Lobbyists Fight to Define Contractors

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Lobbyists Fight to Define Contractors

By Neil Munro
Staff Writer

Members of Congress are debating a draft bill that would change the rules that decide whether high-tech companies must treat their workers as independent contractors or as employees with full benefits.

The bill should be stopped because it would create a confusing new regulatory regime for large and small high-tech companies, argued Harris Miller, president of the industry-funded Information Technology Association of America, based in Arlington, Va.

"We are concerned about a rush to reopen this issue. ... We are actively lobbying against it," he said.

However, "the practical effect of the new law is ... to increase the flexibility of firms to use independent contractors" amid a shortage of high-tech workers, said Harvey Shulman, a lobbyist for the National Association of Computer Consultant Businesses, a Washington-based association of independent consultants.

The only firms opposing the draft law are those that compete against independent consultants by renting out employees as consultants to software and hardware developers, Shulman said.

The draft law is a small element of the U.S. House of Representatives' massive budget reconciliation measure, intended to produce a multibillion dollar tax cut and a balanced budget by 2002.

The new law would offer businesses the choice of using the new rules or an older 20-point test. The older test has been used since 1978 by companies and the Internal Revenue Service to gauge whether companies should treat their workers as independent contractors, or employees that must be offered health benefits, pension plans, stock options and other legally mandated benefits.

Those benefits can amount to 30 percent of employee wages, according to Brian Horn, a manager at Keller Bruner & Co., a 170-person accounting firm based in Bethesda, Md.

The new rule would allow companies to classify their workers as contractors if they meet any one of several tests, including whether the workers bring to their employers a significant personal investment in assets and training, whether the worker is working exclusively for the employer or whether the worker has offered to perform work for other employers.

The new rule would prevent the Internal Revenue Service from forcing small companies to treat independent contractors as employees, said Chris Hull, a spokesman for Rep. Joe Christensen, R-Neb., who is sponsoring the amendment.

Since 1988, the IRS has told companies to treat 400,000 contractors as employers, raising an extra $500 million in business taxes, he said.

House photo House Speaker Newt Gingrich, R-Ga

However, the White House opposes the bill, saying it would allow companies to convert employees to lower-cost contractors, according to a June 25 letter sent by the Department of the Treasury to House Speaker Newt Gingrich, R-Ga.

"I don't think [the new rule] will have any impact one way or the other. It may give [employers] comfort and some certainty as to what their liabilities are," said Mark Nebergall, a tax expert at the Business Software Alliance. The alliance is a Washington-based industry association of software companies led by Microsoft Corp., Redmond, Wash.

This is important for high-tech companies, particularly Microsoft, which is fighting a court battle in San Francisco that could cost it billions. The case dates from the early 1990s, when several workers sued for financial damages, saying Microsoft unfairly classified them as contractors instead of employees, thus barring them from purchasing Microsoft stocks at prices far below today's levels.