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May 13, 2010
Reasonable Basis Defense Regarding Independent Contractors

Maria Anastas discussed the ‘reasonable basis defense’ in a BLR webinar entitled ‘Employee versus Independent Contractor: Where’s the Line? How to Make the Proper Call and Stay Out of Court’. She explains that the reasonable basis defense provides a ‘safe harbor’ to employers based on existing government or court classifications of workers in a particular business or industry. Employers may use this defense if they can establish the following:

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  • Judicial precedent treating workers in similar circumstances as nonemployees
  • A Revenue Ruling issued by the Internal Revenue Service (IRS) indicating that similar workers are exempt
  • An IRS Technical Advice Memorandum stating that the worker in question is not an employee
  • A long-standing and recognized practice in the industry of treating similar workers as nonemployees
  • A prior IRS audit finding that individuals in substantially similar positions were not employees

Section 530 of the Revenue Act of 1978, which provides a “reasonable basis” safe harbor for employers who use independent contractors and limits additional IRS rules on the subject, may be repealed if a bill currently proceeding in the U.S. House of Representatives passes. The bill, H.R. 5804, the Taxpayer Responsibility, Accountability, and Consistency Act, would replace Section 530 with an I.R.C. Code section that would dramatically increase penalties.

Maria Anastas is a partner in the San Francisco office of law firm Ogletree, Deakins, Nash, Smoak & Stewart, PC ( ). She represents employers in labor and employment law matters exclusively, with a primary emphasis on traditional labor matters. She also devotes a substantial portion of her practice to providing employers with practical advice on a wide variety of employment law issues. She can be reached at

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