posted on Friday, May 18, 2007 2:13 PM
by
Lou Michels
Contractor Woes
Some of my clients believe that the easiest way to avoid employment litigation and related labor concerns is simply to not have employees. That's a great plan until you need to have some bodies around to handle the heavy lifting. A number of companies solve this dilemma by using, or simply designating workers as, independent contractors. As we all know, independent contractors are not employees, cannot file claims against the companies for which they work, can be let go at the end of their contract periods, or even sooner if the agreements are drafted properly, aren't subject to all that messy income tax withholding stuff, and don't cause your workers compensation and unemployment compensation insurance rates to rise.
Of course, there is this small problem that people working for you full time, under your direction, and in your facilities, might not really be "independent contractors." In fact, in many cases they are not, notwithstanding the fervent beliefs of their employers. This practice has always been a problem for the IRS and any number of state agencies, and now, apparently, it has become a sufficiently large problem that the good folks in Washington are making it a priority. On May 12, 2007, the IRS advised an ABA committee meeting that it was undertaking major audits in conjunction several state workforce agencies to increase employer compliance with tax requirements. The chief of the IRS Employment Tax Division is quoted as saying that employers could expect to see "a nice increase" in employer tax compliance efforts in fiscal year 2008, in the form of additional audits. There are substantial penalties for employers that fail these audits, although an employer can escape the penalties if it can meet the IRS requirements, a major one of which is having a reasonable basis for not treating the worker as an employee.
It's that "reasonable basis" that will prove to be the sticking point, in my experience. If you have a large number of independent contractors working for you, you might casually look through their work records, and make sure that you can jump through the IRS hoops that are coming to an audit near you.