Where congress is heading democratic majority working on employment law, taxes

Hardware Retailing, Sept, 2007

With Congress on summer break during August, it seemed a good time to look back over activity under Democratic control. There are two areas in which Congress is moving that could lead to trouble for businesses: employment law and taxes.

Let's look at employment law first. Organized labor has an agenda and Democratic Congresses tend to listen to organized labor. Labor's top item was raising the minimum wage. That was accomplished and the first of three increases went into effect in July.

Other items include relaxed rules on organizing campaigns and broadening employee benefits and equal employment rights. Democratic lawmakers are responding, but efforts are not likely to go very far in this Congress as Senate Republicans use the filibuster and President Bush threatens vetoes. However, they are worth noting should a Democrat move into the White House and Democratic majorities increase in 2009.

The House passed the Employee Free Choice Act, better known as the card-check bill, which would have allowed a union to be certified if it collected authorization cards from a majority of employees, thus eliminating secret ballots in union elections. Republicans in the Senate blocked a vote on the bill, sending it down to defeat.

Paid family leave is another item on the want list. Legislation has been introduced in the Senate to set up an insurance fund to provide up to eight weeks of paid leave. It would be mandatory for businesses with more than 50 employees who would pay into the fund through an additional payroll tax.

The Supreme Court got into the equal employment fray when it ruled that employees cannot sue employers for discriminatory actions after the statute of limitations runs out. The case involved a salary decision made years ago; the employee claimed each succeeding paycheck was a discriminatory action that started a new time limit. The court disagreed, but the dissenting opinion said Congress had the power to change the rules. The House quickly passed legislation to reverse the decision. The Senate was not expected to follow suit, and President Bush said he would veto it if they did.

Watch Out for Higher Taxes

Now to taxes. Given the Democratic leadership's determination to pay for tax breaks and new spending with cuts elsewhere--or new taxes--they seem to be on an endless search for ways to generate new revenue. This translates into higher taxes, at least for some taxpayers.

The individual alternative minimum tax (AMT) is reaching more and more middle-income taxpayers. It is too expensive to repeal, but there are proposals to provide relief. One, coming from the House Ways & Means Committee, would exempt incomes of less than $250,000 from the AMT and raise tax rates or impose a surcharge on incomes above $500,000. Such a change could have a significant impact on shareholders of Subchapter S corporations and other pass-through business structures.

Sub S shareholders could also face a renewed focus on the definition of "reasonable compensation." Congress has been considering whether to make two significant changes in the tax structure. One would require publicly traded partnerships to pay taxes the same as corporations. The second would require income that equity managers receive from managing an equity fund be taxed as ordinary income rather than as capital gains.

Neither would affect Sub S corporations, but consideration of how businesses are taxed could lead lawmakers to look at the way Sub S shareholders structure compensation between salary and distributions, with an eye to forcing more into "reasonable compensation," which is taxed at higher rates and is subject to employment taxes.

Finally, Congress and the Internal Revenue Service (IRS) are paying more attention to whether workers are classified as employees or independent contractors. A report attached to the appropriations bill for the IRS urged greater attention to worker classification because "misclassification leads to the under-reporting and underpayment of employment and payroll taxes by employers and individuals." The IRS has said worker classification would be a major focus in 2008 now that it has set up data-sharing agreements with state labor departments to refer employment tax cases for audit.