Another update from the Jungle….
Rob has a small consulting business that does project-based work. That means Rob needs a flexible work force that can easily gear up when there are lots of clients, but can also gear down when projects are few.
Rob relies on a group of individuals that he classifies as independent contractors. For each project, Rob explains what the client wants, the deadlines that must be met, and the scope of work. The worker can accept or reject any project. Rob’s been happy with his flexible work force.
At a recent networking event, Rob heard that the U.S. Department of Labor (DOL) has decided to ditch its old “control” test for deciding if a worker is an independent contractor (1099) or an employee (W-2). Instead the DOL will use an “economic reality” test. Rob does some quick research at www.dol.gov/whd and finds the document outlining this new test. What he reads makes him reach for a bottle of Gentleman Jack.
After a couple of stiff drinks, Rob thinks he understands the main points of this new test. The
economic reality test says that a worker who is economically dependent on an employer is an employee and not an independent contractor. Rob doesn’t know if his workers are economically dependent on him. He uses them part-time and always believed that they did work for other consulting businesses.
Rob sees that the new test has several factors. The factor that most worries Rob is the one that says if the work performed is an integral part of the employer’s business, then the worker is a W-2 and not a 1099 worker. Rob knows that his consulting business depends on completing projects for his clients which requires the use of skills that his independent contractors have.
After another shot of Gentleman Jack, Rob does some worst case scenario calculations of what will happen if his workers must be converted to W-2’s. He realizes immediately that it wouldn’t be financially possible to convert all of them to employees.
What are Rob’s options?
- He can choose a couple of the independent contractors that have the broadest range of skills and offer to convert them to W-2’s who work full-time for him. All the other workers would no longer be eligible to work on his company’s projects.
- He can talk to his CPA about cash flow and tax strategies for dealing with the new economic reality test.
- He can continue business as usual, including drinking more Gentleman Jack, while he waits to see what DOL will do.
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