HOUSE BILL 400

House Bill 400 establishes penalties for employers who are not following state and federal laws that require them to provide workers’ compensation coverage and pay income tax, unemployment compensation, or other required premiums or contributions for individuals. Employers are getting away with these crimes by not classifying workers as real employees of their businesses – instead employers are often requiring these individuals to agree to work as an “independent contractor.”

• The bill establishes the presumption that workers are employees and may not be considered “independent contractors” unless they meet a reasonable but specific set of criteria, which is based on criteria used in other states.

WHY IS THIS BILL NECESSARY?

Many employers in Pennsylvania misclassify employees as independent contractors – they do so by providing them an IRS Form 1099 instead of a W-2 form, or by paying them “under the table.”

• Unlike many other states, Pennsylvania laws do not address independent contractors.

• Employers who misclassify individuals do not make legally required payments and withholdings for workers' comp, unemployment, income taxes and other required premiums – studies and estimates of the number of independent contractors have demonstrated billions of dollars in revenue are lost each year in this way.

• the government also loses out by these illegal independent contractor arrangements – the US Government Accounting Office calculated that misclassification caused up to $4.7 billion loss to be lost in tax revenues in 2004.  A national unemployment audit found that $436 million in wages were not reported. 

• By misclassifying a worker as an independent contractor, the employer refuses responsibility for the worker and effectively denies the worker’s rights to state and federal labor and employment laws.

• By denying workers’ rights, misclassification is unfair to all – this is not a union issue.  It has been proven to harm, and has more potential to harm even more working individuals.  

• For example, employees who are misclassified as independent contractors suffer when they are hurt on the job and find out that they are not eligible for workers’ comp.  They suffer when they are laid off and cannot collect unemployment to provide for their family while they look for a new job.

• They suffer when they learn that independent contractors are responsible for higher taxes than regular employees – they have to pay both the employer and employee sides of the FICA and FUTA taxes, which amounts to about 15% of their wages (compared to only about 7.65% for employees).

• Misclassification causes competing, law-abiding businesses to lose out.  The playing field is not even when employers who misclassify employees can unfairly reduce their own payroll costs by 15 – 30%. 

• Many of us realize that it is time for Pennsylvania to address this situation – we cannot continue to let employers break the law. This issue is too important – to the many employees who are being misclassified, and to the many honest businesses who are having trouble competing with these dodgy employers, and to the programs that are losing revenue – for us not to act. WE NEED TO ACT NOW!