Independent Contractor Compliance Blog

Warning: Be Very Careful When Bestowing the Title of Independent Contractor on Your Contingent Workers

In my client work for Collabrus most of the misclassified workers I encounter are Independent Contractors in title only. Where most companies go wrong is they bestow the IC title on a contractor or consultant out of convenience (or fear of losing the talent!), but treat the individual in every other way as an employee. 

Unfortunately, it’s not the title or even the intent-it’s the working relationship and the consultant’s authentic business enterprise that matters.

Every worker classification determination begins with an evaluation of the work for which the contractor has been engaged to do. The “direction and control” factors of the project must be evaluated in totality. Next, you must evaluate the workers business factors. Many times, these individuals have a great set of technical skills and experience but have no idea how to properly set themselves up as an independent business person. Maybe more important, most companies do not know how to safely engage these would be entrepreneurs. That is why enforcement agencies like California’s EDD and the IRS find such a high level of misclassified workers (upwards of 70%) when they audit a company for IC compliance.

What is a common “IC” arrangement that virtually guarantees a misclassification?

Every situation is different and therefore there is no standard formula for what makes an IC or a misclassified worker, but I’ve seen common patterns over the years. Below is a common description of a misclassified worker who is considered an IC in title only. I’ve seen it thousands of times.

The Contractor:

  • Is paid for the hours worked-as opposed for a completed job.
  • Is reimbursed for expenses by the client.
  • Is provided supplies and possibly a laptop or desktop computer.
  • Is provided a workstation.
  • Has no other clients.
  • Does not market or advertise for other clients.
  • Does not have business cards, stationary, purchased professional liability insurance or other materials or actions that says to the world, “I’m self-employed.”
  • Does a variety of duties, or jobs, (within their professional discipline) depending on what is priority for the company at the time.
  • Is engaged for an extended period of time (either in a single contract, a series of consecutive short -term contracts that are regularly renewed or extended, or just a handshake…)
  • Follows a work protocol that is defined by the company.
  • Is not allowed to hire subordinate employees to perform the work, as an independent business could do, but is expected to personally perform the work.
  • The job can be terminated at any time and the only liability is for the actual time worked by the contractor. There is no liability for “breach of contract” incurred by the terminating party.

If a government enforcement agency saw anything close to this relationship they would consider the consultant to be an employee. If the company were not properly withholding and reporting it would be assessed for the misclassified wages, with penalties and interest. 

Now be careful…

Don’t latch onto one or two of the listed items above, observing they do not apply to your contractors, and think you are safe. Remember, it is the total picture that determines if someone is properly classified, not individual elements about the relationship. This list is not complete and can vary depending on the profession and project being considered. There could be a dozen other questions to consider before the correct answer can be determined.

Worker classification is not a Weekend Warrior job.

It takes an expert to review each individual situation and decide if your project and consultant will be properly classified as an IC or not.

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