Dear Secretary Paulson:
We are writing to ask for a full investigation and audit of Blackwater USA's practice of classifying many of its personnel as independent contractors instead of employees. As House Oversight Committee Chairman Henry Waxman recently found, Blackwater may have enjoyed an unfair competitive advantage over other contractors if its classification were incorrect, and as a result, may owe the American taxpayer millions of dollars in Social Security, Medicare, and unemployment taxes.
Misclassification of workers as independent contractors is a widespread problem in our country, but it is particularly disturbing that a government contractor of Blackwater's scope may be engaged in it. According to the Internal Revenue Service (IRS), the misclassification of workers accounts for 30-40 percent of the $20 billion annual federal employment tax gap and can also lead to the loss of basic worker protections under labor law. As you may know, we introduced S. 2044, the Independent Contractor Proper Classification Act (ICPC), earlier this year to improve enforcement of existing laws protecting workers from misclassification and laws ensuring that employers comply with their employment tax obligations. The legislation also modifies the Section 530 safe harbor in tax law that currently encourages misclassification and protects some employers engaged in it.
The Section 530 safe harbor in tax law requires the IRS to excuse misclassification for employment tax purposes and allow an employer to continue reporting employees as independent contractors if the employer (1) has been treating similarly situated workers as independent contractors; (2) has been consistently reporting the workers as independent contractors to the IRS and has been issuing 1099's to the workers; or (3) has a reasonable basis to classify employees as subcontractors. The reasonable basis test is satisfied if the employer meets any one of the following: (a) the employer reasonably relied on a court decision or IRS ruling issued to the employer; (b) it was the subject of an IRS employment-classification audit that did not result in any "assessment" for misclassification; or (c) it relied on a long-standing practice of a significant segment of the industry.
We are concerned that Blackwater may be violating the law by inappropriately classifying its workers as independent contractors. It is difficult to fathom how Blackwater employees in Iraq can be considered independent contractors. They are trained by Blackwater, paid by Blackwater, and told whom to guard by Blackwater. These are not independent small businessmen establishing their own individual working relationships with those they are hired to protect
In a statement to the Associated Press, a Blackwater spokeswoman said the company has appealed an IRS ruling related to a specific Blackwater associate where the IRS determined that the worker had been misclassified. The spokeswoman further stated that the Small Business Administration (SBA) told the company that Blackwater security guards do not have to be classified as company employees. We do not believe it is appropriate for Blackwater, or any private company, to rely on the SBA for tax classification determinations either under Section 530 or any other provision of law and ask you for clarification.
The Blackwater case is a perfect example of the failure of tax enforcement and the need for reform of the Section 530 provision. That provision currently bars the IRS from writing rules, regulations, or guidance on complying with the law. Without the ability to provide direction to employers and its own auditors, the IRS is left with piecemeal enforcement that, at best, creates confusion among businesses, and at worst, allows companies like Blackwater to purposefully evade the law.
Our legislation is pending before Congress, and we look forward to working with you on it. In the interim, we ask that you open a full investigation into Blackwater's classification practices.
Senator Barack Obama
Senator Dick Durbin