When addressing whether your business is operating in compliance with state and federal laws governing independent contractors, the end of the year is often the best time to conduct this review and to make necessary changes. This end-of-year review provides your business an opportunity for a new start with improved practices, supported by the proper legal documents. Based on what we have observed the past year, below is my list of top five independent contractor issues to address heading into 2017.
- Tighten compliance efforts if your business is built on referring work to subcontractors. Many businesses that hire independent contractors do so via a referral arrangement with contractors. That is, as the prime/first-tier contractor, they generate leads/jobs, and refer those jobs to independent contractors who then provide the services under contract with the prime. The referring business processes payment, and takes a commission/share of the fee billed for the contractor providing the services. In 2017, these referral agencies continue to be under heavy scrutiny with agencies routinely and aggressively finding reason to conclude that these contractors should be employees (or more precisely, “covered workers”). If you’re operating under this business model then, given the climate for these businesses over the past couple years (indeed, past several years), it is important to ensure, prior to an audit, that your practices are as tight as they can be, compliance-wise.
- Take action based on lessons learned in past audits. Some of you may have been through audits and/or appeals in the past. More likely than not, it was a difficult, upsetting and frustrating experience that you’d simply like to put behind you. While it’s good to move on, resist the urge to move on by burying your head in the sand, and continuing with business as usual. It’s important to take action based on lessons learned in the audit. You may need to make foundational decisions as to whether you can continue with the same independent contractor-based business model. You may need to improve your record collecting and record-keeping. You may need to stop doing business with certain independent contractors. You may need to revise your independent contractor agreement, or get one in place for the first time. Whatever the task or tasks, place them on your to-do list and commit to going into 2017 free of issues that led to the difficulties in your audit. See our blog from earlier this year which identifies typical issues to address after an audit.
- Consider whether you should switch to the employee model. The independent contractor business model, as you may know, is heavily regulated, with businesses being susceptible to worker classification audits from multiple agencies at any time. Further, compliance with independent contractor law is not only dependent on what you do as the business owner (which is difficult enough), but on what the contractors you engage do. Business owners will often learn in an audit that they failed the independent contractor test not necessarily because of what they did, but what their contractors did or failed to do in running their business as independent contractors. Indeed, just this past month, a litigation specialist chose to fail an independent contractor because he (the litigation specialist) questioned the content in the contractor’s tax returns, and chose to hold the contractor’s tax filing against the business owner. I don’t say this to legitimize what the litigation specialist did (it’s wrong an arguably an abuse of authority), but it shows the aggressiveness of agencies to use what a contractor does to penalize a business owner. Given agency scrutiny, the general difficulty of complying with poorly written/interpreted independent contractor laws, and given the fact that your ability to comply with IC law rests not only on your shoulders, but on what your contractors choose to do, it can often be easier (and maybe even cheaper in the long run) to convert contractors to employees/covered workers, and thus avoid the numerous pitfalls associated with hiring independent contractors. If you’re contemplating this change, the best time to make the change is at the start of the new year. This ensures that, among other things, you’re not giving the same worker a 1099 and W-2 for the same year, which can be a red flag to agencies that you may have improperly classified your worker(s).
- Prepare/revise contract documents. Contracts are important to compliance. While they will not ensure that you pass the independent contractor test, a poorly drafted contract in the hands of an auditor will assure that you will fail the test. This year, I’ve had to represent several clients where an agency found that an independent contractor failed the independent contractor test based on content in the independent contractor agreement. Indeed some of my clients come to me with contracts that make me tremble a bit as I pass on to auditors requesting the documents. The reality is that most independent contractor agreements are deficient if they are not specifically drafted to comply with Washington’s independent contractor law. If you have a contract that wasn’t prepared to comply with Washington law, or worse, if you don’t have a contract, prioritize getting your contract revised or prepared. See our earlier post addressing some of the basic requirements of an independent contractor agreement.
- Stop making the 10 biggest mistakes that business with independent contractors make. There are some practices that are guaranteed to result in your business failing an audit, and with you owing substantial back taxes, penalties and interest as a result of this failure. Review my earlier post on the top 10 mistakes to avoid…plus one, and avoid them.
