by Maria Ricci
There are quite a few steps that should be considered before providing a 
contractor with an engagement contract and sealing the deal. Whether you are hiring for a couple of hours or several months the impact of a poorly executed engagement can result in misfortune later!
Get Ready, Set and Go!:
- A Statement of Work (SOW) is provided to the engagement officer (hiring manager) with the following details: name of the contractor, contact information, rate, start date and end date of the engagement.
- Have both an Independent Contractor Agreement and an Employment Agreement available and insure that both have been carefully established and approved by your legal counsel based on the classification the worker is electing to engage with.
- Communicate with the Contractor. Review the statement of work and establish whether they will be processed as an Independent Contractor or Employee. The on boarding package you will provide to the contractor and the checklist you need to use is different depending on the workers classification status.
Below are examples of items you need to include on a checklist. Items may vary based on federal, state/provincial tax and labor laws.
| EMPLOYEE (T4/W2) CHECKLIST | INDEPENDENT CONTRACTOR CHECKLIST
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| |
- Employment Agreement w/ resume
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- Federal, State/Provincial Tax Forms
| - Articles of Incorporation
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- Corporate Employee Handbook
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- Copy of Policies and Procedures
| - Copy of Policies and Procedures
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- Payroll Forms/Direct Deposit
| |
- Background Check Authorization
| - Proof of Background Check Completion
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- Expense Reimbursement Forms
| - Expense Reimbursement Forms
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- Time Sheet/Entry Instructions
| |
ETC...
| ETC...
|
As you can see there are quite a few things to consider. Building the process, actualizing the agreements, validation, distribution and collection of the forms, ongoing compliance, etc… You also need to factor in the cost and time you will need to invest before you even get to the, "Get Ready, Set and Go stage!"
Once you see what's behind compliance, outsourcing may be a great option. :)
Let PSC know how we can help...
In the PSC Train Blog this week we have been discussing "prevention" steps for Independent Contractor risks. Today we are going to address a seemingly innocent operational convenience that can have deep legal and cost consequences.
We encounter many times when organizations find out, after the fact, that a independent contractor is working on premise without the proper corporate documentation. When this occurs the company works to get the proper paperwork in place after the assignment has begun. Sometimes due to the urgency of the work, the contractor is engaged immediately with the promise of paperwork to follow. So, what's the big deal?
Well it turns out that when a contractor is asked to complete and execute paperwork outlining terms and conditions of their assignment after they have been engaged, that documentation can be deemed null and void by the courts because it was completed after the engagement took place. The contractor could contend that it was signed under duress. Meaning that if they didn't sign it they might have lost that the assignment and the revenue. They could contend that some of the terms and conditions, like non-compete, non-disclosure, were unknown to them and therefore unenforcible by law. There are a slew of exposures that can be caused by operationally putting the "kart before the horse". So, what's the solution?
First, don't let this happen. Create a policy whereby a contractor cannot be engaged or arrive to perform any work until all paperwork is completed and verfied. This isn't always optimal but it might be better than the legal and cost alternative. Educate offenders of this policy.
Secondly, you can provide the contractor "consideration" for signing the document. While the laws vary by state, provice and federal jurisdictions. Most legal advice will direct that by paying the contractor a nominal sum of money in consideration for signing the contract post assignment, the effect is that the contractor was compensated for the contractual considerations and therefore, the contract is valid and thus the terms enforcible.
As with many things in life, something so simple or small can be very dangerous.
Check in with us next week while we explore more news and prevention strategies in the world of employer of record services.
NOTE: We strongly recommend that you consult your legal counsel on the proper activities before your institute any of the recommendations in this post. These are merely operational guidance.
We have a guest writer jumping on the PSC Blog Train today. Maria Ricci is the General Manager for PSC in Canada and has many years of industry experience. Recently she has come upon a reoccuring risk to companies who use contract labor and wanted to share her experiences with us. I'm sure you will find it insightful.
PROTECTING YOUR INTELLECTUAL PROPERTY
by Maria Ricci, GM, PSC
Many corporations today find themselves associated with staffing firms whose multifaceted service offerings include Traditional Staffing, Specialty Staffing, Outsourcing Services, MSP Services, VMS Technology, RPO services, PEO services and what not. A one stop shop philosophy remains the most commonly used value proposition and marketing tool for the majority. Very interesting at the outset and may, at times, seem beneficial. Upon further inspection, risks may present themselves for the corporation regarding the protection of their intellectual property.
A contractor’s professional experience is gained by delivering their services to various and continuous mandates that allow them to put their specialty to work. Contractors will look to staffing companies for assistance in the quest to find these opportunities. Staffing companies make this their priority. A contractor is most valuable to them for placement when they have developed this professional experience particularly within the same industry. This is where the risk presents itself. The Staffing Company will continue to place the contractor where they will continue to deliver the utmost professional and beneficial services which will most often be within a competitive environment to the Corporation. Often then, the contractor finds himself being able to put his experience to practice and sharing his knowledge within this new opportunity and environment. The Corporation’s request for these experienced contractors is high and industry specialized contractors are few. This will prompt the corporation to bring back those same contractors through the years. A corporation’s Protected Intellectual Property has transformed to Shared Intellectual Property.
PSC’s service offering is singularly that of a Professional Employer Organization. This is our key differentiator in comparison to a staffing company. We do not participate in any recruiting activities. We provide 3rd party independent contractor engagement and billing services to those corporations who are manning their Independent Contractor population on their own, bringing known independent contractors back from previous projects or pay rolling independent contractors through staffing companies for long periods of time. PSC’s agreements, contrary to those of staffing companies, allow for and provide all the needed protection for the corporation through our Non- Solicit and Non-Competition, Confidentiality and Non-Disclosure, Intellectual Property clauses which or only amongst some of the clauses within our agreement.
Our value proposition goes beyond the one stop shop.
Please share your thoughts…….
Over the past month we have been instilling a lot of F.U.D. into our readership. F.U.D. stands for Fear, Uncertainty and Doubt. Now, what good service provider would do such a thing without coming back with some solid solutions?
Therefore, over the next few weeks we want to focus our attention on solutions to the problems that are mounting in the general area of Misclassified Contract Workers. If you are new to the PSC Blog Train, read some of our past posts on the market forces that are bringing these risks to light.
How can I protect my organization against Tax Audits and misclassification risks?
First off, let us say that nothing can make your organization "bullet-proof". We live in a litigious society that allows for both individuals and governments to pursue action freely. However, it is how your organization puts processes and procedures into place that will determine the level exposure you have. NOTE: We strongly recommend that you consult your legal counsel on the proper activities before your institute any of the recommendations in this post. These are merely operational guidance.
1) Be Prepared Like with most legal actions, the court will look more favorably on an organization that has taken prudent actions to demonstrate the diligence to comply with the laws. Ignorance is never an accepted excuse by the court. Make sure your organization has taken documented action to be compliant about the engagement of contractors.
2) Have Documented PoliciesDemonstrating to the authorities that your firm was diligent in attempting to follow the rules and comply will often minimize the exposure in terms of penalties. The organization that get hit the hardest are those where the intent is pecieved as maliciously trying to avoid the tax or claiming ignorance. As a bona fide employer you are obligated to know the laws and comply.
Document policy that is periodically distributed to your organization that stipulates the company's position on the use of contractors and the steps that should be followed to engage such resources.
3) Outsource/Centralize ManagementMany organizations have begun to outsource the management of independent contractors to 3rd parties. This is a great way to demonstrate an effort to provide compliance and organization to the process. It also defers the risk to the outsourcer to manage and shield yourself from the risk. One of our clients once described outsourcing independent contractors "as a cheap form of insurance". Any associated processing fees that an outsourcer would charge, are cheaper than your corporate insurance, headcount to manage and the potential risks of penalties. We'll expand on this point more in next week's post.Another alternative is to centralize the management of this within Human Resources or Procurement. Much like the outsourcer, the centralized organization is responsible for compliance and consistency in the processing of contractors, however, it does not provide that layer of 3rd party protection.
4) Inspect
Insure that you periodically inspect the processes and procedures with internal or external counsel. Case, Federal, State/Provincial laws change often and can effect what and how your policies and procedures need to change. Rigor of the program processes must be checked from time to time to insure there has been no degradation in the exception processing.There is a lot more to cover and we will continue to bring you more enlightenment over the next few weeks. In the interim, if you want to take our Free Risk Assessement, please click and answer the 5 easy to answer questions and we'll be back to you with an overview report.
Have a safe weekend.
As we close our our week on Independent Corporations/Contractors and insurance, we wanted to conclude with 3 main conclusions from this weeks articles. Also, we would like to thank those who have responded and participated. We had some great dialogs. Please keep contributing.
1 - All Corporations who employ the use of Independent Contractors should institute a rigorous insurance policy. Each Contractor should required to carry a minimum policy as dictated by the corporations Risk Management or Human Resources Departments.
2 - Individuals who have made the decision to work as and Independent Contractor should insure that they have researched the advantages and risks associated with this employment status. After which, they should take the necessary steps that protect them from tax and business exposure that could exist be being declared and Independent Corporation/Contractor.
3 - Independent Contractor's who are registered and are currently employed under this status, should be willing to make the necessary investments that insure they are legitimate from a business, tax and protection aspect.
Next week we are going to begin to explore the world of C0-employment Risks and the use of "Perma-Temps". We hope you will join us next week and jump on to the PSC Blog Train and share your insights.
Remember, if you want to have a Free Assessment to see whether your firm is at Risk or has Reward opportunities for savings in yoru current program, please click the link and answer the brief, 5 Question Survey.
Enjoy the rest of your weekend and we'll see you next week.
Does your company require background checks on employees prior to being allowed to begin employment?
Background checks such as criminal (CPIC), drug, credit and others are typical employment practices for full time employment in both the US and Canada. However, when your company brings in an Independent Contractor are the same checks being conducted?
Now, we are not referring to contractors brought into the organization via staffing agencies. Those staffing agencies should be conducting the necessary background checks that are consistent with your firms hiring practices and consistent with your contractual stipulations with the agency. However, we see many firms that employ Independent Contractors and allow them to arrive on their work premises with no background validation. At Risk?
Real Case Story
This is a real story. Now, after reading this you may say, "No Way!" But after over 20 years in the industry, there is not much I haven't seen or heard.
Pre-9/11, at a large financial services firm in New York City, two gentlemen arrived at Human Resources. When the Human Resources Manager was called the gentlemen identified themselves as FBI agents and inquired if a certain individual who's name they provided was working on-site? Upon checking the full time database and not finding the name, they checked the contractor database and the name showed up. Declining to provide reason, the two agent asked to be taken to the individuals works station where, upon arrival and opening the individuals briefcase, the agents discovered a loaded semi-automatic machine gun. The briefcase was closed and the agents with their suspect in cuffs, left the premises.
The end to this story was that Human Resources never heard another word on the individual nor from the FBI. The individual was working on the company's client database and was brought in by a hiring manager on a referral from a friend outside the company. Needless to say, policy change regarding Independent Contractors was changed that day.
While this case story may seem extreme and probably won't happen to you, be smart and insure you know who you are bringing into your organization and make sure the meet they meet the standards and requirements that you, your employee and company would expect.
In continuing this weeks theme on insurances we are trying to help our readers understand what drives most individuals to classify their employment status as
"Independent Contractors". Now, we could write volumes on this topic but we will try and keep it succinct and to a couple of key points.
The most consistent reasons why we see the the classification of Independent Contractors selected are:
- The corporation is a legitimate entity that meets the IRS 20 Point Test and has a registered Federal Tax ID.
- The individual doesn't know how to classify themselves or register appropriately and erroneously select this status.
- The individual is aware that they do not meet the requirements but want to get the full tax benefits of being an Independent Contractor without having to meet the requirements and essentially decide to play tax Russian Roulette.
Time and time again we run into highly compensated Independent Contractors ($100/hr and up) who are misclassified as an Independent Corporation. During an audit or compliance check they resist having to comply with the government statutes, deny culpability and create great resistance all in the effort to maximize their income despite the law. Additionally, we have contractors who are on an annualized compensation that is above $200K who claim they cannot afford basic business insurance premiums.
Bottom line here. We see a lot of Independent Contractors who are eating a lot of cake...
This is a controversial issue and we welcome your insights and thoughts on this topic.
In the continuation of our series this week about Independent Contractors and Business Insurances, we wanted to approach some of the issues you need to consider why Independent Contractors need to be insured.
Very often Human Resources and Procurement Departments are called upon to "waive" the insurance requirements of an Independent Contractor usually due to costs of the policy to the individual. This is, of course, if any actual corporate insurance requirements exists. The challenge here comes when the hiring manager wants the contractor, wants to save money and/or needs the "expertise". They don't care or understand the risks...but they should.
"Everybody's Happy Until Someone Get's Hurt."
Oh, the wisdom of our parents. This saying hold true here when the insurance requirements are not upheld and the uninsured Independent Contractor make a mistake or does something wrong. Maliciously or Not. Below are a couple of true cases that will illustrate our point...of course the names have been changed.
CASE 1: XYZ Corporation uses 4 Light Industrial Workers referred through a Warehouse Manager of XYS Corp to assist with the transportation of old laptops and desktops to the warehouse for inventory and asset documentation. Human Resources is not notified and procurement has no insurance requirements in place. The 4 workers loaded a truck with over $4MM of computer hardware equipment that, unfortunately, never made it to the warehouse. Matter of fact, nobody knows where the hardware went. And, yes the workers had no insurances. They were prosecuted by the law but the assets were never recovered and the $4MM was a total write off.
CASE2: ABC Inc. brings on a specialized Independent Contractor Database Analyst to help with a data cleansing project. Two weeks into the project the database is blank, the data is lost. To make matters worse the back-up was malfunctioning without any knowledge of Corporate IT. The cost to recover the data and recreate the database was over $2MM. And, yes, the contractor didn't have insurances. Since they were independent there was no recovery of the loss to ABC Inc of the money required to recreate the data loss.
I trust that these two cases represent what can happen if your organization is not insured properly when employing Independent Contractors. If you have a similar case that you could share with our readers, please comment with us below. If you want to know if your firm is at risk, please take our Free Risk Reward assessment by clicking on the link.
Tomorrow we'll cover how Human Resources Management needs to partner with Indirect Procurement Services Departments to make sure Independent Contractors aren't trying to "get their cake and eat it too".
The area of Professional Insurances seems to be a never ending challenge for organizations that employ independent contractors. The most common questions you should be asking yourself and your company's risk management
department or legal is:
- Do we need to require that our independents need insurances?
- What insurances and at what levels are required?
- What is our risk if they don't have insurances?
Our experiences have taught us that most organizations have varying risk thresholds and will approach this challenge with different requirements. However, here are several items you need to consult with your Risk and HR departments prior to making a decision surrounding you Independent Contractor Insurances Policies.
Q: Does requiring the Independent Contractors help us against Co-employment Risk?
A: As with most of the co-employment legislation and case law, this area is gray. However, in the IRS 20 Point Test for Independent Contractors, items;
Point 15: Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
Point 16: Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
A strong argument can be made that if your Independent Contractors are required to provide such insurances as a part of their contract, they then will meet Points 15 and 16 of the IRS IC Test. While Canada does not have such a test, similar requirements have been applied in the case laws.
We will continue to explore insurances this entire week so come back to learn more about the risks that you might have with Independent Contractors, and to take advantage of our Free Risk Reward Assessement, Click Here and answer the questions.