When keeping employee records, you don’t want to clutter up your files with old papers or terabytes of meaningless data. However, there are some documents (paper and digital) you should store in a safe place for protection should you ever face an independent contractor (IC) misclassification challenge.
There are numerous incidents that can trigger an IC misclassification challenge at a later date. They include:
• Being audited by a tax agency
• A former consultant files for unemployment insurance
• A current worker files a worker’s compensation claim for an injury
• A current or former consultant files a lawsuit for overtime, fringe benefits, etc.
In each of these situations, and many others, you will need evidence to prove you did everything right and the consultant was truly in business for himself.
Here are a few of the business documents you should safeguard if you utilize ICs:
• The written contract
• The statement of work, or description of the deliverables
• Timetable for deliverables
• Milestones completed
• Circumstances of how the job ended (documentation showing successful completion of work, reasons for early termination, etc).
• Payment schedule (amounts paid, when paid, and what payments were based upon).
• Performance reviews: Were you satisfied with the work and would you re-engage this contractor?
Once this documentation is collected, it needs to be stored in a safe location for at least five years after the project ends and after the consultant is gone. We recommend this because challenges can come several years after an engagement concludes. By then, the individuals who had personal knowledge of the project may be no longer available, or their memories may fade. Also, the contractor may not be available. This makes reconstructing data at a later date costly, and it can also create questions about accuracy.
The best practice is to properly manage your consultant population and protect your business by gathering the necessary documentation when it is fresh and readily available.
Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or 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.