Independent Contractor Compliance Blog - by Collabrus™

Don’t let your company make the mistake of thinking it can’t get burned in an IC misclassification conflict…that it won’t happen… that if it does you will win…or that the cost will be small.

Don’t be a victim of the infamous Layered Defense Strategy Argument.

Over the years, I’ve met a number of clients who say they aren’t worried about being audited by either the IRS or California’s EDD. Typically, the conversation involves the director of HR, the VP who oversees the procurement process, and their in-house attorney. The attorney is usually the one who makes the argument.

The typical rationale goes something like this (I’m paraphrasing here):

“We’re OK with the small risk of not reporting our temp help and our consultants. We treat them all as IC’s. It doesn’t really matter if we suspect they are misclassified, because…”

1. “Only between 2 to 5% of employers are audited in a given year, so the odds of being selected for an audit are very low and in our favor. If I could consistently get 95% to 98% odds of winning in Las Vegas, I’d quit my day job.”
2. “If we are selected for an audit we’ll put up a vigorous defense and will probably win most if not all of the issues in court.”
3. “Even if we lose some of the issues, we have the option of just paying up at that time. The cost to us then will be much lower than paying for everyone now because of the “Present Value of Money Theory” a dollar will be cheaper in two or three years than today.  In other words, a $1 invested today will be worth $1.25(?) in three years, so we’ll pay them the $1 in three years and pocket the 25 cents (or something like that).”

I always politely listen to the argument, even though I’ve heard it many times before in its various different versions. The problem is the person making this argument has some information, but doesn’t understand the truth behind the statistics (always a dangerous combination!)

The primary problem with the Layered Defensive Strategy is reality hands you a different experience.

This strategy sounds flawless until it runs into reality. It typically takes a series of discussions before the company understands the flaws of this argument and changes their policy.  

Over the next few articles I’m going to take each part of the Layered Defensive Strategy Argument and explain its numerous defects. Generally, this argument is made by someone who has statistical data supplied by the government, but who has never actually engaged in combat with a competent employment tax or labor law enforcement agency or (in the case of a civil lawsuit) an opposing attorney who knows what’s happening. The experience can be an education.

Make an informed decision

After reading this series you may still decide to gamble that your consultants, or your contingent workers, or your independent contractors are being properly handled and that you have no risk. If you read these articles and still make that conclusion at least you are making what I call an informed business decision.  However, I would respectfully ask you to consider the alternative.

What to expect

In the next series of articles I’ll cover:

• The risks of being selected for an audit are higher than 2-5%-much higher if you are not properly protecting your company.
• That the costs of being right up front are less than paying for a mistake later.
• The real odds of winning and losing in court, or at an informal hearing, and the truth behind these odds.

After that you can make your own informed business decision…