Your Independent Contractor Messes Up? Strictly Your Problem!

Consider this common scenario. You engage an independent contractor to provide services to your company. Prior to hiring the contractor, you conduct your due diligence and confirm that the contractor has a business license, and is registered to do business in the state. You confirm that the contractor’s trade license/registration is valid. If she or he has employees, you might have even confirmed that the contractor is reporting and paying the appropriate employment premiums on the workers. The contractor then starts providing services, and certain deficiencies occur that you did not know, could not know, or should not be expected to know about the contractor.  For example: the contractor allows his/her L&I account to go inactive; or the contractor allows his/her contractor’s license to lapse; or the contractor stops reporting and paying taxes on his/her employees;  or the contractor does not keep proper business records; or the contract does not file/pay self-employment taxes. Any one of these, as many of you know, will alone undercut independent contractor status.

Then as your luck would have it, an audit comes up, and during the auditor’s investigations these deficiencies are discovered. What should result? Who should bear responsibility? The fair and perhaps intuitive result is that where a diligent business owner hires a contractor, and the contractor screws up, then the contractor should be held responsible, or at least primarily responsible. After all, the contractor is an independent business person, and these types of deficiencies are his/her fault alone.

Much to clients’ shock/chagrin, agencies don’t see it that way. If contractor deficiencies are identified in an audit, the hiring business is strictly liable, and none of that liability is passed on to the contractor. Agencies will defend their position with assertions that you should checked their status and you should have kept checking their status. For deficiencies that you could not have known (like whether they filed their taxes, or kept proper books and records, or did not report and pay taxes on their employees), then you should have done your best to find out about these things. And if you didn’t, then too bad. The law is the law, and you get what you get.

As a practitioner in this area, I share my clients’ frustrations on these matters i.e. How can the law place this responsibility on me? I have my own d*mn business to run! Or…or…or how can the law, on the one hand, tell me that independent contractors need to be truly autonomous and independent, and free from direction/control, while on the other hand, I’m being told by agencies that I literally need to be “all up in their business” by closely tracking their licensing status (to prove they are at all times properly licensed and registered), by asking them for a copy of their tax filings (to prove they comply with the filing requirement); by asking them for a photo of their home office (to prove they have a tax deductible space); or by obtaining proof that they are keeping their books and business records (to prove they satisfy this requirement).

Indeed, this doesn’t make sense. Yet this is the state of our law, and the manner in which it is being applied. Until the law changes, the silly season will continue, and the claims of unfairness (often, entirely warranted) will continue.

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