Texas and Florida have recently passed legislation forcing employers to identify independent Contractors (ICs) as employees with one purpose on the agenda. The purpose of the new bills is all allegedly related to child support collections. According to Fisher Phillips (2021), the latest regulation improved Florida’s child support collection system by making reporting requirements substantially similar for contractors and employees. Unfortunately for the legislators and the child support agencies and fortunate for parents who are independent contractors, collecting may not be as simple as implementing a new law.
Reporting independent contractors as employees requires much more than simply changing the language in state law. Texas HB 458, filed by Representative Matthew Shaheen and according to a press release (2021), required that technology companies, such as ride-share companies, withhold child support from their employee’s checks. There needs to be a solution to the language in the bill. Simply put, the Internal Revenue Service (IRS) classifies employees differently than independent contractors. And for many good reasons, too.
Effective September 1, 2021, the bill attempted to circumvent laws on how a parent is garnished for child support by simply including an independent contractor’s payments for services under the same umbrella as earnings paid to employees. The problem is that considering independent contractors as employees for the sake of garnishments violates all other laws concerning distinctions between the two. The two are classified differently because independent contractors are not subject to regular social security, unemployment, and Medicare taxes. To only pass legislation to attempt to avoid federal policy undermines statutes enacted to protect employers, contractors, and the government in no particular order.
A serious issue arises when considering how businesses are supposed to execute the calculations and deductions. For example, because independent contractors, such as Uber and Lyft drivers, still need to set work schedules or receive guaranteed pay amounts, it is nearly impossible to predict their earnings on a weekly or monthly basis. Regular, dependable, and adequate paychecks have been less reliable for gig workers since the pandemic, leaving businesses, employers, employees, and independent contractors living in financially uncertain times. Texas legislators have dictated the solution to employers by demanding they calculate what is supposed to be during a preset work schedule and deduct child support based on what is on the income withholding order or IWO.
The example the Texas Office of Attorney General or OAG provided is based on the contractor working for three months. The OAG (2021) states that the employer must withhold the ordered number of months’ worth of child support of the maximum amount permitted by the law. Deducting child support for any number of months from either employer or IC should be illegal because it contradicts the Final Ruling issued in 2016 by the Federal Government. However, employees can face deductions of up to 65% and more, while ICs face up to 100%. Employers are supposed to leave parents enough money to provide for their basic needs.
Regardless of their classification, workers should be protected from being forced into financial hardship due to child support garnishments. 45 CFR (Statute symbol) 302.56 Paragraph (c)(1) of the Final Rule (2016) indicates that child support guidelines must provide that the child support order is based on the noncustodial parent’s earnings, income, and other evidence of ability to pay that it:
- takes into consideration all earnings and income of the noncustodial parent (and, at the State’s discretion, the custodial parent);
- takes into consideration the basic subsistence needs of the noncustodial parent (and at the State’s discretion, the custodial parent and children) who has a limited ability to pay by incorporating a low-income adjustment, such as a self-support reserve or some other method determined by the State; and
- if imputation of income is authorized, takes into consideration the specific circumstances of the noncustodial parent (and, at the State’s discretion, the custodial parent) to the extent known, including such factors as the noncustodial parent’s
- assets,
- residence,
- employment and earnings history,
- job skills,
- educational attainment,
- literacy,
- age,
- health,
- criminal record and other employment barriers, and record of seeking work,
- as well as the local job market,
- the availability of employers willing to hire the noncustodial parent,
- prevailing earnings level in the local community,
- and other relevant background factors in the case.
It is ineffective for Texas to pass legislation that, on paper, looks as if it will implement change to how the State treats independent contractors in regard to child support IWOs. In reality, the State can already withhold up to 50% from ICs. Research has shown that barriers prevent the garnishments from regularly occurring from IC, not from the parents dodging child support obligations. It is essential to recognize the difference, mainly when legislators use taxpayer money unnecessarily.
Moving on to Florida, the new law that went into effect on October 1, 20,21, was Senate Bill 1532. The bill amends Florida §409.2576 mandates that any “service recipient” report contractors making $600 or more per calendar year to the Florida Department of Revenue (DOR). This alteration is reasonable, considering the Biden Administration passed a similar income reporting mandate in the America Rescue Plan (ARP) of 2021. According to Public Law 117.2, enacted on March 11, 2021, the following applies:
” a third-party settlement organization shall not be required to report any information under subsection (a) with respect. To third-party network transactions of any participating payee if the amount which would otherwise be reported under subsection (a)(2) with respect to such transactions after the date not to exceed $600.”
It needs to be clarified how many people are upset about the decrease in the income reporting law that has been in place for decades. There is a perspicuous connection between the stipulation in the ARP and the new child support IWO laws for independent contractors. The amendments are specific to(Statute or section) 409.2546 of SB 1532. Terms such as “service recipients” and “individual who is not an employee” were added to the statute so that employers would forward all IC information to the new hire database.
FloridaState.gov (2021) defines a service recipient as a person engaged in a trade or business who pays an individual for services rendered during such trade or business. Due to this language change, criteria for new hire reporting will include all Floridians regardless of their work status. Each employer report, based on FloridaSenate.gov, shall consist of:
- name,
- address,
- date of hire
- social security number of every new and rehired employee, and,
- address and the federal Employer Identification Number (EIN) of the reporting employer.
This criterion mirrors the requirements when reviewing the National Directory for New Hires (NDNH) on the Federal Office of Child Support Enforcement or OCSE’s website. The agency advises that only some states are required to report ICs to the NDNH. The OCSE (2021) informs visitors that Federal law does not require it. The fact that the Feds do not require employers to report ICs to the directory proves that legislators go above and beyond to create loopholes, circumventing the protections ICs have depended on for years. Placing unwarranted demands on employers and forcing them to treat ICs like employees, thus bending the rules to comply with child support guidelines, shows that overbearing legislators are determined to make money instead of following the law.
Several problems arise when considering the laws passed in both Florida and Texas. One of the most pressing is possible misclassification between the independent contractors and employees. Not only have supporters of the latest bills claimed that misclassification allowed parents to avoid paying child support, but some have implied that employers have been taking advantage of the IC “scheme.” Employee misclassification has negative consequences for State and Federal governments, which are being shorted millions of dollars in tax revenue (Department for Professional Employees, 2016).
The loss of government revenue is the real reason politicians are passing legislation attempting to force employers to consider all workers synonymous, although different, based on common law rules. Additionally, there is no need to implement allegedly updated statutes because ICs are required to pay child support already, but not through traditional IWOs. As it stands, the OCSE (2017) states that if you receive an IWO for a non-employee and make payments to that person, you must withhold child support from those payments. The OCSE and States have already implemented rules concerning ICs and IWOs, so there is no need to recreate what the government previously created.
There is a monumental exception in protections between employees and independent contractors regarding just how much can be withheld for child support. The Consumer Credit Protection Act, or The CCPA, has enacted a statute that limits the withholding amount by employers. Per the OCSE (2017), the following applies when states honor the CCPA garnishment caps:
- 50 percent – Supports a second family with no arrearage or less than 12 weeks in arrears,
- 55 percent – Supports a second family and more than 12 weeks in arrears,
- 60 percent – Single with no arrearage or less than 12 weeks in arrears,
- 65 percent – Single and more than 12 weeks in arrears.
Garnishment laws change for IC because no protections dictate how much of their earnings the agency can withhold for support.
For example, nine states report that they can withhold 100% of pay to recover support payments. Jurisdictions such as Michigan and South Carolina proclaim no withholding limits defined as earnings or disposable income determined by the CCPA (OCSE). The states under this directive express that the government can seize 100% of the money paid to ICs working in these states and seven more nationwide. Combining the CCPA no-limit law and the misclassification conundrum, States like Texas and Florida are attempting to do a great disservice to parents and workers nationwide. The State will deprive independent contractors of the protections afforded to employees; the government will also rob parents of the earnings needed to provide for themselves and their offspring.
While the problems caused by possible missorted worker classification are significant, the concern of lost revenue due to misclassifications is even more substantial for elected officials. Arguably, the lost revenue seems more important than the children’s best interest. Take, for instance, a 2000 Department of Labor (DOL) study that found that nearly $200 million in Unemployment Insurance (UI) tax revenue was lost each year due to misclassification. Losing that amount of money is never appropriate for the government. Considering that the child support system is one of the most profitable government programs, linking IC’s IWOs and child support collections is the best solution for the States.
References
26 U.S. code § 6050W – Returns relating to payments made in settlement of payment card and third party network transactions. (n.d.). LII / Legal Information Institute. https://www.law.cornell.edu/uscode/text/26/6050W
ADP. (2023, February). Should you garnish earnings for independent contractors? https://www.adp.com/spark/articles/2023/02/should-you-garnish-earnings-for-independent-contractors.aspx. https://www.adp.com/spark/articles/2023/02/should-you-garnish-earnings-for-independent-contractors.aspx
EIN News. (2021, February 10). Representative Shaheen files bill closing loophole with child support. https://www.einnews.com/pr_news/535390880/representative-shaheen-files-bill-closing-loophole-with-child-support
Employer Portal. (n.d.). Employer Portal. https://employer.oag.texas.gov/s/income-withholding-frequently-asked-ques
Flexibility, efficiency, and modernization in child support enforcement programs, 93492-93569 [2016-29598]. (2016, December 20). Justia Regulation Tracker. https://regulations.justia.com/regulations/fedreg/2016/12/20/2016-29598.html
Florida businesses now required to report earnings of independent contractors. (n.d.). Fisher Phillips. https://www.fisherphillips.com/en/news-insights/florida-businesses-report-earnings-independent-contractors.html
Misclassification of employees as independent contractors. (2020, February 19). Department for Professional Employees, AFL-CIO. https://www.dpeaflcio.org/factsheets/misclassification-of-employees-as-independent-contractors
Nicole – CEO at Blue Jay Tax. (2022, January 20). Employee and contractor reporting. Bluejaytax.com. https://www.bluejaytax.com/post/employee-and-contractor-reporting
Office of Child Support Enforcement. (n.d.). Processing an income withholding order or notice. https://www.acf.hhs.gov/css/outreach-material/processing-income-withholding-order-or-notice. https://www.acf.hhs.gov/css/outreach-material/processing-income-withholding-order-or-notice
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p id=”a9″>Statutes & constitution :View statutes : Online sunshine. (n.d.). Welcome : Online Sunshine. https://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0400-0499/0409/Sections/0409.2576.html
