Employee or Independent Contractor?

PRO Act And ABC Test: No One Knows What The Effects Will Be

From Forbes, Erik Sherman provides an outstanding discussion of the possible effects of the Protecting the Right to Organize Act (the “PRO Act”). The following are some excerpts from Erik’s terrific article showing the complexity of the issue:

You may have followed debates about the Protecting the Right to Organize (PRO) Act, union-friendly legislation that would make the largest modifications to the long-standing National Labor Relations Act since the Taft-Hartley Act restricted union power in 1947. In the process, you’ve likely heard about the ABC test and heard absolute statements about how the bill, if enacted, would affect independent contractors (ICs)—self-employed small businesspeople.

Those statements may have been “this will only affect the right of independent contractors to join a union and nothing more” by supporters or “the entirety of self-employment will melt in a blinding solar flare if the bill passes” from critics.

Neither is true. Instead, the biggest problem is uncertainty for ICs, businesses large and small, and even employees.

Experts in tax law as well as labor law attorneys representing both employers and employees have all told me that the legislation will potentially clash with existing laws in many ways. Untangling that could require years of court cases, potentially endanger the ability of many long-established independent contractors to continue their businesses, and even possibly hurt many people supporters claim it will help.

Could, would, maybe, and might are words frequently used to create fear. In this case, though, they provide the only apt and reasonable descriptions available.

As Jeremy Schatz of Virtus Law Group, a labor lawyer who represents employee plaintiffs suing employers in Alabama, put it, the ABC test in the PRO Act is a “massive conflict” with existing laws (not unusual for any new law that doesn’t try to address contradictions with existing statutes) and that anyone who says they know exactly what the implications are is “not being truthful.”

 

Proponents have frequently emphasized the legislation would only affect the National Labor Relations Act. That is true and it’s exactly why the legal conflicts would exist. “The IRS has one test [for independent status], the Department of Labor has one test, state laws have other tests,” Moran continued. Title VII of the Civil Rights Act of 1964, which prohibits discrimination based on race, color, religion, sex, and national original, “has a different test, too.”

“Anyone who tells you they’re confident on how broad or narrow that phrase [the usual course of business] is going to be, they’re not being honest,” said Daniel Kalish, managing partner of HKM Employment Attorneys, a large national law firm that represents employees and unions.

The PRO Act technically only applies that standard regarding unions. However, the Biden administration, unions, and Democrats have all declared their desire to push the ABC test into all areas of employment, labor, and tax law. That is what worries so many ICs.

There is also an additional issue. “Although this is narrowly drafted to only amend the National Labor Relations Act, it is likely to be used as guidance in a number of other contexts,” Moran said.

“How are other courts going to apply this test?” Kalish asked. “Are courts going to interpret the statutory language in a way that will make it more likely workers are employees?”

“There’s variation among federal statutes already,” said Michael Hayes, a professor of employment and labor law at the University of Baltimore School of Law. “The IRS has a different test from the Department of Labor for the Fair Labor Standards Act. If this is not passed in the Senate, of course everything stays the same. But I do think the Department of Labor and maybe the IRS might take another look at the definition of an independent contractor. The percentage of workers being brought into that category is increasing so much.”

Taxes and other issues

One aspect of being an IC is operating under laws designed for businesses, not employees.

“It allows them to deduct certain expenses, to set themselves up more along the lines of a business,” said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business. Without that ability, a business can become untenable as the Tax Cuts and Jobs Act of 2017 eliminated employee deductions for non-reimbursed business expenses. Now not only is the IC paying the expenses but taxes on them as though the money was profits sitting in their bank accounts.

But even without intended extension of the ABC test into all other areas of law, if the claimed intent is to let ICs join unions, that could have a negative effect.

ICs who work as part of a union and under a collective bargaining agreement could potentially find the IRS—which has its own complex test—in disagreement over their tax status.

“Now you have two federal laws. If they’re conflicting, that’s not as easy [to resolve],” said Michael Raiken, a tax attorney and CPA who is an associate at E. Martin Davidoff & Associates.

This quickly gets tangled. If someone has treated themselves under taxes as a contractor for a long time, the IRS may leave things given a “quirky section that was never codified into the [Internal Revenue code],” Raiken said. That isn’t a guarantee and it also doesn’t keep employers from taking their own preventative action to what they would see as a risk.

The most likely prediction lawyers were willing to make was that the interplay between the NLSA and long-standing antitrust legislation would “probably” prevent ICs in a union to run afoul of issues like price-fixing, which technically they otherwise could. But then they are in a union—probably participating in collective bargaining (Why else would they join?)—and may be worrying about many other things.

Read the full story at PRO Act And ABC Test: No One Knows What The Effects Will Be

Back to Top