by Maria Ricci, GM, PSC The Contractor Engagement Checklist we produced last week prepares the employer of record for the proper on-boarding of a contractor to avoid any 
problems later. The continuity and ease of this administration ultimately gives the client, where the contractor is working, a positive experience.
However, you and your contractor have an important role to play to ensure that the relationship is a successful one. Below you will find some keys to professional conduct that will make the relationship go smoothly and insure a positive outcome for all involved.
CONTRACTOR RESPONSIBILITIES:
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".
Welcome Procurement Professionals!
As we continue to survey our audiences, we see more and more procurement professionals being tasked to look into the opportunities that exist within a company's use of Independent Contractors.
Over the upcoming weeks, the PSC Blog Train will be providing valuable best practices for managers of indirect services procurement to learn more about how to gain greater Visibility, Savings and Sustainability into the management of independent contractors and non-agency staffing services.
Besides these areas, Payment Services Corp will address numerous issues that will help procurement internally address the need for changes to this category and how to strategically insure adoption. Some of those areas will include:
- Co-employment Risk
- Mitigating Tax and Insurance Exposure
- Learn of Potential Legal Risks
- Electronic Processing and Tracking
- Gaining Long Term Program Compliance
- ...and more
We hope you'll hope on the PSC Blog Train and gain valuable insight on how to mitigate risk and insure savings. If you are interested in an immediate on line assessment of your current program, take our free Risk Assessment.