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 our series on how to be prepared in the various aspects of Independent Contractor risks, we came accross this article from a the CPA firm of
Habif, Arogeti & Wynne, LLP in Atlanta.
We trust you'll find these Audit proceedures helpful.
IRS Employment Tax Audit InitiativeBy Frank Ciaburri
Last fall, the IRS announced a major audit program targeting underpayment of employment taxes by companies. Over the next three years, they expect to conduct approximately 6,000 audits of randomly selected employers for employment tax compliance. A broad cross-section of businesses are targeted, including tax exempt employers. To ramp up for this initiative, the IRS has trained 200 to 300 experienced agents to handle the workload. Starting this month, the IRS will be sending letters to employers selected for audit. Once selected, a company should expect the audits to be very detailed and time consuming. In addition, the audit may expand into other aspects of company operations.
The audits are part of the National Research Program, which is structured to gather statistical information about compliant and noncompliant employers. This information will be used to help determine whether enforcement or legislative changes will be necessary to address evasion of employment tax schemes. The goal is to test how much of an estimated $15 billion gap in employment taxes actually exists and how to close it. Of course, collecting revenue from non-compliant employers is an important aspect.
Audit Focus
The expectation is that the audits will be thorough and will address areas perceived to be issue prone:
- Worker Classification
- Fringe Benefits
- Owner/Officer/Executive compensation
- Reimbursed Expenses
- Non-Filers
The audits will begin with the examination of federal employment tax returns and in larger companies will typically impact functions other than payroll, including benefits, legal and tax.
Of the issues being examined, employer misclassification of workers as independent contractors has the greatest collection potential for the IRS, as the employer could be liable for employment taxes even if the misclassified workers have paid their employment taxes. For fringe benefits, the audit focus will be on the proper treatment of fringe benefits and per diems as tax free rather than as compensation. For compensation of owners and other highly paid employees such as officers and executives, the IR will consider whether compensation is reasonable in amount and will include deferred compensation, stock options, and other perks. Expense reimbursements will be reviewed for compliance with the accountable plan rules to exclude them from compensation.
How to Prepare for a Potential Audit
To make sure your company is ready for an audit, consider taking the following actions:
- Ensure that past employment tax returns and supporting records are available and have been reviewed for compliance with applicable rules. This includes reviewing past employment tax notices and ensuring that they have been resolved.
- Perform a self-audit of your company's employment tax practices and procedures, focusing on the areas the IRS would audit if your company were selected. If issues are discovered in this process, consult with tax counsel to determine the appropriate corrective action.
If Your Company is Selected for Audit
If your company is selected for audit, designate the person that will manage the audit. This may be an internal resource and/or outside tax counsel. In larger companies, an audit may be handled by the payroll and/or tax departments, as they have experience in dealing with IRS audits.
Smaller enterprises, whether they prepare their own payroll or use a payroll services provider, generally should consider having their tax counsel manage the audit, as tax counsel regularly handles IRS audits.
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.
Great update from HRMorning.com
The Department of Labor is gearing up to enforce labor laws. Proof: The agency just asked for an additional $67 million in funding.
The funds were part of the budget it released earlier this month for fiscal year 2011.
Some noteworthy items in the DOL’s proposal:
- Part of the funds allocated for worker protection programs would allow the agency to hire 350 employees – 177 of which would be investigators and other enforcement staff.
- The Wage and Hour Division would receive $244 million in funding (up $20 million) and hire 90 new investigators and enforcement staff.
- The DOL also indicated it’ll crack down on employers that define workers as independent contractors.
- As part of a joint venture with the Department of the Treasury, the DOL budget includes $25 million to target employee misclassification and hire 100 additional enforcement personnel.
- The DOL has plans for a $50 million initiative to promote paid-leave experiments on the state level.
The budget request has ruffled the feathers of one congressman, John Kline (R-MN). He said the DOL’s plans would create an emphasis on punishment rather than compliance.
In addition, he claims the proposed budget will spark efforts designed to “demonize employers.”
Please share with us your concerns or stories... Also, take our Free Risk/Reward assessment. Don't be one of the Government statistics.
Employers' use of independent contractors instead of traditional employees has been on a steady incline over the past 20 years. Some employers feel that they can save money by using independent contractors instead of full-time employees. The contractors themselves may value the autonomy and economic perks that the status provides. Also, the specific skills and knowledge that independent contractors can bring to a short-term project can be critical and, therefore, worth a premium but not sustainable in the long term. But the use of independent contractors is not as perfect as these mutually beneficial points may seem.
A report prepared by the U.S. Government Accountability Office (GAO) in the Fall of 2009 concluded that employee misclassification is a “significant problem” with “adverse consequences” because it reduces tax revenues flowing to the government. In fact, the misclassification of employees as contractors is estimated to cost the Treasury Department over $7 billion in lost payroll tax revenue over the next ten years.
So the theory goes, since independent contractors are, by definition, self-employed, they are not considered “employees” and thus not covered by various tax withholding laws. Independent contractors also are not subject to most employment laws, so in addition to avoiding taxes, some employers may reclassify employees as independent contractors in order to avoid payment of overtime and benefits, and workers’ compensation liability.
And, thus, the crackdown on the misclassification of employees as independent contractors began. he U.S. Department of Labor (DOL) has made the proper classification of employees and independent contractors one of its "top priorities." The agency’s 2011 budget includes an additional $25 million for what it calls the “Misclassification Initiative” designed to target misclassification of independent contractors. Approximately 100 additional DOL enforcement personnel will be added to investigate employers.
The Internal Revenue Service (IRS) is in the middle of a similar misclassification crackdown. Beginning in February 2010, the IRS will commence intensive audits of randomly selected employers. One of the focal points of the audits is whether the employers are improperly misclassifying workers as independent contractors to save on taxes and employee benefits.
There’s also new federal legislation on the horizon. Congress is expected to take up legislation that will penalize employers for employee misclassification. One proposed piece of legislation, known as the Independent Contractor Proper Classification Act, was sponsored by President Obama when he was a member of the U.S. Senate.
States are getting into the enforcement act as well. New York and Massachusetts have created task forces to locate employees who are misclassified. Other states such as Maryland and Colorado have enacted new laws that impose harsh penalties on employers who misclassify employees as independent contractors.
Here in Delaware, the General Assembly passed its own law last year imposing stiff penalties on construction industry employers who improperly classify employees as independent contractors to save on business costs and avoid paying appropriate taxes. In addition to penalties of $1,000-$5,000 per misclassified employee, employers who fail to produce requested records can be issued a stop-work order by the Delaware Department of Labor and fined up to $500 per day for each day during which the requested records are not produced.
Compliance, though, presents its own difficulties. The tests used to determine whether someone is an independent contractor or an employee are fact intensive and differ among government agencies. In addition, each state may have its own unique test to determine a worker’s proper status.
Still, the penalties for non-compliance make this a treacherous area for the unwary employer. In addition to federal and state governments seeking unpaid payroll taxes and associated penalties, employment lawsuits in this area are becoming increasingly common. Claims from misclassified workers range from those seeking unpaid wages and overtime, to multi-million dollar class actions lawsuits. Misclassified employees have also successfully recovered retirement benefits, medical coverage for injuries they sustained on the company’s property, and rights to employee stock options and bonuses.
Given the increased attention to this area, the time to act is now. An internal review and audit of worker classifications should be a crucial component for any company that currently employs independent contractors
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We trust you will weigh in on this important piece. Also, come and take our Risk/Reward Assessement.
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.