A bill newly proposed in the House would amend the Internal Revenue Code of 1986 to change the classification of employers and employees.

“Currently, it is difficult and overly complicated for businesses to use independent contractors, which limits companies’ growth and individuals’ work,” said Rep. Erik Paulsen (R-MN), who introduced H.R. 3396 on July 25.

He added that this legislation “provides clarity and guidance for businesses so they know they are properly classifying independent contractors without fear of IRS penalties.”

Paulsen noted that he sees his bill as part and parcel of the larger tax reform effort that GOP leaders have promised to undertake before this year is out.

H.R. 3396 has been referred to the Ways and Means Committee. The text of the bill has yet to be released, but the Customized Logistics and Delivery Association, a proponent of the measure, said the legislation would provide standards for determining a worker’s employment status. It would use a two-part test that “establishes a formal definition of who is an independent contractor and creates Safe Harbor provisions of the Tax Code" that help to define the relationship between an independent contractor and the service recipient and/or payor, according to CLDA.

“This bill provides much-needed clarity and guidance for businesses that partner with independent contractors to provide the flexibility of their workforce they need to meet customer needs,” said John Benko, CLDA president. He noted that in a recent survey, over 89% of CLDA members said that their ability to use independent contractors was important to their business success. 

“Independent contractors are the backbone of our industry,” Benko added, “allowing us to be responsive and flexible enough to meet changing customer demands. This bill brings clarity and transparency to the definition of an independent contractor, enabling all industries that depend on them to remain in compliance and to properly classify them.” 

According to CLDA, the bill would deliver a fix by adding a new section to the Internal Revenue Code to assist businesses in making the proper classification.

The association explained that back in 1978, Congress enacted Section 530 of the Revenue Act of 1978 to provide a safe-harbor for businesses with respect to the employment classification of individuals. "This came as a result of inconsistent employment tax audits where the definition of ‘employee’ was unclear. Congress affirmatively acted to make the Section 530 Safe Harbor permanent in 1982. However, this issue wasn’t included in tax reform in 1986 and therefore was not codified as part of the Internal Revenue Code.”