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US ‘Misclassification’ laws spread. Self-employed are being hammered

January 2013

Phase one: ‘misclassification’

In 2010 we presented an analysis of why attempts to create US federal misclassification laws were entirely wrong, would harm US small business entrepreneurship and not achieve improved regulatory compliance. The laws failed to pass Congress and be enacted.  

Phase two: ‘misclassification

But under Vice President Joe Biden's initiative, the US Department of Labor has convinced states to enact misclassification laws. As of mid-2012, 13 states had misclassification laws—namely, Louisiana, California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington. The approach continues to be flawed and damaging to US small business entrepreneurship. In one way or another the laws reflect the model we reviewed in 2010.

In late 2012, Maine has done the same with new laws taking effect from 31 December 2012. See here and here. Maine’s new laws apply to the state’s regulations including workers’ compensation, department of labor and revenue services, including unemployment insurance. There are four criteria that must be met and an additional three criteria to be met from an additional list of seven. The total criteria are effectively a codified version of the main common law tests, which is actually a good thing.

However, we continue to maintain that this approach of a simplistic single solution is no solution at all. Instead it damages small business entrepreneurship.

Further, we’re labelling Massachusetts as the state that most hates self-employed entrepreneurs. Its laws virtually ban people from being self-employed, independent contractors.

Tax hit against the self-employed

But it does become worse.

This analysis argues that self-employed people are the highest taxed group in the USA, with some rates exceeding those of billionaires and corporations.

In summary
  • USA Self Employment (SE) tax funds social security and Medicare and is currently set at 15.3%. Employees pay half while employers pay the other half.
  • Self-employed pay the full amount—that is, twice what employees pay.
  • The 15.3% is paid on net business earnings (after expenses).
  • This is taxed again as ‘gross personal income’ (between 10% and 28%).
  • The result is a personal income tax on self-employed people of between 24.3% to 43.3% (2013) of their income.
  • This is more than the 35% top tax paid by American corporations.
  • It’s more than the top 43% rate for billionaires’ dividend incomes proposed for 2013.

US self-employed incomes down

Combine the tax hit and the spread of misclassification laws and it’s no wonder that self-employment incomes are in decline in the USA compared with employees. Between 2007 and 2009 employee incomes declined 4.2% whereas self-employed incomes dropped 5.3%.

And US self-employed numbers?

The question is, is this suppressing the number of self-employed in the USA?
  • One article says that the US Bureau of Labor Statistics predicts a decline of self-employment between 2010 and 2020.
  • But by end 2012, the US Department of Labor reported an increase in self-employed people of 5 million. The US recession has pushed people into creating their own jobs! The world of work keeps changing!
  • Yet another article predicts that the US ‘contingent’ workforce will increase to 40–45 per cent of the US workforce by 2030.
  • This is more in line with figures from Kelly Services which find that 26 per cent of the US workforce were self-employed in 2009.

It’s a conceptual tussle about business and economic structures!

The US is going through a conceptual tussle about the acceptable nature and structure of business and the economy. This is typified by one Professor of Entrepreneurial Studies saying that self-employment is in decline because this is the natural evolution in advanced economies.  

He says that this "... occurs in part because of something I call the Walmart effect... Because of the efficiencies of scale, Walmart replaces a lot of small, independent businesses. The end result is fewer people running their own businesses and more working for someone else.”

We disagree. Consolidation of businesses in some areas tends to mask deconstruction of business structures in others. The creation of new and different (self-employed) jobs in new areas is also masked.

The following comments on the changing nature of the American entrepreneur make more sense:
“In strict terms, the number of people becoming entrepreneurs did indeed rise during the years following the financial crisis. However, that increase came in the form of businesses owned by individuals without employees. The number of startups with employees continued to decrease. In other words, a lot of people became freelancers or independent consultants during the recession, but few created firms that hired workers”
Misclassification laws are misplaced and are trying to push against this rising tide of self-employed entrepreneurship. Misclassification laws create distrust in government. And Simon Bridge from Ireland provides a timely reminder about why ‘trust’ is so important to business, economic and social success.

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