How companies can use contractors effectively and reduce their risk

According to Staffing Industry Analysts, the publisher of this newsletter, less than 20 percent of companies believe that their ICs are all classified properly. SIA estimates also showed that companies spent roughly $250 billion on independent contractors during 2009. There's money to be had. Little wonder then that the IRS is on the warpath. "I'm concerned with fair tax administration, which means that there are no unfair advantages for certain businesses because of the way they may treat some of their workers," says John Tuzynski,  chief employment tax operations in the Small Business Self Employed (SBSE) group.

Employers no longer have a choice. They simply can't afford to take the issue of worker misclassification lightly. So what can companies do to help alleviate risk? SIA spoke with a cross section of professionals including CW managers, attorneys and compliance providers. Here is their advice.

Friendly Route

"The magic is coming up with a user-friendly process that people are going to follow," says Eric Rumbaugh, partner with Michael Best and Friedrich, a Wisconsin-based law firm. There's no point having a process that works only on paper. Thanks to hiring freezes, hiring managers are forced to come up with ways to get the job done. Hiring managers often classify workers as independent contractors to avoid increasing their employee headcount.
"Recognize the business need or you will have people working around procedures you implemented," Rumbaugh says. At the same time, the process should not be demeaning or onerous to the contractors. Specialized, highly sought-after consultants have their pick of assignments; a company's vetting process shouldn't turn them off.

An IC, Really?

Of course, there are those workers who use IC status to get in the door. In reality, the person may not be an independent contractor to begin with. Such a situation poses all sorts of issues for a company, especially if the worker finishes a project and is not brought on board as a traditional employee. A disgruntled worker may tip off regulators and trigger an audit. Or, perhaps a worker files an unemployment claim after wrapping up a project. That, too, could immediately set off an audit.

Trained Personnel

Vetting of employment status needs to be done by appropriately trained personnel. "Make sure that if you do build a process (internally or otherwise), it stands up if an audit comes along,' says Jon Kesman, global procurement director at Reed Elsevier, a professional information solutions provider. While some companies do have the necessary expertise in-house to classify candidates as contractors or employees, Reed Elsevier has outsourced this function.

Outsource the Job

Conventional wisdom agrees with Reed Elsevier's approach: It's a safer bet to outsource the job to those who claim it as their core competency. There can be internal benefits to doing so, as well.
Inertia can set in among companies that have had an IC vetting process in place for years. Many managers don't necessarily want to change old habits, brushing aside the risk. It's easier for a third party solution provider to clear away the cobwebs. Different permutations and combinations exist around the third-party model.

"One advantage of utilizing an unbiased independent third-party provider is that you don't succumb to internal pressures from a senior executive who insists that X be available tomorrow morning as an IC," says Sue Ann Leone, SVP of business development at ZeroChaos Inc., a workforce solutions company. Johnson & Johnson uses its MSP to classify contractors; its VMS helps with the process. Kesman, on the other hand, uses an independent provider that focuses just on IC compliance, making it easy for contractors and their clients to work together.

Define Your Goals

Contractors come in a range of shapes, sizes and skill sets. "As you start dealing with a variety of skill sets around independent contractors, it's hard to make the process standardized," says John Ure, director of external talent management at Johnson &Johnson. But that is the goal -- however hard -- that most corporations strive to achieve. This is tied in with defining the risk objectives of the company upfront.
Some corporations determine what their compliance criteria are. For example, they insist on contractors having certain types of insurance, assess them for certain factors like how many clients they have, whether they have an office and how long they have been in business for themselves.

What a company expects of its contractors depends on its goals. Different departments have diverse objectives. HR folks want quality talent, hiring managers want to engage that talent fast, and procurement wants reduced costs. Companies really need to understand and agree on what their objectives are before launching an IC compliance program. "Trying to manage this to absolutely zero risk can be very cumbersome and expensive," says Ure.
Once the overall CW program goals are established, "the focus should be on adequately defining a project or a statement of work," says Mark Young, VP of operations and service delivery for Synergy Services, a provider of IC compliance solutions. Once they start writing a scope of work document, hiring managers often realize that what they really need is a temporary worker. Defining the assignment effectively could result in highlighting the call for staff augmentation rather than contractors.

ICs are Vendors

Temporary workers are not ICs. By definition, independent contractors are self-employed. Because they are not employees of the company they are working for, that organization is not required by law to withhold employment, labor, or other various taxes. ICs are responsible to pay those taxes on their own. "To protect themselves, organizations should treat ICs like a supplier and hold them to all the same terms and conditions they hold suppliers too," says Leone.

Companies need to have a contract in place, signed off by legal counsel, for use when engaging ICs. There are those businesses that do want to deal with the IC directly. But it comes to numbers of contractors, price and expertise. It may not be either cost-effective or good for business to deal with thousands of ICs directly even if a contract template is in place.

C-suite Buy-In

Effective contracts notwithstanding, experts advise developing a solution that works for everybody. For that to happen, the message has to come from the top. "Those are the people that managers listen to," says Melissa Oliva, VP of compliance at WorkforceLogic, a workforce management company. Approval from the top sets the tone. If a disgruntled manager escalates an IC issue to the C-suite, a firm "this-is-our-program" response sends the right message to all units. Sponsorship by a key leader is an essential ingredient for success when implementing a new program. Then an actively involved team that stays committed can provide ongoing reinforcement.

Start Small, Slow

Once a clear policy is established, and  it's been determined who will manage the resource pool, roll out the program slowly, experts advise. "Don't cast the net wide," says J&J's Ure. "Cast the net as small as possible and get a process that's proven." Once companies have a verified method, then the process can be built and pushed out.

Draw Them In

Don't let the process take over. Through it all, don't forget the contractors. Give them reasons to want to engage with your company. High insurances or a tiresome onboarding process can be off-putting. Firms want to bring in top talent. And in many cases, the top talent is embracing a culture of independence. These workers want to be contractors, not temps. And if you want to engage these specialists, you have to establish an effective solution.

Wrapping Up

In a perfect world, businesses would operate without independent contractors -- and there would be no risk to worry about. But given economic realities, that's not going to happen. "Employers need to remember that the government thinks they are going to get more revenue faster if you withhold taxes," says Rumbaugh. His advice: when in doubt, go the employee route.
That having been said, courts have been known to rule in opposite directions on the same employee classification case for the same employer. Any pool of talent being assessed is going to have some indicia of employee status and some of IC standing. ICs bring a lot to the table. Properly utilized, they are a great asset to a company's bottom line. Following the IRS guidelines along with having a consistent user-friendly process should help mitigate risk.

Subadhra R. Sriram is editorial director at Staffing Industry Analysts. She can be reached at ssriram@staffingindustry.com
or you can follow her on twitter.com/subadhra_cws
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IC checklist

Essential points your compliance provider/MSP should look out for

At the end of the day, it shouldn't take an independent contractor more than an hour to assemble all documentation needed to shield an organization from liability, experts claim. Your or your provider should supply them a list that a contractor can check off. This list may include:

    * Appropriate contract with client in place
    * The IC has a valid tax ID number
    * Proof ICs are filing their taxes
    * Proof the ICs are drawing fair salaries for themselves
    * Insurance certificate, licenses, marketing materials
    * Other types of insurance (e.g. automobile coverage, general liability) if required
    * Proof of workers' compensation coverage
    * Different clients
    * IC has own offices, equipment