Direction and Control: One of the Most Common Mistakes Companies Make When Engaging Independent Contractors
One of the most common mistakes I see clients make is to turn a consultant, who qualifies and truly wants to be independent contractor, into an employee by controlling every part of the project.
The consultant often starts out looking like an independent contractor.
The client wants to engage an individual who has a unique set of skills for a project. Oftentimes, the consultant:
- Has a reputation as an expert in an industry
- Possibly has set up a corporation
- Markets their services on the web
- Has business cards
- Has had other clients
- Generally conducts himself as an independent business
So what’s the problem?
The problem occurs when the consultant is forced to step outside of his/her own business and work as an employee.
How does that happen? Direction and Control: the client wants to manage every part of the project, instead of agreeing to an end product for a set price then letting the expert do what they do best – which is the reason why they were hired in the first place!
For example the client may insist on:
- Paying the consultant by the hour and requiring an accounting of the hours worked, and progress made, on a periodic basis.
- Paying for all expenses incurred and requiring an accounting for them.
- Using their forms and internal procedures.
- All work being performed during the client’s regular business hours.
- All work being done on the client’s premises.
- All work personally being performed by the consultant and not allowing the consultant to employ subordinate employees. (Some clients will allow subordinate workers if they have the right to approve them, which is still a strong control factor).
- The right to unilaterally change significant portions of the project’s deliverables in “mid-stream.” (The client does not consider it to be a problem since they are paying the consultant by the hour).
- The right to unilaterally change the day-to-day tasks the consultant will perform.
- The engagement being open-ended, or allowing the project to be extended or to evolve into other jobs over time. (The result is the consultant loses his/her independence and is slowly converted into a regular employee).
Companies may want to control their consultants for good business reasons; however, there are consequences.
Often managers feel responsible for the success of a project and cannot let go of control for a variety of reasons.
- Proprietary information or other security issues
- Fear the project will fail and not produce the desired result
- The work requires flexibility or the details change depending on the changing environment
The consultant usually agrees to the controls because even the most independent of consultants want to satisfy their client’s needs.
However, regardless of the reasons why the work is controlled, doing so may create a common law employment relationship.*
The problem comes when an outsider (such as a federal or state agency during an audit, or a judge in a civil case) takes a fresh, third party look at the working environment. From this detached viewpoint all they see are strong elements of direction and control, resulting in a common law employment relationship. At this point the company’s rationalization for control can rarely be used to mitigate the misclassification. Typically, the rationalization is politely taken note of and then discarded as having little or no weight in the determination.
There is no substitute to doing it right from the beginning. This is what we do every day! Collabrus provides clients with expert compliance evaluation and tailored management solutions, helping companies to maximize the benefits of a flexible workforce and alleviate tax and co-employment risks that can result from worker misclassification.
*Disclaimer: Given the general nature and context of this presentation this article is for informational purposes only and should not be considered to be substitute for competent expert or legal advice. For specific information on recent developments, the effects of specific factual situations, or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert like Collabrus or a competent legal advisor.