An unfortunate reality with independent contractor law compliance is that compliance is not solely dependent on what you do. Rather, a significant part of compliance depends on what independent contractors and other related parties do. And what they do can undercut even your best compliance efforts.
One area where this is particularly relevant is with regard to the various contracts that apply, or potentially apply, to the services being provided. As most businesses know, it’s important to have a fully compliant contract with independent contractors. This is because if you’re ever audited, the independent contractor agreement will be scrutinized by the auditor to find out whether the contract exerts impermissible direction and control over contractors. And if the agreement shows that the independent contractor is being directed and controlled, auditors will rely on such contract language to find that the independent contractor is a misclassified employee.
What happens a fair amount in independent contractor audits, however, is that when an auditor sees that your business and independent contractors are providing services to a higher-tier contractor, the auditor may/will want to review the contract with the higher-tier contractor. And if the contract with the higher-tier contractor sets specific and detailed requirements for your company and independent contractors who can work on the job, or if the higher-tier contractor sets performance expectations of those independent contractors, the auditor will use those requirements to assume and conclude that your company is necessarily directing and controlling independent contractors.
As an example, if your contract with a higher-tier contractor requires your company to monitor and supervise the work of all independent contractors, to train independent contractors to provide the services, or to discipline or fire independent contractors for certain infractions, then the auditor will assume that your relationship with independent contractors features these impermissible controls and practices, even if your contract with the independent contractor does not contain any such language. We see this happen most often with government contracts that tend to specify contract expectations for government contractors and independent contractors hired by those contractors, as well as with national companies who tend to specify expectations of lower-tier contractors and all independent contractors who are brought in to perform the contract services.
So if your company is providing services using independent contractors to a higher-tier contractor, your compliance efforts will not only focus on ensuring that you have a proper contract with your independent contractors, but also in ensuring that nothing in your contracts with upper-tier contractors will lead an auditor to assume that you are directing and controlling independent contractors. In some cases with upper-tier contractors, you may be able to remove problematic language in the applicable contracts. In other cases, you might not have leverage to change the contract and will just have to hope and pray that the language doesn’t create problems for you in an audit. At a minimum, however, you should take time to know whether your contracts with higher-tier contractors present a compliance risk for your business, and to take steps to mitigate those risks.