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Many Private-Sector Employees May Be Independent Contractors Soon

The last eighteen months have been the most traumatic to America’s businesses community ever.  The Obama administration started out by bashing those who run companies and those who invest in them: CEOs and Bankers.  Oddly enough, now those two demographics are a little punch drunk and unable to do what the American economy needs: make money, invest, grow, hire.

From Politco.com

In the eyes of corporate America, President Barack Obama relied on a healthy dose of industry-bashing to sway votes in Congress for health reform and the new Wall Street regulations signed into law Wednesday.  Now those efforts threaten to undermine the one agenda item essential to Democrats’ hopes in the midterms and Obama’s chances for reelection: turning around an economy still just a half step out of recession.  Some corporate leaders said Obama’s comments prove that he’s hostile to business. Others cited corporate fears of a credit crunch as banks comply with financial reform or the possibility of significant tax hikes if the Bush administration tax cuts are allowed to expire.  But it all adds up to a lack of confidence in Obama among some in corporate America — and that’s fueling a reluctance among executives from Wall Street to Main Street to deploy their large cash reserves to make new investments and hire new workers.

And the Daily Caller chimes in on the tone-deafness of Obama’s circle of anti-business cronies:

“By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses,” said Seidenberg, who had been one of Obama’s strongest allies in the business world up to that point.

General Electric CEO Jeffrey Immelt said around the same time that “government and entrepreneurs are not in synch,” and said the Obama White House and business leaders were not getting along.

By early July, the charge that Obama is anti-business had become a mainstream idea, with everyone from Newsweek to speakers at the Aspen Ideas Festival voicing doubts about whether the president understands markets and their interaction with government policy.

If the Obama administration’s attitude wasn’t enough to get businesses to re-think their hiring and investment strategies (yes, of course hiring is a form of investment – but progressives might read this and it must be explained), he went on a wreck-loose, anti-business revolution via massive government reforms.

First, health care reform.  This legislation puts massive new responsibilities on companies – companies that really just want to make money, expand, hire, invest, make more money.  Now they have to mind how much insurance and what kind of insurance their employees have or pay a penalty.

If health care reform didn’t put business owners over the edge, how about this idiotic push by Congress.  According to an article at CNSNews.com, Obama and his lackeys are forcing companies to report how much they pay each employee broken down by race, gender, national origin – heck BMI may not be far away.  This is intended to force fairer pay practices, but as usual with government overreach, will do the opposite.

The same CNSNews piece continues:

But critics charge that the Paycheck Fairness Act will be harmful to small businesses and the economy. The National Association of Manufacturers issued a statement about the bill in April.

“The Paycheck Fairness Act, which purports to prevent instances of illegal gender-based discrimination, could outlaw many legitimate practices employers use to set employee pay rates, even where there is no evidence of intentional discrimination and employers act with reasonable belief that their pay policies are lawful,” the statement said.

“Manufacturers strongly oppose unlawful discrimination in any form, but the Paycheck Fairness Act would impose unparalleled government control over how employees are paid, among even the nation’s smallest businesses,” it added.

“It would drastically alter the Equal Pay Act to allow unprecedented penalties of unlimited punitive and compensatory damages in cases of alleged discrimination,” the statement said.

James Sherk, Bradley Fellow in Labor Policy in the Center for Data Analysis at conservative The Heritage Foundation, said that the law would be a boon to trial lawyers seeking damages from employers for their clients and would allow the courts to “micro-manage” American businesses.

Unionization has been an issue for quite some time.  Their demands for outlandish benefits and ridiculous compensation has put a stranglehold on American industry.  Independent contractors may represent a way to weaken the those organizations.  Why would businesses collectively bargain with a union when a hungry contractor will certainly take a contract over a promise?

A good businessman or woman knows that success is all about adapting to change.  The government assumes that the only changes a business will make are those that their newest shiny tax or rule intended.  Fortunately for the economy entrepreneurs are in business to make money, not make the government happy.  So what will businesses do?

Adapt – and as usual, not in the way the government intended – I believe they will be increasingly going to go to contract labor models.

Contract labor changes the relationship between the consumer of services and the producer.  In standard employment situations, the relationship is employer-employee.  For contract labor, the business becomes the client and the worker is now the business.  According to the IRS, it uses three characteristics to determine if the relationship between two entities is employer-employee or client-contractor:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

Why would business choose this model?  First, overall costs for contract labor are estimated to be 20-30% less than an equivalent employee.  Consider what a business provides to or pays for employees:

  • Social Security taxes (6.2% up to the annual maximum)
  • Medicare taxes (1.45% of wages)
  • Federal unemployment taxes (FUTA)
  • State unemployment taxes (SUTA)
  • Social Security (Employee pays 6.2%)
  • Social Security (Employer pays 6.2%)
  • Medicare (Employee pays 1.45%)
  • Medicare (Employer pays 1.45%)
  • health care insurance (soon to be required)
  • worker’s compensation
  • tools, computers, facilities

For independent contractors businesses supply:

  1. Only what is stipulated in a negotiated contract

In some cases, like Fed Ex, the trucks are actually leased or purchased from fed ex by the operators.  Imagine that model where you work.  Lease your computer, tools, fax machine, etc.  Nothing prevents it other than those IRS characteristics mentioned earlier.

Granted, for critical business functions, a company may not choose the volatility the independent contractors represent.  If there is even the hint that the relationship is indefinite, the IRS may very deem the contractor as mis-classified and demand back taxes.

From a purely theoretical position this sounds plausible but expected, right?  Guess again:

Entrepreneur.com reported

Chicago-based payroll company SurePayroll, which releases a monthly “scorecard” based on data from more than 25,000 U.S. small businesses, calculates small business contracting grew 19 percent last year while staff hiring grew only 3.4 percent. “There was a much greater percentage growth in contractors than there was in the overall small businesses,” says SurePayroll President Michael Alter.

Examples of Companies that went independent contractor:

ZipRealty

Fed Ex

In closing, note that the IRS has noticed and has become fond of this new model as well

From Bloomberg.com:

“It’s easier and quicker to audit smaller businesses”

For decades the IRS has played a game of find-the-freelancer at businesses where independent contractors remain on the payroll for months or even years. Companies, especially small ones, increasingly rely on such workers because they offer greater flexibility—and because they’re cheaper. Employers can save as much as 30% on wages by avoiding payroll taxes, unemployment insurance, worker’s compensation coverage, and benefits they provide regular employees.

Now both the IRS and state agencies across the country are redoubling efforts to uncover long-term “temps.” In February the IRS launched a three-year program that will examine 6,000 companies to find permanent workers misclassified as freelancers in violation of the Tax Code. President Obama’s proposed 2011 budget includes funding for 100 additional federal staffers to pursue such cases, and it would repeal a 32-year-old rule allowing companies in industries ranging from construction to health care to legally classify long-term employees as independent contractors. What’s more, a 2008 initiative linking the computer systems of various agencies makes it easier for the IRS and states to share data on how companies classify employees.

The only question is how will businesses adapt to this government action?

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  1. That’s true, a lot of new businesses have sprung up as well. There are more freelancers now than ever.

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