Independent Contractor Compliance Blog - by Collabrus™

In my seminars I often tell a story about the worker who insisted on being independent when his project was created.

“He’s a ‘1099′ and has always worked as one,” the hiring manager pleaded…  

“He won’t take the job unless we bring him on as an IC.”

Fast forward two years later. The project well has dried up. The hiring manager has to let the IC go.

The Former IC Goes Down to the Local Unemployment Office…

Your former IC needs money. Either knowingly or mistakenly, he files for unemployment benefits.

He’s been working exclusively for you for the past two years and has lost his industry contacts. It’ll take him time, even in a good economy, to connect with another company. It doesn’t take long for your former IC to learn only ex-employees (not ex-independent contractors) are entitled to unemployment benefits.

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

In his interview with the UI office he mumbles, “It was the only job available…I’m not sure legally what I was…” or something to that effect. The sequence typically goes like this:

1. The sympathetic caseworker, who is bent on paying benefits, sends the file to the local state employment tax audit office to determine the consultant’s correct status.
2. In the meantime, the ex-IC is often paid his benefits on the assumption he was, in fact, misclassified.
3. The auditor receives the assignment to determine if the individual is entitled to UI benefits, which can only happen if the “UI Claimant” was misclassified.

How do you think this will end? And remember this is the tax audit office. They are paid to do tax audits! The system is stacked against you.

When the project was created you didn’t plan on this development.

Remember, this is the same consultant who insisted, even threatened you, to treat him as an IC for the project. So you may not have felt compelled to properly qualify the consultant or the project for IC status and you probably also didn’t maintain the documentation needed to prove you did it right. Now things have changed.

You protest the ruling-your day in court.

Many things have changed over the past two years, including the fact that the original hiring manager is no longer with your company.

When you go to the hearing the consultant will be sitting on the opposite side of the table testifying for the government. He’ll show check stubs, with no deductions, and say he worked fulltime for you. It is his word against yours.

You offer up the IC contract as your proof. The judge takes the contract as evidence then casually sets it aside. Everyone knows little if any weight will be given to its carefully crafted wording, because he has the direct testimony of you and the consultant available to him to illuminate what actually occurred. Direct testimony will outweigh what the contract predicted would occur.

Not to mention the uncomfortable fact that contract law does not supersede employment law.

The burden of proof.

All the IC and the government does is make a few perfunctory statements and then everyone turns to you and the judge says, something like, “So what’s your version?” Credibility being equal, 99 out of 100 times the judge will go with the consultant’s version and rule that they were misclassified.

Ouch! Your company has become the victim of the most common trap in the worker classification world because you didn’t properly protect yourself when the project was established.