Proposed Tax Reform May Cause Workers To Forego Employment Protections

By Owen H. Laird, Esq.

Last month, President Trump laid out a tax cut plan that, among other things, would lower the corporate tax rate to fifteen percent from the current rate of thirty-five percent. This reduction in the corporate tax rate is one of the most significant changes proposed by Trump; his plan would primarily benefit corporations and the wealthy. Although President Trump is constantly in the headlines, even to the extent that a signature tax proposal is overshadowed, it is important to pay attention to the less sensational actions taken by the Trump administration that will have long-lasting effects on the American public.

A recent article in the New York Times delved into potential effect of the drastic cut to the corporate tax rate: if the corporate tax rate is significantly less than the personal income tax rate, individuals would be incentivized to form corporations and pass any income they earned through that corporate entity, forsaking the traditional employee-employer relationship. Many workers are already considered “independent contractors” rather than employees. If these independent contractors formed a C-corporation and ran their income through it, that income would be taxed at the corporate rate, rather than the normal individual rate. If the tax incentives were high enough, whole classes of workers might choose to restructure their employment by becoming independent contractors and incorporate themselves in order to lower their tax burdens.

The Times article notes that there are drawbacks to abandoning the employee-employer relationship, such as loss of unemployment insurance, loss of employer-subsidized health insurance, and higher payroll tax burdens. Perhaps the most significant disadvantage to the independent contractor / pass through status is that those individuals are not protected by labor and anti-discrimination laws.

Many of the statutes that protect workers’ rights are more than fifty years old, and were not designed with modern employment schemes in mind. Laws like Title VII of the Civil Rights Act of 1964, the Fair Labor Standards Act, and the New York City Human Rights Law are clear: they apply to employers and employees. This means that independent contractors are not entitled to overtime pay at a premium rate, and do not have the same protections against discrimination and retaliation that employees do. For years, employers have tried to categorize their workers as independent contractors in an effort to avoid liability under these laws. Under the Trump plan, workers may be incentivized to do the employers’ work for them and relinquish the protections of these laws on their own.

Many independent contractors assume they have the same protections as traditional employees, then find out that there’s little they can do in the event they are discriminated against because they are “independent contractors,” rather than employees. Though individuals might not understand the difference between these classifications, you can be sure that employers understand the benefits they gain, including reduced liability, through having a workforce made up of independent contractors.

If you believe you have been discriminated against, or improperly classified as an independent contractor, contact The Harman Firm, LLP.