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The Threat To Independent Contracting

The construction industry is central to the health of the U.S. economy and must play a vital role in economic recovery. Infrastructure investment is expected to be a key driver of employment as the government acts to stimulate demand. Under those circumstances, government ought to be taking steps to ensure that the construction industry can operate efficiently and effectively.

December 08, 2008

The construction industry is central to the health of the U.S. economy and must play a vital role in economic recovery. Infrastructure investment is expected to be a key driver of employment as the government acts to stimulate demand.

Under those circumstances, government ought to be taking steps to ensure that the construction industry can operate efficiently and effectively. Instead, federal and state governments are doing the exact opposite – threatening the industry's ability to respond in a time of crisis.

The problem is the government's treatment of independent contractors, a vital part of the construction industry that the U.S. Bureau of Labor Statistics says accounts for 20 percent of the 10 million Americans working in construction. Fifty-six percent of construction managers are self-employed, and most construction companies – 65 percent – are small businesses, employing four or fewer workers.

Independent contracting is the industry's lifeblood, making construction companies competitive by giving them the flexibility needed to respond to volatile economic conditions and seasonal changes in demand.

Contracting helps workers as well. It enables them to find work quickly, add hours to increase their earnings, balance work and home life, and build equity in their own small businesses, which are key to tomorrow's job growth.

Ignoring all of this, policymakers have declared war on independent contracting. At a time when they should focus on competitiveness, job creation and driving the growth of key industries, officials are instead crippling those industries – and American workers – through a misguided series of actions that force companies to turn away from independent contractors and instead carry the burden – a mandatory burden – of full-time employees.

Some of the policymakers' actions, which compel employers to “reclassify” their contractors as full-time employees, seem intended to protect workers. But they are likely to have the opposite effect. By denying opportunities for independent contracting, these laws and regulations deny workers the flexibility to find new work quickly after layoffs, work extra hours if they're able, and increase their incomes.

These government actions also hamstring the larger businesses that are critical to recovery, denying them workforce flexibility to respond to changing conditions, while adding cost of staffing and scheduling that doesn't match real-world demand cycles.

The effect of this government action? The small business sector – our greatest job creation engine – will slow. The impact will be particularly severe in construction, where small businesses predominate. The damage from this goes far beyond the industry. When small businesses have to sustain the cost of full-time employees (whether needed this month or not), how can they sustain profitability and create new jobs? And how can the economy recover?

The attacks on independent contracting come from several quarters:

  • The IRS is on a sustained drive to force the companies that use independent contractors to turn them into employees. In 2007, the IRS undertook what it calls a “worker misclassification” program, forcing companies to turn independent contractors into employees, and entered into data-sharing agreements with more than 25 states. This operation is now the largest single tax enforcement program – 30 percent of 2008 IRS audits are earmarked for “worker misclassification” investigations. Numerous lawsuits have been filed, some already successful, forcing companies to convert contractors to employees. In December 2007, the IRS assessed FedEx Ground $319 million, charging that FedEx had “misclassified” employees as independent contractors – even though their workers had contracted in that role.
  • A number of states have adopted new, anti-contractor laws that impose penalties on companies that “misclassify” workers as contractors. These states include Arizona, Delaware, Illinois, Massachusetts, Michigan, New Jersey, New Mexico, Oregon, and Pennsylvania. Former New York Governor Eliot Spitzer created a Joint Enforcement Task Force on Employee Classification in 2007. New Jersey's Construction Industry Independent Contractor Act, passed in 2007, was called by the New York Law Journal “the most aggressive law in the country governing hiring practices involving the use of independent contractors.”
  • A bill currently before Congress (H.R. 5804) would repeal a 1978 law that protects independent contractors from “overzealous” IRS actions. And the proposed Independent Contractor Proper Classification Act of 2007, currently before the Senate, would impose a host of restrictions and burdensome reporting requirements on companies that use independent contractors.
  • Labor unions have gone to court to force companies to convert their independent contractors to employees. These actions come as unions are also trying to challenge the Taft-Hartley Act by eliminating the secret ballot – a venerable American right – in their organizing campaigns.

These anti-contractor actions ignore the obvious benefit that independent contracting brings – to workers, businesses and the overall economy. According to the IRS, independent contractors account for 8 percent of the U.S. workforce. In all, there are 10 million of them. They are central, not only to construction, but to virtually every industry. They are a dominant force in transportation, technology and health care, as well as in construction and a host of other industries.

Independent contracting offers a shortcut to economic recovery – for workers, who are able to find work quickly after layoffs, and for businesses, who use contracting as a tool to control costs, maintain flexibility and respond to agile, formidable overseas competitors. The jobs created through independent contracting – especially in small business – drive both consumer spending and investment.

For the construction industry, independent contracting is a proven business model. It allows workers, companies, and private and public developers to respond flexibly, even in extraordinarily volatile conditions. Virtually everything from weather to the economic climate can rapidly change the scope and pace of construction projects. Independent contracting helps construction firms stay viable as they adjust to an always-changing situation. Eliminating that flexibility – through a wrongheaded effort to create forced employment – would cause the industry, the economy and families across America untold damage.

Independent contractors and the companies that rely on them – within the construction industry and beyond it – need to stand up and make that case. Our organization, the Coalition for Independent Contractor Freedom, exists to give them a voice. We invite independent contractors to tell us their stories, and explain to legislators, policymakers, regulators, and the public at large why independent contracting matters, and why it needs to be protected.

Working as an independent contractor is a fundamental American right – the right to work where you want, when you want, in the way you want. Individuals, companies and the economy all benefit. In a time of severe economic challenge, we need to use all the tools available to us, and take advantage of flexibility wherever we can, to support construction and other vital industries.

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