Independent Contractor Compliance Blog

For each project extension do you draft up a new contract and go blissfully forward thinking you are protected?

I’ve seen the “Status Drift” phenomenon pop up again and again over the years: The three month project that became another three month project that became a six month project that became a semi-permanent engagement ultimately turns into a misclassified employee.

A couple of factors affect a long term relationship to create Status Drift. One of them is financial dependence.

When the IC stops serving other clients and knows he/she can depend on one client to stay busy and keep the money coming in, the contractor becomes financially dependent on a single client. A contractor who is financially dependent on a single client has taken a huge step to becoming a misclassified worker. 

Another factor is incrementally increasing direction and control.

Companies rarely appreciate how perpetuating a temporary relationship, regardless how it’s contractually created, can affect a relationship. A natural, and unavoidable, progression of human nature is that over time control is tightened in subtle increments. The parties grow closer and closer, resembling more and more a employer-employee relationship. Soon the client thinks nothing of dictating the details of how the day-to-day work is performed, or even what work will be done on any given day.

Welcome to Direction and Control…

Everything may go well until an objective third-party observer examines the relationship. 

This can happen when:

• A state or federal tax auditor knocks on your door,
• There is an injury on the job,
• These workers look around and decide they are doing employee work without the benefits and file a co-employment suit

Suddenly you are faced with an unplanned, retroactive cost; a dangerous event in today’s highly competitive marketplace.

Why? Because the examiners only see what the relationship looks like today. They don’t consider how it incrementally changed.

To protect themselves many companies institute some version of an arbitrary 12 month rule. Once someone has worked for the company as either a temporary employee or as an IC for 12 months they are terminated. The company believes this strategy will enable them to avoid several issues from misclassification to civil suites for fringe benefits. This is a simplistic, unnecessary and often ineffective approach. You can lose valuable worker assets with this policy and still not be protected.

It is just as possible to have a misclassified employee who has been on the job for one day!

What’s the correct solution?

The answer is to insure you have properly classified and engaged your independent contractors and are properly handling your temporary employees. If you utilize temporary employees consider the use of a third party vender like Collabrus who will provide a full range of benefits and HR support in their role as the employer of record. Collabrus also helps you to properly classify your contractors and monitor your IC’s to insure your company doesn’t become a victim of Status Drift.