Auditors’ investigations during independent contractor audits involve two steps. The first involves reviewing the business’s records to understand, as an initial matter, how the business engages its independent contractors. The second step involves sending out questionnaires and otherwise contacting independent contractors to find out and/or corroborate the business’s independent contractor practices.
Perhaps the most uncertain and nerve-racking part of the audit for a business is the second part. What will their independent contractor say? How will the contractor respond to the Independent Contractor Questionnaire? The reason for the concern is legitimate. It is common for subcontractors who truly operate as their own businesses to inadvertently/unwittingly answer questions in a way that gives the auditor precisely the evidence he or she needs to undercut independent contractor status. For example an independent contractor’s response can suggest to an auditor that the business under audit has control over the IC’s schedule, when in fact, the business, is working around the IC’s schedule. Similarly, an IC who happens to be doing a fair amount of work for that one business may lead an auditor to incorrectly find that the IC works only for a single business, and really isn’t independently established. Or an IC who doesn’t understand a question might respond incorrectly and provide answers that undercut independent contractor status. As one client described the questionnaire: “An Ivy League scholar would be hard pressed to completely understand it and complete it properly. I feel it is almost a trap.”
So what should businesses do, or try to do, when their contractors are being contacted with IC questionnaires. As an initial matter, there is not much you can do. You can’t and absolutely shouldn’t encourage independent contractors to make misrepresentations in responding to the questions. But should you encourage them to respond? Here, the contractor has no obligation to respond. Many don’t in fact, and there is no consequence to them for failing to respond. I’ve been told by one auditor (I don’t know how correct this is) that only 10 percent of contractors on average respond to these questionnaires. Note, however, contractors’ non-response can and does result in a determination that they do not satisfy the independent contractor test. For example, here is an excerpt from actual audit findings in which an auditor failed a business on the IC test because contractors failed to respond. The results read:
“I mailed independent contractor questionnaires to the identified subcontractors to acquire the needed information for the analysis of the independent contractors. I did not receive responses from ___________________; therefore, these workers were determined to be covered workers as they were not demonstrated to meet all seven criteria laid out in RCW 51.08.181.”
This is not an isolated incident; rather it is a common finding in audits. Notwithstanding the likelihood that an auditor will conclude the above when independent contractors don’t respond to the questionnaire, I remain reluctant to encourage clients to encourage contractors to respond to questionnaires. I remain convinced that not much good can come out of a contractor providing an auditor one-word or one-sentence responses that are devoid of context of how a business truly relates to its IC. If auditors choose to fail the business due to lack of information, my preference is to address these issues via the reconsideration process when full context of the business relationship, not just short answers, can be provided.
Note, this is my personal approach (for the time being), and is not in any way a recommendation on how these matters should be addressed as a general matter. For advice on how to address your legal matters, consult with an experienced attorney.
