Independent Contractor Compliance Blog

Nobody wants a permanent house guest-the relative who came to visit for a weekend and is still living with you a year later, and now complains if you don’t fix his favorite food for dinner. In the business world the permanent house guest is very common. It is the Independent Contractor consultant who has been working for the same company several years.

The consultant who never leaves is typically someone who has done a good job and has the potential for more good work. The original project is completed and the business arrangement is often extended informally for an indefinite period. Occasionally, an attempt is made to maintain the appearance of an IC relationship by creating a series of contracts that tag onto each other-one-after-another-year-after-year.

If you’ve been reading my other articles you know where this is going. This consultant has morphed into an employee somewhere along the route and if you are still treating him/her as an IC you have a misclassification issue.

At this point you have two choices:

1. Send the IC packing.
2. Put the consultant on your payroll as an employee.

When I give this advice to clients I usually get one, or both, of the following responses:

Excuse #1: “The consultant is too important to lose.”

Fine put him on the payroll. If you put the consultant on your company payroll you have a defensible position of doing the right thing once you realized the consultant had become an employee. You have your valuable worker and you eliminated your risk of a misclassification issue raising its ugly head sometime in the future.

Excuse #2: “But if I put him on the payroll now isn’t that a red flag saying he was misclassified all along?”

Answer: Maybe, maybe not. However, the alternative is to continue in a relationship that eventually guarantees a misclassification issue. The longer you operate this way the higher the risk of something going wrong (injury on the job, tax audit, class action suite, etc).

The truth is that it is possible for a properly classified IC to later become a properly classified employee.

If you are challenged in the future by an auditor, who believes making the consultant an employee means the consultant was always an employee, your defense will be to prove the working relationship changed at the time the classification changed. This is where a properly documented compliance file will come in handy.

The clock is ticking

The statute of limitations for misclassification errors is normally three years, so the sooner you fix the error the sooner three years will run its course and the misclassification issue will pass into oblivion…

What’s next?

Remember the IC who insisted on being independent when the project was new? It’s now two years later, the project well is dry, and that IC has now decided on changing his preference after he learned only ex-employees (not ex-IC’s) are entitled to unemployment benefits.

How can you protect yourself from this treachery?