Over the years, given our firm’s focus on working with businesses that hire independent contractors, we’ve gotten a unique view into what works, and what doesn’t work, when working with independent contractors.
Below is a list of our top 5 tips for ensuring that you’re well-positioned to successfully work with independent contractors:
Tip No. 1 – Abide by the Simplest Independent Contractor Test of All
Anybody can know when the independent contractor classification is appropriate. It’s really not rocket science. That is, you’ll know that the independent contractor classification is appropriate (or at least not clearly incorrect) if you can honestly say to yourself that the service provider you’re hiring has an actual/bona fide/legitimate business, and is providing services to you and to their other clients as their own independent business. Where this is not the case, it is best to presume that your independent contractor classification is incorrect, and that you’ll therefore need to rely on other strategies for getting into compliance.
In short, listen to your “spidey sense” when choosing the independent contractor classification. If it doesn’t feel exactly right, it’s assuredly not the right choice (except perhaps if accompanied by appropriate precautionary steps).
Tip No. 2 – Default to Employment Model if You’re Uncertain
Don’t assume that the independent contractor choice is the right choice for your business.
Businesses will often choose the independent contractor classification because, among other reasons, the worker is providing services on a part-time and/or sporadic basis; or the position is historically perceived to be an independent contractor position; or there is an assumption that it is more cost effective to hire somebody as an independent contractor, rather than as an employee, etc.
Many times these kinds of assumptions don’t hold true in reality. For example (using the assumptions above), unless your part-time person is operating as an actual business, it is almost always the case that employment classification is the proper classification. Likewise, many industries get the independent contractor classification wrong, and so following others in your industry can be like jumping into that fire –that our moms warned us about — because our friends jumped into the fire. Indeed, regulators will often focus in on certain industries because they know misclassification to be rampant. Regarding costs, it can in fact be counter-productive to try to save on employment taxes by classifying individuals as independent contractors. The reason is that the independent contractor classification restricts your ability to train, instruct, or otherwise interact with independent contractors, which can directly impact revenue to your business. Then there’s the issue of potentially failing an audit which results in you having to pay back taxes along with penalties and interest, which could far exceed your operational costs if you had chosen the correct classification in the first place.
Bottomline, be sure to give due consideration to hiring workers as employees before settling on the independent contractor choice.
Tip No. 3 – Having No Contract is Better Than Having a Bad Contract
When a client comes to me for representation in an independent contractor audit or appeal, it’s often the case that the best news for me is that they didn’t have a contract with their independent contractors. The reason is that most contracts are drafted without a proper understanding of our state’s independent contractor law, and as a result, they will invariably include performance expectations and other provisions that auditors will literally copy and paste into their audit findings as proof that an independent contractor is subject to direction/control, and therefore fails the independent contractor test.
Bottomline, if you’re going to have a contract, make sure that it’s drafted by an attorney who is familiar with our state’s independent contractor law. Otherwise, it’s better, at least for independent contractor law purposes, to have no contract at all.
Tip No. 4 – Pay “Covered Worker” Taxes on Contractors Where Appropriate
There are generally two types of contractors. The first type are bona fide independent contractors who unquestionably operate independent businesses, and who could never be accused of being employees. The second type are contractors who “dabble” as independent contractors/consultants. They may or may not have business licenses; they typically only have one client at a time; they’ll get a business license because they’re asked to do so to get the contract in question; and sometimes, not even their spouses will know that those contractors have their own business (I exaggerate, a little). During an audit, the first group of contractors will present zero issues. The second group, however, will invariably flunk parts of the independent contractor test, and subject businesses to back taxes, penalties, and interest.
What we recommend in appropriate cases is that if you’re working with the second group of contractors, that you consider paying premiums to those agencies that don’t offer an exemption for your contractors, and that are most likely to consider the contractors non-exempt independent contractors or “covered workers.” By proactively paying certain premiums on certain contractors, your business eliminates legal and financial risks arising from periodic audits of your business.
Tip No. 5 – Check up on Contractor Registrations and Licensing
In virtually every independent contractor audit or appeal we’ve handled, it’s almost always the case that a client will get fined because their contractors allowed their business licenses and registrations to lapse, thus resulting in failure of the independent contractor test being applied. It’s therefore a good practice to have a system of periodically checking up on independent contractors’ licensing and registration to make sure you’re not paying, for example, $9000 in back taxes and penalties on a single contractor because the contractor failed to keep up with her licensing obligations.
Bonus Tips
Other tips we consider important but that didn’t make the top 5 cut include the following:
- Keep time records on independent contractors, and casual workers. If you go through an audit and fail, oftentimes having time records can result in substantially lower fines than the fines estimated by agencies.
- Don’t assume that having a business license is all somebody needs to be an exempt independent contractor. Having a business license is necessary, but hardly sufficient.
- Don’t choose the independent contractor classification to satisfy a contractor. They have zero consequences for misclassification, and all the risk is yours.
- Take extra care with choosing the independent contractor classification if you’re working with many contractors. The financial consequences of misclassification increase dramatically the more independent contractors you work with. When working with dozens or hundreds or thousands of independent contractors, compliance should be a first and foremost operational consideration, and not an afterthought.
