A  friend and I were talking the other day about how she had just visited a client who thought he was taking on his proper worker classification duty by the horns.  The client had advised my friend that he was being vigilant when bringing aboard independent contractors. For the most part, the client was sending  questionable independent contractors directly onto someones payroll. However, there were a few instances for which the client had taken the liberty of approving a worker’s  independent contractor status. The workers whom he had been evaluating were set up as legitimate businesses, had significant investment in business, were paid on milestones, and the projects were relatively short term with little-to-no control. What the client wasn’t taking into account was that  they were the  independent contractor’s first  and only source of revenue. Therein lies the problem.

I’m not going to turn this blog into a public service announcement denouncing all independent contractors who are just starting out. Unfortunately they serve as just one example of  how classifying  workers is no easy task.  Put yourself in this position: you’ve engaged a  independent contractor for a short term project. Business continues to grow and before you know it, that initial three month project has turned into a nine month project.  The independent contractor knows they’ve got a pretty nice gig, so there’s little chance that he/she is going to decline the extension. What could have  potentially been a small percentage of the independent contractor’s income for the year has now turned into something bigger. Fast forward to the end of the project and the independent contractor finds themselves without another gig on the horizon. Days and weeks go by without work so what happens next?  They have to pay bills so what do they do? They file for unemployment.  Was the decision of the worker premeditated? Most likely not. Could it lead to an inquiry by the IRS or EDD? I wouldn’t bet against it.

This is an example of a problem that could arise when dealing with any independent contractor, let alone a first time contractor. I would even go as far as to say that the example I have provided was somewhat extreme since I’ve rarely crossed paths with an independent contractor who was truly set up as a business or was being brought on to perform a project that was free from control. You could even swap out the unemployment portion and replace it with workers compensation and it would still draw interest from the government. 

So what’s the point to all of my babble?  No matter how closely you’ve examined a worker and provided them with independent contractor status, it’s still out of your hands.  You can only do so much to prevent an independent contractor audit. Whether the worker conducts themselves like a true independent contractor is a whole different story.  I’ve used the examples of an independent contractor filing for unemployment and workers compensation.  Not only does a company have to worry about those issues but  also whether or not the independent contractor is filing his/her taxes. When does the worrying end?  With so much to think about, I can see why companies  hire part-time workers or utlilize third party agencies to payroll all non- employee workers: independent conractors or not.

When speaking to clients, rarely have I encountered a company who didn’t want to do the right thing when it came to worker classification. Unfortunately, when companies let their guard down, audits strike. I used the conversation between a friend and I because I thought it summarized how most companies handle their independent contractor classification dilema. Whether you perform independent contractor evaluations yourself or outsource it to a vendor, no company thinks that a “harmless” company decision will ever land them in an audit.