The Involuntary Conversion of Employees into Self-Employed: The Internal Revenue Service and Section 530

Abstract

During the 1980s, increasing numbers of farmworkers as well as many other low-paid dependent workers have been deprived of various benefits and protections provided by federal and state law because their employers have denied the existence of an employment relationship. By classifying their employees as "independent contractors," employers can shift the burden to workers to prove their employee status. Among the obligations - all of which presuppose the existence of an employment relationship - that employers are seeking to avoid are: employer's social security tax; employer's federal unemployment insurance tax; employer's state unemployment insurance tax; workers compensation premiums; statutory minimum wage or overtime payments; withholding of social security or income tax; collective bargaining; private pension benefits; safety and health inspections; prohibitions of race, sex and age discrimination;" and sanctions for employment of "unauthorized aliens."

The employees most affected by this practice are farmworkers, construction workers, nurses and allied health workers, janitors, carpet layers, casual and temporary retail employees, industrial homeworkers, forestry workers, truck and taxi drivers, and wholesale and door-to-door salespeople.

This article offers a narrative and analysis of the legislative history of the relatively little known (and uncodified) federal income tax provision, section 530, which has facilitated this wave of reclassifications.

In order to illustrate the practical impact of section 530 on low-income workers, an example of how this purported conversion of employees into self-employed operates is set out first.

Keywords: employees, independent contractors, internal revenue code, section 530, Form 1099-Misc, farm workers