Misclassifying employees as independent contractors is a very tempting proposition during difficult economic times.
After all, companies can get out of payroll taxes, unemployment, workers’ compensation, paid sick time, vacation and health insurance. Companies can save substantial amounts of money that can instead be allocated towards other important business needs.
This is probably why the IRS is cracking down on this practice.
Misclassification is not a good idea at all, as it can land companies in a world of trouble with the IRS. And this is true whether the misclassification was intentional or unintentional.
Recruiting or staffing agencies can ensure their clients stay on the right side of the law in this matter by employing some of the tests the IRS uses to evaluate if workers are functioning as employees. These tests are designed in part to examine behavioral and functional control, which means they assess whether a company has the right to direct and control an employee’s work and the financial and business aspects of his or her job. In addition, they will also take a look at the type of relationship a company has with workers, and whether that tends to describe an employee/employer relationship.
Some examples of what is evaluated include:
· How the business pays the worker
· The extent to which the worker can realize a profit or incur a loss
· Whether the business provides the worker with employee-type benefits
Dependent on the outcome of these tests, one option companies can employ to avoid misclassification risk is the development of a contract for temporary employees. In a general sense, this contract would be designed to limit the control a company has over the worker, while also spelling out the agreed-upon responsibilities of each party.
Other strategies that can help avoid misclassification include labeling any work as a project that can be completed at any time by the contractor, requiring invoices from the contractor for all services, and structuring the contract between the contractor’s business entity (if applicable) and companies. But again – this is all dependent on the outcomes of tests offered by the IRS.
What will always ring true is that each employment situation is unique with its own challenges and complexities. And your clients will always look to you as an expert in all employment matters. This means there will be a certain expectation with your clients that you will be the one that helps to prevent them from any trouble with the IRS.
While some of the options I offer above can be taken into account when consulting your clients, note that employment guidelines can change rapidly. In other words, the advice you can take from a static post in a dynamic world is this – always stay up to date on the changes – and when the IRS is involved never offer advice today based on what you knew to be right yesterday.
To learn more about how staffing software by Bond US can help ensure your staffing agencies processes remain efficient, in the face of ever-changing employment guidelines, request a free demo.