A Practical Approach
Ten tips to effectively manage the risk around ICs
By Mark B. Roberts
While many HR professionals and even attorneys often conduct analyses of independent contractor status in a mechanical fashion leading to predictable conclusions, a better approach is to focus on what the IRS and other governmental entities have historically considered the key factors in their determinations.
With between a quarter and a third of all IT consultants being placed with clients as independent contractors, according to data from TechServe Alliance, IT staﬃng ﬁrms need to be especially careful.
Here are some best practices to mitigate reclassiﬁcation and other types of risk:
- Agreements. Ensure you have a strong written independent contractor agreement that recognizes both the practical realities of the staﬃng model while simultaneously demonstrating the IT professional’s independent contractor status.
- Pay. As a separate business, it is critical that you pay independent contractors as a vendor. Do not run independent contractor fees through your payroll process.
- Risk of loss. While employees are entitled to be paid regardless of whether their employer is paid by the client, independent contractors need to bear the “risk of loss” in the event of nonpayment. While you may well receive push back from independent contractors who may be reluctant to agree to such a provision, this is an important factor in IRS reclassiﬁcation audits.
- Deﬁnite term length. While employees are most often engaged without a deﬁnite term of employment, independent contractors should be engaged for a deﬁned period of time. If the needs of the client change, you can always supplement your contract. The use of a purchase order as an exhibit to the independent contractor agreement can facilitate this process.
- Non-Competition/Non-Solicitation Provisions. While there are alternative ways to protect a staﬃng ﬁrm’s interests, it is generally inadvisable to include non-competition/nonsolicitation provisions in independent contractor agreements. Such provisions are highly suggestive of employment status.
- Insurance. An independent contractor should be required to maintain their own insurance coverage. While employees are generally covered by their employer’s policies, independent contractors, as separate businesses, need to maintain their own General Liability (GL) policy (at a minimum). Both GL and Professional Liability policies are generally available to independent contractors at a modest cost.
- Taxes. In your agreement, ensure the independent contractor has expressly acknowledged its responsibility for paying and/or withholding all federal, state, and local employment taxes. While responsibility for their own employment taxes is inherent in the nature of independent contractor status, an expressed acknowledgement of their responsibility is a good practice.
- Beneﬁts disclaimer. Ensure independent contractors have expressly disclaimed entitlement to health and other employee beneﬁts from your organization as well as your client.
- Intellectual property. While the work product of employees is generally presumed to be owned by his or her employer and its client (by assignment), absent express contractual language, the work product of an independent contractor is generally presumed to be owned by the contractors themselves. Ensure your agreement provides that all of their work product is “work for hire” for the beneﬁt of your client.
- Work with incorporated ICs. To further mitigate risk, place independent contractors who work through an incorporated entity. While it is not impermissible to place sole proprietors or LLCs (not the same as a corporation for these purposes), you can reduce your risk of reclassiﬁcation liability if you work with properly incorporated entities who abide by the corporate rules.
While placing independent contractors is not without risk, the risk can be eﬀectively managed. A practical approach — being neither overly fearful nor overconﬁdent in placing independent contractors and consistently applying industry-tested best practices — has served many IT staﬃng ﬁrms well. It can work for your ﬁrm too.
Mark Roberts is CEO of TechServe Alliance, the national trade association that represents technical staffing and solutions firms. He was previously a partner in the employment law group of a large law firm. He can be reached at firstname.lastname@example.org.