Independent Contractor Compliance Blog - by Collabrus™

What do you do when you realize the legitimate IC you brought in a year and a half ago has evolved into a misclassified employee and your company is now at risk for: 

• Civil lawsuits for overtime, health benefits, retirement, stock options and other fringe benefits.
• A costly tax audit by the IRS or EDD.
• Liabilities and fines under workman’s comp laws if there is a work-related injury.

You probably have four choices (and an unrevealed fifth) to correct the problem:

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. Terminate the IC before something goes wrong.
4. Put the consultant on your payroll as an employee.
5. I still haven’t heard any correct guesses for this one from last week’s post…

Let’s look at each.

Change nothing

After all, the arrangement is working as is - why fix what ain’t broke? 

It is ‘broke’, you just haven’t recognize it yet. You are driving a car with no brakes, but since nothing has happened - you haven’t needed to stop - you are blissfully driving along. There hasn’t been a stop sign, or red light, and no one has pulled in front of you, so you think all is well.

You need to fix the brakes before the accident. If you wait until a car pulls in front of you, or you come to a red light, it will be too late. You will crash.

It’s the same with a misclassified employee. Everything seems great until something unplanned occurs (an employment tax audit, workman’s comp claim, or civil lawsuit). Eventually, if you continue to drive the vehicle, you will need those brakes. 

Adjust the relationship back to an IC if possible.

This option is usually very difficult to accomplish. The consultant likes the current arrangement and so does the project manager. Also, it is diffuclt to go back once you begin to direct and control the consultant’s work. In addition, if an auditor looks at the relationship and believes the common law factors are being manipulated to give the impression of an IC, the road will get very bumpy for you. Going back would be like trying to glue the dust back on to the brake pads after it has worn off. This may be theoretically possible but not easy to do in the real world. Also in the real world the relationship will most likely drift back into the employee range. Retread brake pads don’t last as long as new ones do.

Terminate the IC before something goes wrong

The problem with sending the IC packing is that doing so may trigger the very type of problem you were trying to avoid - a wrongful termination civil suit. Besides, the consultant is a valuable member of your team or you would not be extending the contract month-after-month. Therefore this option is probably not your best choice. It’s like parking the car and not driving it ever again just because it needs brakes.

Put the consultant on your payroll as an employee

If you put the consultant on the payroll you have a defensible position of doing the right thing once you realized the consultant had become an employee. You keep your valuable worker and eliminated your risk of a misclassification issue raising its ugly head in the future. You have fixed the brakes before it’s too late. Now you can drive safely.

You may ask: “If we put the consultant on the payroll now isn’t that a red flag that s/he was always an employee?”

Maybe - maybe not. However, the alternative 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).

Note: When you do this you may be able to document there was a time when the consultant was a bona fide independent contractor but the relationship changed and you properly put the consultant on the payroll at that time. An expert will know how to establish and document this for you.

The revealed fifth choice

You go to a good auto mechanic to get your car worked on why not a compliance expert to help with your misclassification issues?

A top level expert, like Collabrus, will help you select the best option and guide you through its implementation. This expert will also insure there is proper documentation to protect you should it ever be challenged. There are many reasons to turn to Collabrus so keep driving and know an expert is there when you need to check your breaks.