The Tale of Two Consultants…
Recently, I completed an internal review for a company who wanted to prepare for an anticipated IRS employment tax audit.
Unfortunately, the company waited until they had already been contacted by the IRS before looking at their consultants’ status and proper documentation from a third-party’s objective perspective. It’s too late to lock the barn door after the animals have escaped and are running down the road.
This story is about two of the consultants I reviewed. I think it provides a great example of the complexity involved in making a proper worker classification. It also illustrates one of the principles I often talk about in my Collabrus training sessions: the ultimate determination decision is based on all of the evidence presented…any one factor will generally not make the decision between Independent Contractor or Employee status.
One looked like an IC (Joe) while the other looked like an employee (Jim). Both were doing almost identical work which typically is a red flag for auditors, who like to batch like consultants and make them all the same (their overwhelming bias of an auditor is to make everyone an employee. However, in this case I thought the company would be justified in distinguishing the status of these two individuals from each other.
Here’s a synopsis of the Tale of Two Consultants: Joe the IC and Jim the Employee.
|
Joe the IC |
Jim the Employee |
| Is a Software Testing Engineer for new programs in a software development company. | Is a Software Testing Engineer for new programs in a software development company. |
| Joe does not have a corporation. | Jim does not have a corporation. |
| Has twenty years experience working in the industry. Began as an employee of another company then left and began free lancing with several other companies over the past six years. | Started working for the company six years ago as a student intern, then continued after graduating. Has always been treated as an IC |
| Markets mostly by word of mouth, but has business cards and a website offering his services. | Does not market his services. |
| Currently has two other businesses that he provides the same or similar services for from time to time. This job accounts for about 45% of his total work. | Works solely for this company-full time. |
| Performs some work at the facility and some at home, depending on his judgment as to where it is most efficient. | Performs all work at the company’s facility. |
| Uses his own desk top computer, supplies and pays any expenses he incurs out of his own pocket. | Uses the company’s computers and supplies and is reimbursed for expenses. |
| May work any hours he chooses as long as he meets the deadlines. Often is working late at night at his own discretion. The company doesn’t know at any given time if he’s working for them, for another client, or snow skiing. | The company has flexible work hours. He can adjust his schedule to a large degree but there are times when the manager expects Jim to be there. All of his work is done when the building is open for employees. |
| Is paid by the hour. | Is paid by the hour. |
| If he needs to rework a job because of an error, he stated that he does not charge the company for the time. | If he needs to rework a job because of an error, he is paid for the time required to fix the work. |
| Submits an invoice when the job is done, with the total hours he is billing for the completed job. | Submits time sheets each week for the time he worked, day-by-day. |
| If Joe lost this account he would still have two other clients to provide income and he stated he would immediately seek out several other prospects who have contacted him in the past about doing work. | If Jim was terminated from the company he’d have no other source of income. He stated he would, “start looking for a new job and consider filing for unemployment insurance benefits to pay the rent.” |
| When asked, he stated he doesn’t expect to be paid overtime because he is self employed. | There was a string of notes and memos in his file where he had asked about being paid for overtime. The response was “You don’t get overtime because you’re an IC.” |
| The only service or work he performs is to test software. Joe attends no meetings, and does not do any other type of work for the company. | Besides testing software Jim may also help the R&D Division in designing new software from conception. He also attends administrative meetings and occasionally has represented his unit at cross functional team meetings for new projects. |
So this was two consultants doing the same basic work but one looked like a legitimate Independent Contractor, while the other looked like a misclassified worker.
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