Warning—Simply Engaging an Individual Who Has Their Own Corporation Does NOT Automatically Protect Your Company From Employee Misclassification Risks.
One of the most common misunderstandings I encounter involves engaging consultants who have their own corporation-sometimes referred to as “corp-to-corp.” It is a common belief that just because the consultant has his/her own corporation the client company is automatically off the hook for employee misclassification issues.
Forming a corporation is not a misclassification “magic pill.”
Forming a corporation does not automatically qualify the work for independent contractor status. If it were really that simple, everyone could create a corporate entity and be paid as an IC. The common law factors, the IRS’ 20 Questions, the Three Elements of Law, etc. would be disregarded and the whole employee versus independent contractor issue would go away overnight.
Obviously, that’s not reality.
The type of entity the contractor has formed is only one element to consider.
The fact a worker is incorporated is just one factor in determining a worker’s status. Incorporating (as an S Corp, C Corp or LLC) only indicates the individual intended to create his/her own business.
It is possible to form a corporation and still work as an employee for another company.
It is not unusual for an individual to “step outside” his own corporation and work as a common law employee for someone else. Why? Because you must review all the common law factors to see the total picture of the working relationship. One way to look at this is to ask, “Did we engage an independent business (corporation), or did we hire an individual to perform the work?
It is important that you contract for the corporation to perform the work, not for an individual who happens to have a corporation.
This is a very important distinction.
If you are employing a corporation to do the work, you are contracting for certain specifications or outcomes, completed within a time frame and for an agreed price. You look to the corporation to perform, not an individual who is being paid through the corporation. Therefore, it most likely won’t matter:
- Who actually performs the work,
- What hours the work is performed,
- How many hours it takes to complete the project,
- If the corporation is also providing similar services for your competitors at the same time.
In contrast, when you engage an individual you may expect him to:
- Personally perform the work,
- Not employ a subordinate,
- Be paid for the time worked as opposed for a completed job.
- Reimburse him for expenses,
- Follow your daily schedule for hours,
- Change activities to meet daily needs,
- Not work for your competitors,
WARNING: If the contractor tells you he/she is an independent contractor of his/her own corporation, where he she is an officer, this is a Red Flag. Corporate officers are specifically included within the definition of employee at both state and federal levels. An individual, who is incorporated, and who isn’t reporting his/her wages properly is not in compliance and may put your company at risk.
As you can see independent contractor compliance becomes more complex when you’re evaluating a business vendor situation. It pays to have an expert on your side!