text: SECTION 1. SHORT TITLE.
  
      This Act may be cited as the ``Misclassification of Employees 
  Act''.
  
  SEC. 2. PROCEDURES APPLICABLE TO DETERMINATIONS OF EMPLOYMENT STATUS.
  
      (a) Waiver of Employment Tax Liability for Reasonable Good Faith 
  Misclassification Based on Common Law Rules.--
              (1) In general.--Section 3509 of the Internal Revenue Code 
          of 1986 (relating to determination of employer's liability for 
          certain employment taxes) is amended by adding at the end the 
          following new subsection:
      ``(e) Waiver of Employment Tax Liability for Reasonable Good Faith 
  Misclassification Based on Common Law Rules.--
              ``(1) In general.--For purposes of determining the 
          liability of any taxpayer for employment taxes with respect to 
          any individual for any period, such individual shall be deemed 
          not to have been an employee of the taxpayer for such period 
          if--
                      ``(A) the taxpayer did not treat such individual as 
                  an employee for purposes of the employment taxes for 
                  such period,
                      ``(B) the taxpayer's treatment of such individual 
                  as not being an employee was based on a reasonable good 
                  faith misapplication of the common law rules used for 
                  determining the employer-employee relationship,
                      ``(C) all Federal tax returns (including 
                  information returns) required to be filed by the 
                  taxpayer with respect to such individual for such 
                  period were filed on a basis consistent with the 
                  taxpayer's treatment of such individual as not being an 
                  employee,
                      ``(D) the taxpayer (and any predecessor) did not 
                  treat any other individual holding a substantially 
                  similar position as an employee for purposes of the 
                  employment taxes for any period beginning after 
                  December 31, 1977, and
                      ``(E) the taxpayer enters into a closing agreement 
                  under section 7121 with the Secretary (in the time and 
                  manner determined by the Secretary) agreeing to treat 
                  such individual, and any other individual holding a 
                  substantially similar position, as employees and to 
                  file all Federal employment tax returns with respect to 
                  such individuals on a basis consistent with the 
                  taxpayer's treatment of such individuals as employees.
              ``(2) Definition and special rules.--
                      ``(A) Employment tax.--For purposes of this 
                  subsection, the term `employment tax' means any tax 
                  imposed by this subtitle, including any interest, 
                  penalty, or additional amount with respect to such tax.
                      ``(B) No refund or credit of overpayment.--No 
                  refund or credit of any overpayment of an employment 
                  tax resulting from the application of paragraph (1) 
                  shall be allowed, notwithstanding that the period for 
                  filing a claim for refund or credit of such overpayment 
                  is not barred on the effective date of this subsection.
              ``(3) Termination.--This subsection shall not apply if the 
          closing agreement referred to in paragraph (1)(E) is entered 
          into more than 1 year after the date of the enactment of this 
          subsection.''
              (2) Monitoring of closing agreement required.--The 
          Secretary of the Treasury or his delegate shall monitor 
          compliance with each closing agreement referred to in section 
          3509(e)(1)(E) of the Internal Revenue Code of 1986 (as added by 
          this section) for not less than 5 years after the date such 
          agreement is entered into. Such monitoring shall include not 
          only monitoring the payments made to the individuals specified 
          in the agreement but also the aggregate wages paid to employees 
          and the aggregate payments to independent contractors for 
          services.
      (b) Modifications to Safe Harbor for Classifications of Individuals 
  as Nonemployees.--
              (1) Requirement of reasonable basis.--Paragraph (1) of 
          section 530(a) of the Revenue Act of 1978 (relating to 
          controversies involving whether individuals are employees for 
          purposes of the employment taxes) is amended by striking 
          ``unless the taxpayer had no reasonable basis'' and inserting 
          the following: ``if the taxpayer had a reasonable basis''.
              (2) Only recent employment tax audit is reasonable basis.--
                      (A) In general.--Paragraph (2) of section 530(a) of 
                  the Revenue Act of 1978 is amended--
                              (i) by striking the paragraph caption and 
                          inserting the following: ``Reasonable basis for 
                          not treating individual as employee.--'',
                              (ii) in the matter preceding subparagraph 
                          (A)--
                                      (I) by striking ``in any case'', 
                                  and
                                      (II) by inserting ``only'' before 
                                  ``if the taxpayer's'', and
                              (iii) by striking subparagraph (B) and 
                          inserting the following new subparagraph:
                      ``(B)(i) an Internal Revenue Service audit of the 
                  taxpayer--
                              ``(I) was conducted solely for employment 
                          tax purposes not more than 3 years before such 
                          period, and
                              ``(II) included an examination for 
                          employment tax purposes of individuals holding 
                          positions substantially similar to the 
                          positions held by the individual involved,
                      ``(ii) upon completion of such audit the taxpayer 
                  was notified in writing by the Internal Revenue Service 
                  that the treatment for employment tax purposes of the 
                  individuals referred to in clause (i)(II) was correct, 
                  and
                      ``(iii) such notification is not revoked before 
                  such period; or''.
                      (B) Conforming amendment.--Subparagraph (A) of 
                  section 530(e)(2) of the Revenue Act of 1978 (as 
                  amended by section 1121 of the Small Business Job 
                  Protection Act of 1996) is repealed.
      (c) Termination of Treatment of Certain Technical Personnel.--
  Subsection (d) of section 530 of the Revenue Act of 1978 is repealed.
      (d) Authority for Regulations and Rulings on Employment Status.--
  Subsection (b) of section 530 of the Revenue Act of 1978 is repealed.
      (e) Payors To Notify Service Providers of Consequences of 
  Employment Status.--
              (1) Section 6041 of such Code (relating to information at 
          source) is amended by redesignating subsection (e) as 
          subsection (f) and by inserting after subsection (d) the 
          following new subsection:
      ``(e) Additional Information Required To Be Included on Statements 
  Covering Payments for Services.--In the case of a statement required 
  under subsection (d) with respect to any payment for services, such 
  statement shall be treated as not satisfying the requirements of 
  subsection (d) unless such statement includes the following 
  information:
              ``(1) The payor is treating the payee as not being an 
          employee and the payee may be liable for self-employment tax.
              ``(2) If the payee believes that he should properly be 
          treated as an employee, an explanation of the procedure for 
          obtaining Internal Revenue Service review of his status.
              ``(3) The payee will not be eligible for any employee 
          fringe benefits and may lose protections or benefits under 
          Federal laws relating to fair labor standards, occupational 
          health and safety, civil rights, unemployment insurance, and 
          worker's compensation.
              ``(4) An explanation of tax benefits to the self-employed 
          such as retirement plans and deduction for a portion of the 
          cost of health insurance.''
              (2) Section 6041A of such Code (relating to returns 
          regarding payments of remuneration for services and direct 
          sales) is amended by redesignating subsection (f) as subsection 
          (g) and by inserting after subsection (e) the following new 
          subsection:
      ``(f) Additional Information Required To Be Included on 
  Statements.--In the case of a statement required under subsection (e), 
  such statement shall be treated as not satisfying the requirements of 
  subsection (e) unless such statement includes the information specified 
  in paragraphs (1) through (4) of section 6041(e).''
      (f) Effective Dates.--
              (1) In general.--Except as provided in paragraph (2), the 
          amendments made by this section shall take effect beginning on 
          the date which is 120 days after the date of the enactment of 
          this Act.
              (2) Modifications to safe harbor; termination of treatment 
          of technical personnel.--The amendments made by subsections (b) 
          and (c) shall apply to periods ending on or after the date 
          which is 120 days after the date of the enactment of this Act.
  
  SEC. 3. CLASSIFICATION OF INDIVIDUALS AS EMPLOYEES FOR PURPOSES OF 
                UNEMPLOYMENT COMPENSATION PROGRAM.
  
      (a) Uniform Federal and State Definition of Employee.--Subsection 
  (a) of section 3304 of the Internal Revenue Code of 1986 (relating to 
  requirements for approval of State unemployment compensation laws) is 
  amended by striking ``and'' at the end of paragraph (18), by 
  redesignating paragraph (19) as paragraph (18), and by inserting after 
  paragraph (18) the following new paragraph:
              ``(19) the determination of whether an individual is an 
          employee of another person shall be made in accordance with 
          section 3306(i); and''.
      (b) Effective Date.--
              (1) In general.--Except as provided in paragraph (2), the 
          amendments made by this section shall take effect on the 180th 
          day after the date of the enactment of this Act.
              (2) Special rule.--In the case of any State the legislature 
          of which has not been in session for at least 30 calendar days 
          (whether or not successive) between the date of the enactment 
          of this Act and such 180th day, the amendments made by this 
          section shall take effect 30 calendar days after the 1st day on 
          which such legislature is in session on or after such 180th 
          day.
target: Misclassification of Employees Act - Amends the Internal Revenue Code to provide for the waiver of employment tax liability for employers for any period if:  (1) the employer did not treat an individual as an employee for purposes of employment taxes; (2) the treatment of such individual was based on a reasonable good faith misapplication of the common law rules used for determining the employer-employee relationship; (3) Federal tax returns for such period were filed on a basis consistent with the treatment of such individual as not being an employee; (4) the employer (and any predecessor) did not treat any other individual holding a substantially similar position as an employee for employment tax purposes after December 31, 1977; and (5) the employer enters into a closing agreement with, and monitored by, the Secretary of the Treasury with respect to treating such individual as an employee. 
  Amends the Revenue Act of 1978 (relating to controversies involving whether individuals are employees for purposes of employment taxes) to require an employer to have a reasonable basis for not treating an individual as an employee.  Requires the use of a recent prior audit as a reasonable basis.  Excludes certain skilled technical personnel from such tax treatment.  Removes the prohibition against regulations and rulings on employment status. 
  Amends the Internal Revenue Code to set forth additional information to be included on statements covering payments for services. 
  Provides for the determination of whether an individual is an employee of another person for purposes of unemployment compensation.
feat_title: Misclassification of Employees Act