Business considerations for managing your contingent workforce:
Nearly every business has a contingent workforce. In fact, 2% of the nation’s workforce is considered temporary employees. However, there can be severe financial repercussions to mishandling this part of your employee base.
Uber made headlines over a class action lawsuit in 2015. Unfortunately, other headlines follow. Now in their wake Amazon, Google and Lyft are seeing similar issues.
Don’t think this problem is isolated to large companies. They make the news and have deeper pockets from which to fight. Worker misclassification is prevalent in Silicon Valley and the Bay Area. What most of these companies who “risk” being audited fail to realize is that one audit often turns into many and the fines are hefty.
Many Silicon Valley start-ups and small businesses without strong HR policies believe that they can hire workers on a 1099 basis to fulfill temporary projects by simply using an IC agreement. A signed IC agreement may not be enough to protect you from legal trouble. www.independentcontractorcompliance.com discusses in a blog a huge case in which FedEx Ground lost because of its misplaced reliance on an IC agreement and its policies and procedures that were good, but not good enough. “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”
If you find yourself considering this work arrangement research if the role really meets the criteria using these tips to navigate proper classification.
Get the Green Light – To avoid misclassification, refer to the IRS’ list of 20 questions – See the full list here (http://galachoruses.org/sites/default/files/IRS-20-questions-W2-vs-1099.pdf).
- Instruction – Independent contractors are independent, thus giving them exemption from any requirement to follow a certain set of work protocols for project completion. An employee on the other hand, will have a set of instructions concerning the location, time and method in which work is to be completed.
- Training – Independent contractors have a specific skill set and do not receive on-the-job education or training; employees receive training indicative of the company policies and procedures.
- Hours of Labor – Independent contractors determine their own schedule, while employees must follow the control of management by working predetermined hours on a regular basis.
- Seeking Additional Gainful Work – Unlike employees working full time, independent contractors do not fall under restrictions that would disallow them from seeking additional gainful work.
- Doing Work on Employer’s Premises – Contractors control where they conduct their actual work.
- Compensation – Regular or temporary employees are paid a regular wage by the hour, week or month according to a predetermined arrangement with their employer. 1099 independent contractors are typically paid per project, by commission in a lump sum or on a periodical basis. A contract or scope of work generally stipulates terms of payment and ideally, payment in case of termination of services.
- Equipment – Unlike regular employees, 1099 independent contractors furnish their own materials for work and all necessary tools for project completion.
- Multiple Clientele – Independent contractors are in no way prohibited from working for multiple contracting groups or companies at one time. Employees may be restricted from working for other businesses per company policy.
The risks of working with 1099 independent contractors:
- Most likely audits will be executed by the IRS, but other government agencies may get involved as well. This could include Workers Compensation or the U.S. Department of Labor among others.
- Class action law suits. A 1099 independent contractor may claim they were an actual employee and take legal action. This could result in a winning law suit regarding insurance, disability, benefits of varying kinds and workers compensation to name a few.
- This is a serious concern of the IRS and could result in thousands of dollars’ worth of legal troubles, benefits and back wages. Penalties of misclassification can be hefty and government agencies will seek all uncollected fees actively.
- Misclassification tax responsibility. The IRS may find you responsible for misclassifying an employee, and if that happens, you may be required to pay all withheld taxes (even if the contractor paid them individually) with interest.