Your Independent Contractors – Are you using independent contractors who aren’t all that independent?

Are you using independent contractors who aren’t all that independent? Are you tired of reading articles from lawyers and accountants warning you about the perils of using the not-so-independent contractor?

Microsoft Corp. learned the lesson the hard way. Between 1987 and 1990 Microsoft hired freelance workers, put them under contract, had them submit invoices for the work they did and paid them through accounts payable (not payroll) checks. “Not good enough,” said the Internal Revenue Service (“IRS”), and Microsoft was forced to pay payroll taxes. The Department of Labor (“DOL”) came along with the IRS, and the “contractors” were awarded retroactive overtime pay. These “independent contractors” then filed a lawsuit and, despite having agreed to a contract providing no fringe benefits, a Federal appeals court determined that they were entitled to participate in Microsoft’s stock purchase and deferred savings plans as “employees.”

Could this happen to you? Do you exercise, or retain the right to exercise, control and direction over the services performed by your independent contractors? If you do, this could be fatal to any argument that these workers are not employees. The IRS is serious about this issue. The possible revenue enhancement (theirs, not yours) is enormous. The IRS has put together a Manual for its agents to train them on how to handle this issue.

We can help you position yourself to come out of an IRS audit with no damage or, perhaps, minimal damage. You may fit a “safe harbor” test even if you might otherwise be in trouble. Of course, we also know the 20 factor test the IRS uses and properly advised up-front you may, indeed, have an independent contractor who will not be viewed as an employee by the IRS. It might even help if we did the audit before the IRS got there because we know what they are looking for and we could make a few changes to solve a potential problem.

Even if we don’t get there first, you should be aware that the IRS is offering quick, low cost settlements if you meet certain criteria and it may be helpful for you to know what those are. If you think we can help, give us a call.

Finally, if you think you can avoid employment discrimination claims by putting someone under a contract that says the worker is an independent contractor, think again. The same analysis which the IRS, DOL and ERISA use to resolve the employee/independent contractor issue is the same test used by courts to determine whether the worker is an employee and thus entitled to the protection of civil rights laws. If you have significant control over the details and means of the worker’s job performance, you have an employee.