Independent contractor

I’m Not His Employee

Another update from the Jungle….
image011Addison works for Rob, who has a consulting business. (We met Rob in last week’s post.) The work is sporadic and project-based but she likes it that way because she’s a free spirit. Addison worked for large corporations for many years and is happy to be on her own now.

She does project-based work for several businesses, including Rob’s, and also has a few clients of her own. She dislikes sales and prospecting for clients because she prefers to focus on the work. She likes working for Rob because he pays quickly and the projects allow her plenty of scope for imagination.

Today when she stopped by Rob’s office to discuss the next project, she found him in a strange mood and slightly hung over from overindulging in Gentleman Jack. Rob began talking about financial problems. At first Addison thought he was telling her that he was insolvent. Then she realized he was talking about some new policy of the U.S. Department of Labor (DOL).
image015The DOL recently said that it would no longer use the “control” test to determine if a worker is an independent contractor (1099 worker) or an employee (W-2 worker). Instead, the DOL plans to use an “economic reality” test. This new test has a number of factors but can be summed up by saying that if a worker is economically dependent on the employer, then the worker is a W-2 and not a 1099.

Addison accepts Rob’s offer of a shot of Gentleman Jack, although she prefers Buffalo Trace, and they sit in a gloomy silence as they contemplate what the new test means for each of them. Addison dreads the idea that she could again be classified as a W-2 because she likes being free to work at her pace and only on things she enjoys doing.

What should Addison do next?

  1. She can explain to Rob that she has other clients in addition to the work she does for him and so she thinks that she truly is an independent contractor.
  2. She can incorporate her business now that she has the money to do so rather than continuing to operate as a d/b/a. Incorporating is additional proof that she is running her own business.
  3. She can wait to make any changes until she has more information.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

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She’s Not My Employee

Another update from the Jungle….
image008Rob 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
image010economic 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?

  1. 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.
  2. He can talk to his CPA about cash flow and tax strategies for dealing with the new economic reality test.
  3. He can continue business as usual, including drinking more Gentleman Jack, while he waits to see what DOL will do.

If your company is struggling with HR issues, Corporate Compliance Risk Advisor can help you create HR policies that are appropriate for your company’s size and then serve as a resource to your staff as the policies are implemented.

Download my FREE eBook today! Click here! 

Click here to join the HR Compliance Jungle today.

Follow us on Facebook & Twitter!