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Fast-Growing Companies | AT ISSUE / VICKI TORRES

Entrepreneurs Find Formidable Foe in Unions

September 03, 1997|VICKI TORRES

For all its touted political clout, small business appears to be no match against organized labor.

For five years, labor unions have won their fight to block the top item on small business' agenda: clarifying state and federal independent contractor rules.

How to define whether a worker is a fee-only, independent contractor or an employee subject to employer Social Security contributions, taxes and benefits was the paramount concern of 1,800 small-business owners at the 1995 White House Conference on Small Business.

After a decade of increasing audits, fines, penalties and reclassification of their workers by the federal Internal Revenue Service, small businesses demanded relief.

Yet, changes favored by small business were rejected for two years running at the federal level and have been beaten back consistently in the California Legislature. The proposals were fiercely fought by unions.

"It's not a matter of clarity," said Tom Rankin, president of the California Labor Federation AFL-CIO, which has 2 million members. "Employers are not interested in clarity. They're only interested in weakening the rules."

Organized labor has opposed changes to the definition because they would have made it easier to classify workers as independent contractors and deny them benefits, Rankin said.

The public is more sympathetic to labor these days, as evidenced by the successful Teamsters Union strike against United Parcel Service, he noted. "People are fed up with contempt for employee situations."

But small business sees it differently.

Instead of fairness or workers' rights, the issue really boils down to politics, said Scott Hague, chairman and chief executive of the 187,000-member California Small Business Assn.

"Small business doesn't count," Hague said. "If you go head-to-head against labor, it's who's got the more powerful organization."

Although small business has shown increasing political clout--most recently winning a decade-long fight to decrease federal inheritance and capital gains taxes--Hague and other small-business activists are pessimistic about the chances for Assembly Bill 810, scheduled for a vote this week in the state Senate. The measure would bring together labor and business on a 10-member task force that would come up with recommendations for a clearer definition of "independent contractor."

AB 810 passed the state Assembly and will probably pass the Senate. Rankin said labor is neutral on the bill, so long as business and labor have equal representation on the proposed task force.

Yet, Gov. Pete Wilson could end up vetoing the measure because the Employment Development Department has said it duplicates a small-business advisory committee that already exists.

"That little bill probably represents 300 hours of my time," Hague said. If it fails, "I'd be inclined to throw up my hands and say, 'The hell with it.' "

Equally pessimistic is Judee Slack, a tax specialist in Fountain Valley who has unsuccessfully lobbied state and federal politicians for changes over the last five years in the face of labor opposition.

"I'm real tired of beating my head against the wall," Slack said. "I don't know what to do."

A task force would only string out the issue, she said, at a time when small businesses are bearing the brunt of audits by the IRS and EDD.

In California's last fiscal year, 10,650 companies were audited by EDD and 67,556 workers reclassified, according to state figures. Except for 129 companies, all were firms with fewer than 100 employees.

These small businesses generally are less equipped to deal with audits than large corporations with human resources departments and staff attorneys. Small companies typically can't spare the time and money to contest the audits and usually just give in, Slack said.

"Small business is a target because small business is the easiest prey," she said.

Government agencies seem to focus their audits on certain industries. Nursing homes, maid services and dental associates were examined in the past. Currently, high-tech and entertainment companies face increasing audits, certified public accountants say.

The audits are typically prompted when former independent contractors file for unemployment benefits from the small companies for which they worked.

Although it would seem a simple matter to find out who is an employee and who is not, "it's a really gray area," Slack said.

The IRS uses a 20 Point Test, a series of questions about workplace conditions, which many CPAs criticize as open to subjective interpretation by IRS auditors.

The state Employment Development Department has its own series of questions, plus it administers a seven-page, 78-question form that businesses fill out if they want the state to determine the status of their workers.

But, Slack said, "if you fill out that form, there's a 90% chance that your workers will be classified as employees."

For safety, Slack recommends that small-company owners make sure they give independent contractors as much control over their work as possible. She suggests a written contract that specifies responsibilities and touches on all the points in the IRS 20 Point Test.

But, she added, "A contract is like the mortar in a brick wall. It will hold it all together but only if the bricks are all there."

*

To view the IRS 20 Point Test, go to The Times' small-business Web site at http://www.latimes.com/smallbiz

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