately $14 million to combat misclassification, including $10 million for grants to States to identify misclassification and recover unpaid taxes and $4 million for personnel at WHD to investigate misclassification.
Meanwhile, on Page 202 of the Office of Management and Budget’s (OMB) analysis of “Federal Receipts,” similar proposals are outlined for the Internal Revenue Service (IRS):
Increase certainty with respect to worker classification.— Under current law, worker classification as an employee or as a self-employed person (independent contractor) is generally based on a common-law test for determining whether an employment relationship exists. Under a special provision (section 530 of the Revenue Act of 1978), a service recipient may treat a worker who may actually be an employee as an independent contractor for Federal employment tax purposes if, among other things, the service recipient has a reasonable basis for treating the worker as an independent contractor. If a service recipient meets the requirements of this special provision with respect to a class of workers, the IRS is prohibited from reclassifying the workers as employees, even prospectively. The special provision also prohibits the IRS from issuing generally applicable guidance about the proper classification of workers. The Administration proposes to permit the IRS to issue generally applicable guidance about the proper classification of workers and to permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification is prohibited under the special provision. Penalties would be waived for service recipients with only a small number of employees and a small number of misclassified workers, if the service recipient had consistently filed all required information returns reporting all payments to all misclassified workers and the service recipient agreed to prospective reclassification of misclassified workers. It is anticipated that after enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not be clear.
The IRS proposal, which OMB estimates would garner nearly a billion dollars in revenue for the Treasury over 10 years, effectively repeals the long-standing protections for independent contractors provided by Section 530 of the IRS Code by eliminating the prospective safe-harbor. It would “permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification” is currently prohibited by Section 530. The proposal would also empower the IRS to issue broad guidance on worker classification.
The Department of Labor and IRS proposals line up with their ongoing focus on the purported misclassification of employees as independent contractors, evidenced in enforcement actions as well as continuing interest in the proposed “Right to Know” rule that the Marketing Research Association (MRA) and others have helped to oppose.
While the president’s budget request is only a request pending Congressional approval, regulatory agencies will likely heed their renewed marching orders contained therein.
Like some state regulatory agencies, the IRS and Department of Labor during the last several years have been skeptical about, if not hostile to, research respondents’ status as independent contractors. The Department of Labor in particular has insisted during audits of research companies that respondents were employees of the research companies, instead of independent contractors, assuming they were given incentives to participate. If sustained, this would mean that respondents must receive overtime wages, the federal minimum wage, and be subject to youth employment laws that would restrict research participation for most people under the age of 16 years old (regardless of parental consent).
The continuing risk of regulators misclassifying respondents was MRA’s motivation to create and introduce the Research Fairness Act (H.R. 5915) in Congress in 2012, which would clarify in Federal labor law that respondents are independent contractors instead of research companies’ employees. Unfortunately, prospects for passage of the Research Fairness Act in this Congress are not great.
Congress should hold hearings on this and related issues later this year, even as they toy with broader tax and labor reforms. MRA hopes that such activity, combined with individual Members of Congress expressing their concerns to the Department of Labor and IRS, and growing support for the Research Fairness Act, will help keep the agencies at bay.