15 ways to avoid feds’ independent contractor wrath
Working with independent contractors? Here are 15 ways to ensure you don’t end up as the next write-up on the Department of Labor’s website for misclassifying them as employees.
The feds at the DOL and the IRS smell blood in the water when they see your company employ a lot of independent contractors – and every state revenue department is only too anxious to join the fray.
They suspect you and your contractors are in cahoots to evade employment taxes.
And they’re poised to prove you should have treated them as employees – and sock you with a huge retroactive tax bill.
To make your independent contractor calls stand up to federal or state audits, here are 15 practical pointers, courtesy of attorney Richard Brann of the Baker Botts law firm, who spoke at the 2013 Labor & Employment-law Advanced Practices (LEAP) symposium in Las Vegas.
1. Train your managers
This is why most companies lose their cases. Their managers get too involved and start supervising the contractors as if they were employees.
2. Establish a written contract
The mere existence of a contract doesn’t always definitively decide a case, but it sure helps.
3. What to call the contractor
Be sure to call the contract worker a contractor, consultant or agent in the contract – never an employee.
4. List services to be provided
Specificity always helps – vagueness or omissions can be held against you.
5. Limit ‘control’ provisions
Resist the urge to write in lots of controls over manner and means of performance.
6. Stress contractor’s authority
Stipulate he/she is in charge of how work is to be performed.
7. Describe method of payment
Never provide payment through the payroll process; always keep it separate through accounts payable.
8. Make contractor pay taxes
Always specify the contractor is responsible for paying his/her own taxes.
9. Describe terms of contract
List circumstances for early termination; it helps if term is on a project basis.
10. Contractor has no benefits
Don’t provide benefits reserved for staff and don’t provide equipment – they’re supposed bring their own tools.
11. No exclusivity
Make sure the contractor is allowed to work for others.
12. Licenses and insurance
Require contractors to have needed licenses for the type of work and carry their own workers’ comp insurance.
13. Keep good records
Don’t keep payroll records, but note when contractor refused an assignment or performed work for others to bolster your case.
14. Don’t discipline contractors
Any discipline your managers mete out makes them look more and more like employees.
Also, limit any training provided. They’re supposed to be highly trained individuals who know what they’re doing; only train on specific hazards they may encounter at your worksite.
15. Treat ’em as entrepreneurs
Train your managers to treat them as independent businesspeople, not as employees; you wouldn’t treat the plumber coming to fix your leaking toilet as a domestic employee, either.
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