Issue link: https://www.e-digitaleditions.com/i/316485
[ 26 ] HRO TODAY MAGAZINE | MAY 2014 Contingent Labor Engaging with independent contractors can present risks if not done carefully. Federal and state regulators are focused on independent contractors for a number of reasons. According to the Budget of the United States Government, Fiscal Year 2015: When employees are misclassified as independent contractors, they are deprived of the benefits and protections to which they are legally entitled, such as minimum wage, overtime, unemployment insurance, and anti-discrimination protections. Misclassification also unfairly disadvantages businesses who comply with the law and costs taxpayers money in lost funds for the United States Treasury, and in Social Security, Medicare, the Unemployment Trust Fund, and State programs. The IRS and Department of Labor are now sharing information about the misclassification of workers as independent contractors with 16 states, including California and New York, both of which signed memoranda of understanding in 2013. The challenge of engaging with independent contractors is properly classifying them. There are different federal and state tests, and some states have multiple tests. At the center of all of these tests is the question of who has the right to control how the work is performed. If the company has the right to control the manner and means of how the work is performed, the worker is an employee. And misclassifying a worker as an independent contractor instead of an employee can be costly. Best Practices for Compliance In addition to the many government guidelines, there are some common practices for businesses that engage with independent contractors to take to minimize the risk of worker misclassification. 1. Document all engagements with a written agreement. A well-crafted contract and statement of work (SOW) helps make the case that a worker is an independent contractor. The written agreement should clearly document the intent to establish an independent contractor relationship between the parties. The SOW should delineate the deliverables and should clearly state the independent contractor, not the business, will control the manner or means by which the results are achieved. 2. Review benefits plans to exclude independent contractors and pay independent contractors like a business, not like an employee. The core element of an independent contractor relationship is that the independent contractor is, in fact, independent—a separate, unconnected business. Accordingly, companies who engage with independent contractors should not provide benefits, such as health insurance, paid holidays, or vacation. The IRS training manual states: "If a worker receives employee benefits, such as paid vacation days, paid sick days, health insurance, life or disability insurance, or a pension, this constitutes some evidence of employee status. In addition, independent contractors should price their services like a business, with consideration of all costs, benefits, and profit. While my plumber may charge time and a half for fixing my stopped-up toilet on the weekends, the best practice for a business is not to pay time and a half to independent contractors for overtime hours. Even though some professions—skilled trades, attorneys, and freelancers—may charge an hourly rate, the best practice for an independent contractor is to be paid when the engagement or project is completed, or once established milestones have been met. If paid hourly, a total estimate of the hours needed and cost should be negotiated and documented in an SOW. 3. Hire independent contractors who have established themselves as a business. Avoid being an independent contractor's first client and be cautious when engaging with "part-time" independent contractors who work or have worked as a W-2 employee within the last 12 months. Independent contractors that are incorporated have taken the time and made the investment to establish themselves as a business, and are more likely to be considered independent contractors. Even though the IRS has said that the corporate form is generally recognized, they and many state agencies will look to determine whether the services are provided by the worker as an employee of the corporation or as an employee of the company who has engaged the worker. 4. Exercise extreme caution when contracting with former employees. Former employees who return to a company to perform similar work, with similar responsibilities, will mostly likely be considered as employees—save highly unusual circumstances. It might be possible, for example, for a computer programmer to retire and start an office cleaning business and contract to clean his/ her former employer office space, but these types of circumstances are rare.