Independent Contractor Compliance Blog

Remember the Independent Contractor who insisted on being classified as independent when the project was first created? Almost every company has one. It’s now two years later and the project well has dried up. Your former IC needs money, so he goes down to the unemployment office and learns only ex-employees (not ex-independent contractors) are entitled to unemployment benefits. The sympathetic caseworker sends the file to the local state employment tax audit office to determine what the consultant’s correct status should have been two years ago. In the meantime, the ex-IC is often paid his unemployment benefits anyway on the assumption that he was misclassified.

There are two important things to remember about tax auditors:

1. Tax auditors are paid to perform tax audits.
2. When a tax auditor conducts an employment tax audit, he/she looks at all potential misclassified workers in your company-not just at the consultant who filed a claim.

So now an auditor knocks on your door and challenges you to prove that every single consultant you engaged in your company over the past three years was properly classified as an IC.

Before you say, “No problem for our company”, consider that:

• The managers who oversaw some of the projects may have moved on…
• Most of the consultants are gone, or no longer loyal to you (except the unwanted “House Guests” described in Part 8)…
• You might be relying on faded memory…
• Your brilliantly drafted contract likely doesn’t offer the protection you thought it did, if you can even find it…
• The auditor is looking at what actually happened in the past…
• Statistically, over 70% of employment tax audits result in a finding of misclassified workers…

The burden of proof is on the business

That’s right. The government puts the responsibility to prove the consultant was properly classified completely on the business, not the IC. The odds of walking away from an employment tax audit untouched are not in your favor.

Consultants have been known to change their recollection of the relationship when they need the money!

This is the same consultant who insisted, perhaps even threatened to walk away if you didn’t treat him as an IC for the project. Things frequently change a couple years later. For example, if the contractor:

• Needs unemployment benefits…
• Was injured on the job…
• Feels he wasn’t treated justly…
• Realizes they would rather be an employee with fringe benefits…

Regardless of the circumstances, the IC has now changed his tune. He’s telling the tax auditor, or the judge, that he just took the job as an IC because that’s the only way he could get work.  Somebody has told him about adhesion contracts. He had no choice but to accept the IC classification if he wanted work.

Your company has just become the victim of the most common trap in the worker classification world.

What’s next?

How can you protect your company from this treachery?