The PRO Act threatens the independence of freelancers and contractors

For small businesses that use 1099 contractors, that practice is eventually going to end. In fact, the end has already started.

A 1099 is the annual tax form used to report to the IRS payments made to independent contractors that perform services for businesses. People that receive these payments are generally freelancers, solopreneurs and self-employed workers — small business owners themselves. Countless small businesses — including mine — use 1099 workers as part of the services we provide to our clients. In my case, I frequently outsource parts of our client technology projects — development, training, customization — to independent workers that specialize in these areas. 

For a small business owner like myself, this arrangement is very beneficial.  I save on employer taxes and benefits because I don’t classify these contractors as employees. My 1099 workers only provide a few hours of services a week and are fully in control of their hours and the way they perform their jobs. I hire them for specific tasks and they’re responsible for getting them done on their own. I have written agreements with them. I also pay them well — anywhere from $50 to $150 per hour for the work they perform. Like any business owner, they’re responsible for their own health insurance and retirement.

The 1099 contractors who do this work for my company have been working with me, in most cases, for many years. They seem happy (although I admit they do have to endure me). They are independent. They have other clients. They are free to choose when they work and can turn down any projects offered. They bill me for their time and I pay them as soon as I receive their invoices. No one has ever asked to be an employee of my company. They would likely make less money if that were the case. They enjoy being their own bosses and running their own businesses. They file Schedule C’s on their personal tax returns or have their own tax returns for their incorporated businesses.

This is how my business has been run for more than 20 years. But now, that arrangement is being threatened by a new bill that passed the House of Representatives this week.

Called the PRO Act, the bill redefines employees as “An individual performing any service … and not an independent contractor, unless —

1. the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact;
2. the service is performed outside the usual course of the business of the employer; and
3. the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.”

In my case I’m OK with one and two. My 1099 workers are completely free to work as they please and I don’t supervise what they do. They’re professionals, so why would I? My 1099 workers also have their own businesses, and their own clients. 

But it’s three that’s a problem for my business — and many other small business owners. The services these people are providing are not outside the usual course of my business. These people are not cleaning my office or delivering packages. They are directly providing services for my clients and I am billing my clients for the services they are performing. 

Because of this, I would have to classify these 1099 workers as employees. That’s assuming the bill passes the Senate which — at least for now — is unlikely. But it could happen. If not now, then sometime in the future. A similar bill passed in California and other states like New Jersey, New York, Massachusetts, Illinois and Washington are also considering their own laws. The bill is supported by President Biden and is one of big labor’s biggest initiatives.

I’ve been watching the conversation about this on my Twitter feed over the past few days. Many in favor of the bill are concerned about how businesses — even small businesses — take advantage of their 1099 workers and don’t pay a fair wage. Others in opposition of the bill decry the loss of entrepreneurial freedom for the millions of “gig” workers across the country.  

As usual, there are good arguments on both sides of the issue. I believe that my 1099 workers are paid well and are happy with the arrangement they have with my company. Otherwise, they would seek work elsewhere. But maybe I’m wrong. Maybe these workers would be better treated if they were my employees and could take advantage of my company’s health and retirement plans.

But, regardless of how this drama plays out in the Senate, it’s clear that a change is in the air. It’s the beginning of the end of the traditional 1099 relationship. The costs of using these people are going to increase. Sooner or later my business model will be forced to change as a result of this legislation, or something close to it. What will I do when this happens? I’ll revisit my overhead structure and adjust my client billings. In the end, I’ll figure it out.

But as for my 1099 workers who enjoy being in charge of their own small businesses, entrepreneurial and their own boss? That’s all going to end for most of them. I guess they’ll just have to get used to me — or some other employer — now being their boss going forward.

Gene Marks is founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.