Avoiding the Independent Contractor Misclassification Pitfall

Recently, it's been reported that federal and state officials are going to be taking a hard look at companies using Independent Contractors to ensure that employers aren't passing off employees as Independent Contractors.  Hopefully you're not in the position to question whether or not the tension to save money has led you down the path to misclassification of your employees, but it looks like now would be a good time for a refresher course on Independent Contractors.

The IRS website is a great place to start. The IRS outlines 3 major, common-law areas to focus on: 
  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker's job controlled by the payer? 
  3. Type of Relationship: Are there written contracts or employee-type benefits? Will the relationship continue and is the work performed a key aspect of the business?
In addition to these key areas, many courts have faced this question and come up with various factors to guide a factual inquiry into an Independent Contractor controversy. These include (among MANY others): 
  1. Terms of the contract.
  2. Level of skill or expertise needed to perform the work.
  3. Which party bears the risk of profit / loss.
  4. Where the work is performed.
  5. Which party supplies the tools, equipment, work environment, etc.
  6. Which party retains discretion about where, when and how to perform the work. 
  7. Whether the contractor is paid on a per project or commission basis.
  8. Whether business or travel expenses are reimbursed. 
None of these factors in and of themselves is determinative - rather the bottom line will always be the degree of control the employer has over the way the worker accomplishes relevant tasks or duties.  The greater the control over day-to-day activities, the more likely the individual will be characterized as an employee rather than as an independent contractor. 

We've developed a short list of Dos and Don'ts to give you a little help along the way (not to be confused with legal advice ;-):

DO: 
  • Develop and maintain specific goals and schedules. Document clear and specific goals and provide timeframes for projects that include interim checkups. Give necessary direction without mandating how the work must be completed.
  • Execute project plans that are results focused. 
  • Execute a well-written independent contractor agreement (read: see a lawyer!)
  • Carefully integrate your Independent Contractors into your business. Use caution when including contractors at company events.
DON'T:
  • Include the contractor in office functions (onsite & offsite).
  • Provide performance feedback and discipline.
  • Provide business cards.
  • Provide administrative support.
  • Give monetary bonuses.
This will give you a place to start and, most importantly, a reminder to re-evaluate your current Independent Contractor practices in light of heightened scrutiny. Good luck!

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