Best Practices for Independent Contractor (IC) Engagement
By: Don Catino, Principal
The best programs for engaging ICs are all about balance. They must minimize the risk of misclassification – but at the same time, they can’t alienate the best IC talent or the hiring managers that need their help.
A good place to start is making sure that all ICs truly understand what it means to be ‘independent’ and that they are not entering IC status uninformed or reluctantly. It is also important for employers to know and respect that workers forced into IC status – have many avenues to complain to the government and potentially trigger an audit or lawsuit or both.
Workers who find themselves as ‘Reluctant ICs’ can file a SS-8 form with the IRS to get their guidance – and put the employer on their radar. The IRS estimates that 85% of these forms come from workers that want to contest their treatment as ICs. If a worker suspects their employer is avoiding taxes by paying them as ICs they can file a Form 3949-A to anonymously report them.
Additionally, each state has its own policing entities. Massachusetts has ‘The Council on the Underground Economy (CUE)’ – which specifically pursues businesses that don’t comply with employment law – complete with an 800 number to anonymously make complaints / provide tips about rogue employers.
Therefore, it is our recommendation that all clients looking to engage prospective ICs should have them read, acknowledge and sign off on the fact that they are waiving their employee rights and that they understand their role and responsibility as an IC – prior to doing any work.
Having this document in hand in addition to following these guidelines can help ensure you don’t have a ‘Reluctant ICs’ working for you and better help you survive an IRS, DOL or other employment audit unscathed.
We recommend requiring these items from your ICs:
- ICs need to set up their own company
- Articles of Incorporation (not Organization), Business Name (not personal name), EIN (Employer Identification Number – not Social Security Number), Business Bank Account (separate from personal account – with voided check showing company name and account number where payment is made).
- Ideally ICs would also demonstrate commercial office space and additional employees
- ICs need to payroll themselves as employees of their own company
- ICs need to be able to demonstrate tax compliance and should be prepared to share their tax filings or supply Form 4669
- ICs need health and wellness benefits
- Ensuring ICs have their own insurance and benefits makes it less likely they’ll try to make a claim on yours in the event something goes wrong.
- Inoculate your company from potential IC claims to health and retirement benefits granted to your regular W2 employees under ERISA (Employee Retirement Income Security Act). Have professionally crafted language in your plans to specifically exclude ICs from them (even if they get reclassified in an audit).
- ICs need General Liability insurance
- Failing to have GL insurance certifications on file for each IC opens employers up to unknown and potentially catastrophic liability
- ICs need Workers Compensation insurance
- Regardless of what state laws dictate – it is our recommendation that any entity engaging with ICs ensures they carry their own Workers Comp insurance to gain ‘Exclusive Remedy’
- In virtually all cases the ICs’ workers comp insurance will protects the client from exposure to a lawsuit brought by an injured IC.
- Unlike Exclusive Remedy which pays the injured worker a defined and fixed sum from the insurance carrier – a lawsuit can bring much larger ‘unknown damages’ awarded by a jury – but paid by the client.
- Workers Compensation is very inexpensive compared to the protection and peace of mind it provides – and any legitimate IC should want to purchase this insurance for their own protection as well.
- ICs need to market their services to additional clients
- ICs should have a website and list their business offerings on other gig economy / freelance sites (freelance.com, upwork.com, github.com etc.)
- ICs should be able to point to other past and current customers
We recommend avoiding these things with your ICs:
- Telling the IC when, where or how to do their job – instead focus on results and deliverables – this is the #1 most important distinction between ICs and regular W2s
- You’re still the client – meaning you should get what you want: a problem solved. You may even have some ideas on how that problem should be solved, but in the end the IC should be in charge as the independent expert they are.
- Guaranteeing pay – instead ICs have risk and can profit or suffer a loss depending on their performance (no payment for hours / work not approved by the client)
- Paying ICs on a regular schedule – make them submit invoices and pay them the same way you pay your other vendors.
- Paying by the hour – instead ICs should be invoicing on milestones
- Dictating their compensation – instead ICs should tell you what their cost is in a competitive bid process
- Reimbursing IC expenses – instead have them provide an inclusive bill rate
- Asking an IC to fill out an employment application – instead they should have a subcontractor agreement focused on specific deliverables with an end date vs. an ongoing broad job description
- Refrain from having ICs do the exact same work as W2s – ICs have to do ‘different work’ than W2 contractors (work surge or special project qualifies even if the work is the same)
- Firing an IC – ICs manage themselves – don’t fire them because they are not your employee – instead terminate their SOW / PO
- Mandated training – avoid giving ICs employee type training and handbooks – they are supposed to be experts already – hence their IC status
- Allowing a W2 worker to come back as an IC or vice versa
- Issuing the same person a W2 and 1099 in the same or subsequent years
- Prohibiting ICs from using subcontractors or working with other clients – restricting ICs here only makes them seem like employees
ICs represent an important and growing part of the talent pool – in particular, in its highest echelons and most niche skill sets. Being able to engage these resources in a way that works for the IC while avoiding penalties that can come from a misclassification is crucial for business success. Understanding that ICs have different risks and requirements than those associated with Co-Employment with your W2 contractors is equally critical to avoid potential penalties.
Companies of any size and reputation are subject to audits, which can be triggered by a number of activities including an IC who files for unemployment or worker’s compensation … or even a whistleblower who reports possible misclassification or files an SS-8 form to request IRS classification determination.
A proper IC program can help avoid misclassification threats that are often triggered by ‘reluctant ICs’. We hope these suggestions can help your company to tap into this amazing talent pool while avoiding unnecessary risk!
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