The Outside Earned Income Limitation Applicable to Members and Senior Staff
Below is a condensed version of this topic; for complete guidance please refer to the House Ethics Manual, Chapter 5 on outside employment and income.
- Amount of the Annual Limitation
The Outside Earned Income Limitation Applicable to Members and Senior Staff
Amount of the Annual Limitation
In addition to the limitations on outside employment set forth above, House Members, as well as officers and employees paid at the “senior staff” rate for more than 90 days in a calendar year, are subject to an annual limitation on the amount of their outside earned income.82 The amount of the limit for any year is 15% of the rate of pay for Level II of the Executive Schedule in effect on January 1 of the year. The rate of pay for Executive Level II in 2008 is $172,200. Accordingly, the outside earned income limit for calendar year 2008 is $25,830. (For 2009 the outside earned income limit is $26,550.) The limitations for other years are available from the Standards Committee.
Income Subject to the Annual Limitation, and Income Excluded From the Limitation. The limitation applies only to earned income, that is, compensation for services, and not to investment income. The term “outside earned income” is defined in the rules as –
wages, salaries, fees, and other amounts received or to be received as compensation for personal services actually rendered.
House Rule 25, cl. 4(d)(1). In the debate preceding adoption of the rule, one Member distinguished earned income as that which one earns “by the sweat of [one’s] brow.”83 The matter of earned versus unearned income is discussed further below.
The limitation applies by its terms to outside earned income that is “attributable” to a calendar year. In attributing outside earned income, the Standards Committee uses the approach reflected in regulations issued by the U.S. Office of Government Ethics for the executive branch, i.e., “[r]egardless of when it is paid, outside earned income is attributable to the calendar year in which the services for which it is paid were provided.” 5 C.F.R. § 2636.304(d) (2006).
In addition, in 1978 the House Select Committee on Ethics issued a major advisory opinion on the outside earned income limitation, and a copy of that opinion as updated to reflect changes to applicable laws and rules is reprinted in the appendices to this chapter.84 That opinion states, “[o]utside earned income is attributed to the year in which the Member’s, officer’s or employee’s right to receive it becomes certain (i.e., under the accrual method) rather than to the year of receipt.”85 Accordingly, for purposes of the limitation, income that a Member or senior employee earns in a particular year may not be deferred to a future year in which he or she has less outside earned income, or until after the individual retires from Congress.
The rule explicitly excludes the following types of income from the definition of “outside earned income,” and hence from the outside earned income limitation:
- The individual’s congressional salary;
- Compensation for services “actually rendered” before the individual became a Member or senior employee, or before the effective date of the rule;
- Amounts paid by, or on behalf of, a Member or senior employee to a tax-qualified pension, profit-sharing, or stock bonus plan, and received by the individual from that plan;
- Amounts received from a family-controlled trade or business in which both personal services and capital are income-producing factors, provided that the personal services actually rendered by the Member or senior employee do not generate a significant amount of income; and
- Copyright royalties received from established publishers under usual and customary contractual terms (House Rule 25, cl. 4(d)(1)).
With regard to the exception for income from a family-owned farm or business, the Commission on Administrative Review in the 95th Congress offered the following explanation:
[T]he Commission believes that Members should be able to render personal services to manage or protect their equity in a family trade or business without having to allocate these personal services toward the 15-percent limitation. However, if the personal services, in and of themselves, generate any significant amount of income, the resulting income should be subject to the . . . limitation. Conversely, the Commission believes that in implementing this limitation care should be taken to prevent Members from circumventing it by incorporating themselves into a “family business” and then withdrawing what in reality are fees for personal services in the form of dividends or profits.86
The debate preceding the adoption of this rule emphasized that personal services that generate income do not come within the exemption and would thus be subject to the earned income limitation:
The crucial element in determining whether the limitation applies . . . is this: If the personal services produce the income, then it does not matter whether it is a family business . . . or anything else. If those personal services actually produce the income, then it comes under the limitation.87 Additionally, Advisory Opinion No. 13 of the House Select Committee on Ethics (reprinted in updated form in the appendices to this Manual) emphasizes the following with respect to the “family business” exemption:
[T]he definition of earned income in Rule 25, which excludes amounts received by a Member from a family controlled business “so long as the personal services actually rendered by the individual . . . do not generate a significant amount of income,” was simply intended to assure Members, officers, and employees that they could continue to make decisions and take actions necessary to manage or protect their equity in a family trade or business, and would not be forced to divest themselves of their family business interests. As with any business, a Member, officer, or employee would not be required to allocate a share of the profits of the business as outside earned income when the facts and circumstances show that the income is in reality a return on investment.
Earned vs. Unearned Income. The annual limitation applies to compensation for personal services (termed “earned income”), but not to moneys received from ownership or other investments of equity (so-called “unearned income”).88 In this regard, Advisory Opinion No. 13 emphasizes that the “real facts” of a particular case would control as to whether moneys received would be deemed earned income:
[T]he label or characterization placed on a transaction, arrangement or payment by the parties may be disregarded for purposes of the Rule. Thus, if amounts received or to be received by a Member, officer, or employee are in fact attributable to any significant extent to services rendered by the Member, officer, or employee the characterization of such amounts as partnership distributive share, dividends, rent, interest, payment for a capital asset, or the like, will not serve to prevent the application of Rule 25 to such amounts. . . .
For purposes of this Opinion, there are two types of income – earned and unearned. If the compensation received is essentially a return on equity, then it would generally not be considered to be earned income. If the income is not a return on equity, then such income would generally be considered to be earned income and subject to the limitation.
Personal Service Businesses. In businesses for which capital is not a material income-producing factor, the Advisory Opinion states that the entire share of profits is generally considered earned income, unless it can be shown that some income actually derives from a return on investment. Even when the Member performs no personal services, it is presumed, lacking a strong showing to the contrary, that the Member’s share of profits from a service business is for attracting or retaining clients and thus is considered earned income. As to law practices specifically, the Advisory Opinion states that “buy-out” arrangements are permitted and will not be counted toward the earned income limit when fair and reasonable in relation to comparable practices. To ensure that these criteria are satisfied, it is advisable for a Member to consult with the Standards Committee before accepting a “buy-out.”
Business Corporations. In business corporations, only payment for services the Member performs is considered earned income. An increase in the value of the firm’s stock or distribution of profits is not considered earned income. This practice, however, cannot be used as a subterfuge, such as a Member incorporating for the purpose of making speeches or writing articles, then having all fees directed to the corporation and later distributed to the Member as “profits.”
Close Corporations, Partnerships, and Unincorporated Businesses. When a Member has an ownership interest and also performs some services, as in a close corporation, partnership, or unincorporated business, some of the profits might result from the personal services of the Member and therefore would be considered earned income. Advisory Opinion No. 13 (included in the appendices) states, “the determining factor is whether the Member’s personal services generate significant income for the business.” The Member may protect his or her interest and investments in the business through general oversight and management of investments without generating earned income. However, fees, compensation, or salaries from such a business are earned income. When the Member’s principal function is to refer or to help retain clients, then “the Member would be deemed to be rendering income-producing services, even though the actual time involved might be minimal.”
82U.S.C. app. 4 § 501(a)(1); House Rule 25, clause 1(a)(1). The House rule limiting outside earned income was adopted originally on Mar. 2, 1977 (H. Res. 287, 95th Cong., 1st Sess.) and amended on Dec. 15, 1981 (H. Res. 305, 97th Cong., 1st Sess.), and again, as a result of the Ethics Reform Act of 1989, Pub. L. 101-194, § 804, 103 Stat. 1716, 1776 (1989).
83123 Cong. Rec. 5902 (Mar. 2, 1977) (statement of Rep. Frenzel).
84 House Select Comm. on Ethics, Advisory Opinion No. 13 (Oct. 1978), reprinted in H. Rep. 95-1837, and reprinted in updated form in the appendices to this Manual.
86 Financial Ethics, H. Doc. 95-73, supra note 57, at 11.
87 123 Cong. Rec. 5897 (Mar. 2, 1977) (statement of Rep. Hamilton); see also id. at 5902 (statement of Rep. Obey).
88 See 123 Cong. Rec. 5901-02 (Mar. 2, 1977) (statement of Rep. Frenzel).