Independent Contractor Compliance Blog - by Collabrus™

One of the most common pitfalls businesses make when they engage independent contractors is The Permanent House Guest, or the IC who never leaves. It’s not uncommon to see an IC, originally engaged for three months to be helping to plan the year-end office party two years later.

It’s the old story of 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 the IC consultant who has been working exclusively with your company for a year or more. To take the metaphor further, the “business house guest,” instead of complaining about dinner, may eventually look around the workplace and think “I’m just like the employees here except I don’t receive the fringe benefits…”

Long term IC’s expose your company to risks.

This long term IC will eventually expose your company to increased risks for possible civil lawsuits including; overtime, health benefits, retirement, stock options and other fringe benefits. Also long term IC’s are waving a huge red battle flag in the faces of tax enforcement agencies, such as the IRS or EDD. Finally, you’re gambling there won’t be a work-related injury.

How does it happen?

Often, this is a story of a true independent contractor, engaged to complete a specific limited term project that works out so well he/she is used again for a follow up project. A new contract is drawn up and a new set of deliverables are spelled out. The consultant is being paid for the time worked and the project is a full time effort, which precludes any other clients. That contract expires and the process is repeated a few months later. Maybe this time the contract has some open ended expectations, or maybe the consultant is managing or administering the project he/she was originally responsible to design and implement. To someone from the outside the consultant begins to resemble any other employee in the company. He has a workspace, a computer, a phone, a company ID, works regular hours, attends employee meetings, and soon becomes operationally indistinguishable from a regular employee. In the meantime, this consultant has not performed any work for any other company and is not seeking other clients. Basically, he/she shows up, follows a set routine and goes home day-after-day; week-after-week; month-after-month…

Even though the consultant is still being paid and handled for accounting and benefit purposes as an IC, your consultant has gradually evolved into a misclassified employee-putting your company at risk.

What’s the solution?

Depending on the exact circumstances, I can offer five choices:

1. Change nothing.  Continue using the consultant as a misclassified IC and hope you aren’t caught up in an employment tax audit, workman’s comp claim, or civil lawsuit.
2. Adjust the relationship back to an IC if possible.
3. Send the IC packing.
4. Put the consultant on your payroll as an employee.
5. I’m saving the fifth option for next week. Any guesses?

There are generally three typical responses to these first four options:

For 1 & 2 above:  “The arrangement is working as is-we’ll take the chance and leave it as is.”
For 3 above:  “The consultant is too important to lose.”
For 4 above:  “If we put him on the payroll now isn’t that a red flag for the IRS and EDD?”

I’ll talk about these options next time.