Imagine you’re sitting alone in your office, looking at a stack of procurement contracts for recently engaged independent contractors (ICs) and realizing you have no idea if they would stand up to the scrutiny of a misclassification audit by a federal or state agency, or a civil lawsuit.
You’re the head of Human Resources, responsible for the company’s compliance with state and federal labor and employment laws, yet the IC qualification process has always been what the line manager wants. You suspect some consultants are being misclassified. It may be only a matter of time before something bad happens such as an unemployment insurance claim by a former consultant, an injury on the job, an audit, or a civil suit for overtime or employee benefits. What are your options?
OPTION 1: Ignore the issue. Assume the company won’t be challenged and if it is your attorney will save the day. This is the “head in the sand” rationalization, probably employed one time or another at thousands of companies.
OPTION 2: Forbid the use of all ICs in your company. Require all workers to be employees. The problem with this option is that there is a legitimate need for ICs – and you need them.
OPTION 3: Go through each contract and reevaluate the status of the contingent worker. If the contractor, or the working relationship, does not meet the standard for an IC, immediately reclassify to employee.
This option may lead to other troubles. First, enforcement agencies, such as the Internal Revenue Service, may ask why you converted “Joe” from a 1099 to a W-2, especially if it happens in mid-year. “Joe” may wish to remain an IC (for tax or other valid reasons) and strongly resist the conversion. “Joe” may also realize he should have been classified as an employee, receiving overtime and employee fringe benefits all along; leading to a civil suit or maybe even a class action suit. Implementation of this option needs to be handled carefully.
OPTION 4: Review all contracts as in Option 3, but when the consultant or the project fails the IC test, look for a legitimate way to restructure the relationship so it would pass the IC Test. For example:
• Do you need to control the hours and days the consultant works? Can you just contract for the finished deliverable(s) by a certain date, and leave it up to the consultant to set the work schedule to accomplish the desired end?
• Why are you paying the consultant for the hours worked when you both may be happier with a flat fee for a finished product? This will inspire the consultant to work more efficiently, since he is being paid the same amount if he works 100 hours or 200 hours to complete the project.
• You hired this person because he/she is an expert in the field, so don’t control the way the work is accomplished. Just step back and allow the expert to decide what tasks need to be done and their order. You should only be concerned with accomplishing the end results you need, within the time frame required.
• Some projects must be performed at a specific location, but many times they can be done offsite. If the consultant provides the supplies, equipment and workspace it will save you money. If feasible, allow the consultant to work wherever he/she wishes. Consider splitting the savings with the consultant. Again, it’s the end results you want, not control of the consultant.
• Now that the consultant no longer must account for his/her time, or do the work at your business location, he/she may seek out other clients, blossoming into a true entrepreneurial business—a solid IC.
Which option is best? Realistically, a combination of options 3 and 4 are your best practice, but you may need someone with the expertise, experience and objective viewpoint to help you through the process.
Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as legal advice. For specific information on recent developments, the effects of particular 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.