May House Members Earn Outside Income?
Q: I have a question about whether Members of the House can hold outside jobs while in office. Although I have never been politically active, I was so disappointed by the results of the last election in our district that I am considering throwing my hat in the ring next year. Before doing so, I want to make sure I understand what the financial implications of actually being elected would be. I have a large family that is dependent on the income I receive as a senior manager at a large multinational corporation. Joining the House would result in a substantial pay cut. The only way that I could pull it off, I think, is if I kept my outside job on a part-time basis. Would this be permissible? What if I deferred the income until after leaving the House?
A: Unfortunately for you, there are strict limits on the outside earned income that Members may receive while serving in the House of Representatives. The House first imposed these restrictions in 1977, at the recommendation of a House commission. The commission listed three reasons for the restrictions. First, outside earned income creates a potential conflict of interest because a Member’s outside employer might exert pressure over the Member by, for example, cutting off the Member’s salary. Second, there is a “time conflict.” Earning outside income can prevent a Member from devoting his or her full time and attention to official duties. And third, the appearance of Members “cashing in” on their positions of influence, even where there is no actual impropriety, undermines public trust in government.
In 1989, the House approved even stricter limits on outside earned income. The House task force that recommended the stricter limits cited reasons similar to those cited by the House commission in 1977.
So, what are the current restrictions? One group of restrictions limits the type of outside jobs that Members may hold. For example, a Member may not hold a job that includes providing services involving a fiduciary relationship. A Member also may not hold a paid position as a board member of an association, corporation, or similar entity. The House Ethics Committee has said these types of positions would raise inherent conflicts of interest between a Member’s official duties and obligations to the outside entity.
Perhaps more significant for you, however, is the limit on the amount of income that Members can earn from outside jobs. The law sets the annual limit on outside income at 15 percent of the rate of pay for Executive Schedule level II in a given year. In 2011, that rate is $179,700, which means that the annual limit on outside earned income for Members is $26,955. Unearned income, such as returns on investments, does not count against this limit.
In determining whether income should count against this limit, it is helpful to review a 1978 House Ethics Committee advisory opinion, which is still largely applicable today. The opinion says that two things must be true for the amount to be counted against the outside earned income limit in a given year. First, it must fall within the definition of “outside earned income.” And second, it must be attributable to that year.
House rules define outside earned income as “wages, salaries, fees, and other amounts received or to be received as compensation for personal services actually rendered.” As for the attributable year, the advisory opinion says that the correct year is not necessarily the one in which a Member receives the income. Rather, it is the one in which a Member’s right to receive it becomes certain — in other words, the year in which it is earned. This means that a Member who earns outside income while in office cannot evade the limit by deferring the income until after retiring from Congress.
Moreover, the advisory opinion warns, income may not be recharacterized in order to circumvent the income limit. If a Member receives compensation from an employer that is attributable to services that the Member provides, the Member cannot evade the limit simply by characterizing the compensation as a partnership share, dividends or interest. In short, income that is not a return on equity is usually considered earned income and is therefore subject to the limit. Income that is genuinely a return on equity, however, does not count as earned income.
All of this means that, even if elected to Congress, you could continue to receive investment income. In addition, at least in theory, you could maintain certain part-time jobs while a Member of the House. However, you could not be paid more than roughly $26,000 per year. And income from the job would count in the year you earned it even if you deferred receipt of the income to a future year.
But, even setting all of that aside, there is one more thing to consider. Time. While I have never been a Member of Congress myself, it might be wise to consult a current or former Member or staffer about the feasibility of keeping an outside job while in office. With official duties, campaign activities and all of the rest, the limit on outside earned income might not be the only barrier to employment while in office.
C. Simon Davidson is a partner with the law firm McGuireWoods. Click here to submit questions. Readers should not treat his column as legal advice. Questions do not create an attorney-client relationship.