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Don’t treat your contractors like employees
By Lauren | September 25, 2009
Continuing my Friday series on keeping your business out of court, let’s return to the classification of employees. Last week, I warned about the dangers of misclassifying employees who should be entitled to overtime pay. Today, we’ll address companies who blur the line between their employees and their independent contractors, putting themselves at significant risk of suit.
It often starts out innocently enough. A company retains an independent contractor to provide specialized services. Over time, the contractor and the company develop a strong relationship and the contractor starts being perceived as “one of the family.” The contractor spends more and more time on the company premises. She gets an office, a dedicated telephone line, invitations to social events, and a listing in the company’s employee directory. Eventually, the contractor effectively becomes an employee of the company. However, the company continues to treat her as an independent contractor for financial purposes. It doesn’t provide her with the benefits it gives its regular employees (health insurance, pension plans, etc.) and doesn’t pay employment taxes on her fees.
At this point, the company may be in serious trouble.
If the company’s relationship with the contractor goes sour, she may bring a lawsuit, arguing that she was acting as an employee and was denied benefits. If a court finds, after examing all the facts, that the relationship was essentially an employment relationship and not an arm’s length contractual one, the employer may have to fork over big bucks (in addition to the high cost of defending the suit). The government has a significant interest here, too. The Kiplinger Letter reported recently that the IRS is expected to launch thousands of random employment tax audits, starting in November and continuing over the next three years. If the government concludes that a company has dodged employment taxes by classifying workers as contractors when they were actually employees, that company can expect to pay major penalties.
The way to avoid this particular pitfall is to keep a bright line between your employees and your independent contractors. It’s fine to be on good terms with your contractors, but don’t let relationships evolve into de facto employment. Hire or contract - don’t try to do both.
Topics: Business Ethics, business communications, corporate responsibility, ethics |