Pros:

• They are fast to take, typically requiring about five minutes to complete.
• They almost magically produce an opinion as to the IC status of your consultant. 
• They give the client confidence they have been protected from misclassification.

Cons:

• The results are created via some behind-the-scenes mystical formula, so it is difficult to trust the accuracy of the answer.
• Typically, the automated questionnaires are not personally reviewed by an expert.
• No supporting documents are required, which will make or break the accuracy of the decision should it ever be challenged.
• They don’t consider weighting for different professions and case law for specific industries.

In my opinion these automated questionnaires are attractive because of their fast easy answers, but they are inaccurate and dangerous to their clients.

If you rely on a system with automated scoring to decide the status of your contingent and contract workers you are placing your company at great risk.

Even though many people like the quick, simple answer, auditors, attorneys and judges, who will actually challenge your IC’s status, don’t use slick, give me an instant answer, questionnaires.

Experts base their decisions on a profound level of detail, case law and years of experience with thousands of cases.  The automated questionnaires are at best shallow and inaccurate guesses.  They are only correct in the most obvious and extreme situations.

Collabrus’ questionnaire is easy to complete and is backed up by real professional experts who personally insure an accurate determination.

Collabrus starts with a short, painless questionnaire that I personally review.  You can rest easy, knowing our answer will withstand a challenge. 

It’s both accurate and fast.

We will provide a definitive determination within 24 hours from the time we have all of the information, including any supporting documents. 

Go with a true expert.

Do you want to be the company who was taken in by a shallow, feel good now, pay later option? I didn’t think so.

We’re now setting up a tracking system for them so they will always be able to: 

• Track the deliverables’ progress specified in each contract
• Know the number and names of all contingent workers, consultants or IC’s working there at anytime.
• Know how much each contract is really costing the company
• Know if a project is going over budget in either time or dollars
• Know if Status Drift has set in and the project, and consultant, has changed from a legitimate IC status into an employee.

Consultants who overstay their initial contract are a risk.

Consultants who stay for a long period, especially past the completion of the initial project are exposing your company to risks of civil lawsuits, tax audits, workman’s comp claims and other problems.

No body wants a permanent house guest-the relative who came to visit for a weekend and is still living with you a year later.

The consultant most likely has been doing a good job and has the potential for more good work. That’s why he/she is still there. Occasionally, an attempt is made to maintain the IC relationship by creating a series of contracts that tag onto each other-one-after-another-year-after-year.

The problem is when something goes wrong and the relationship is viewed from outside the company, it simply looks like a continuous long term engagement-just like an employee. The consultant has lost his/her independence and has become financially dependent on your company. That’s why you need a system to be checking on your contingent workers and IC’s regularly to insure you have not allowed their status to drift towards employment.

When the project is approaching the total dollar amount budgeted it is time to ask:

• Is the job complete?
• Is the consultant doing other jobs not part of the original contract?
• Has the project gotten out of control?
• Should we reevaluate the contract terms?
• Has this person become our misclassified employee?

A good system will help you answer those questions.

Is there a person responsible to track IC projects in your company?

Oftentimes, tracking these details falls to someone in the company with 25 other duties and responsibilities they believe are more important, and since the squeaky wheel always gets greased first, the other wheels are ignored. The problem is by the time the IC compliance wheel squeaks it’s too late. That wheel usually doesn’t make a sound until it falls off.

Want proof?

FACT:  In February of this year the Government Accounting Office (GAO) in Washington, DC issued a report to Congress criticizing the IRS for not being aggressive enough in collecting over $55 billion dollars of the Tax Gap a year in uncollected employment taxes.

FACT:  In May the Commissioner of the IRS told Congress he was using part of the Economic Recovery Stimulus money the IRS was receiving to hire and train 4500 new IRS Agents to close the Tax Gap, stating many of them will be used to collect employment taxes due.

(If you ask, “Where are they?  I haven’t seen them…” Remember the government moves slowly-very slowly, but once it gets started it has momentum.  It takes the government time to announce the job openings, select the successful candidates, train them and send them out).

FACT:  Last week the IRS announced it was conducting a pilot study to audit 5000 US businesses for employment taxes and misclassification of workers. The program begins the end of this year. Depending on the outcome of that sample they may again expand the misclassification program nationwide, but either way those 5000 businesses will be audited within the next year or so…

FACT:  Since at least the year 2003, the IRS’ Taxpayer Rights Advocate has been reporting to Congress, every year, Section 530 (the so much appreciated Safe Harbor law protecting employers) should be repealed or significantly amended to give the IRS more authority to enforce worker misclassification issues. This year Congress is listening because they are looking for ways to collect more revenue.

FACT:  The State of California does not have a Safe Harbor law to protect you from an EDD audit.

FACT:  In the past two years both state and federal law makers have been introducing bills to increase fines for misclassification and to make it easier for the auditors to identify misclassified workers. One of the toughest federal bills was actually sponsored by our current President when he was a Senator. Once the other issues are resolved (health care and budgets) it’s a safe bet both state and federal lawmakers will pick up those bills, dust them off, and pass them into laws.

If you are preparing for the economic recovery and thinking of engaging contingent workers and IC’s you need to be sure you are protected.

To be safe you need to establish a process for control and accountability in your consultant engagement process now. Before you hire new staff and before the government knocks on your door, call Collabrus.

They are hard working, creative and talented. They have to be to survive on their own even during reasonably good economic times. Now they want to apply their skills to working in your company. So you reason, “This person will be a great asset to our company.”

Let’s take a step back and have a closer look at the situation

Don’t get me wrong. These self starters can be a valuable addition to your team if they fit the profile your company needs. However, I can think of a few questions to ponder when considering them.

1.   Are they independent contractors?  Just because the person has a business of his/her own does not guarantee he/she will be an independent contractor while working for you. It is very possible for someone to “step outside his own business” and work for you as an employee. It is easier than you think to get caught up in the logic of “This guy has his own business, so I’ll bring him in. He does the work I need and I can pay him as an IC. It’s the best of both worlds for me…”

To be a bona fide IC he must still meet all the same common law standards of any IC. You should be cautious even if you pay him through his own corporation. By definition, the president of a corporation is an employee. If he is incorporated his own corporation should be properly handling his wages. Beware of the person who is the president of his own corporation and tells you he is an IC. He could be a risk to you sometime in the future.

2.   Are they team players?  Many times these entrepreneurs are tough individualists. They may have set ideas how things should be done. Also their “moonlighting” at your company may hurt their focus or impede their own business’ growth. They may begin to resent the distraction and look for a fast bale out. Also, while they are working for you be careful they aren’t also looking for their own business contacts.

3.   Are they committed heart and soul?  The question is will they immerse themselves in your company’s success for the long term? The goal for most of these entrepreneurs is to bring in enough money until their own business picks up. They are looking for alternate sources of income to make ends meet. They may stay a long time and provide you with an abundance of value, or they may only be looking to ride out the storm. If it’s the latter they could bale out just as they become valuable to you.

I’m not advising against bringing these talented people into your company - just be cautious.

And of course, if you bring them onboard as an IC, be sure you properly classify them and then document your decision.

• Civil lawsuits for overtime, health benefits, retirement, stock options and other fringe benefits.
• A costly tax audit by the IRS or EDD.
• Liabilities and fines under workman’s comp laws if there is a work-related injury.

You probably have four choices (and an unrevealed fifth) to correct the problem:

1. Change nothing. Continue using the consultant as a misclassified IC and hope you aren’t caught up in an employment tax audit, workman’s comp claim, or civil lawsuit.
2. Adjust the relationship back to an IC if possible.
3. Terminate the IC before something goes wrong.
4. Put the consultant on your payroll as an employee.
5. I still haven’t heard any correct guesses for this one from last week’s post…

Let’s look at each.

Change nothing

After all, the arrangement is working as is - why fix what ain’t broke? 

It is ‘broke’, you just haven’t recognize it yet. You are driving a car with no brakes, but since nothing has happened - you haven’t needed to stop - you are blissfully driving along. There hasn’t been a stop sign, or red light, and no one has pulled in front of you, so you think all is well.

You need to fix the brakes before the accident. If you wait until a car pulls in front of you, or you come to a red light, it will be too late. You will crash.

It’s the same with a misclassified employee. Everything seems great until something unplanned occurs (an employment tax audit, workman’s comp claim, or civil lawsuit). Eventually, if you continue to drive the vehicle, you will need those brakes. 

Adjust the relationship back to an IC if possible.

This option is usually very difficult to accomplish. The consultant likes the current arrangement and so does the project manager. Also, it is diffuclt to go back once you begin to direct and control the consultant’s work. In addition, if an auditor looks at the relationship and believes the common law factors are being manipulated to give the impression of an IC, the road will get very bumpy for you. Going back would be like trying to glue the dust back on to the brake pads after it has worn off. This may be theoretically possible but not easy to do in the real world. Also in the real world the relationship will most likely drift back into the employee range. Retread brake pads don’t last as long as new ones do.

Terminate the IC before something goes wrong

The problem with sending the IC packing is that doing so may trigger the very type of problem you were trying to avoid - a wrongful termination civil suit. Besides, the consultant is a valuable member of your team or you would not be extending the contract month-after-month. Therefore this option is probably not your best choice. It’s like parking the car and not driving it ever again just because it needs brakes.

Put the consultant on your payroll as an employee

If you put the consultant on the payroll you have a defensible position of doing the right thing once you realized the consultant had become an employee. You keep your valuable worker and eliminated your risk of a misclassification issue raising its ugly head in the future. You have fixed the brakes before it’s too late. Now you can drive safely.

You may ask: “If we put the consultant on the payroll now isn’t that a red flag that s/he was always an employee?”

Maybe - maybe not. However, the alternative eventually guarantees a misclassification issue.  The longer you operate this way the higher the risk of something going wrong (injury on the job, tax audit, class action suite, etc).

Note: When you do this you may be able to document there was a time when the consultant was a bona fide independent contractor but the relationship changed and you properly put the consultant on the payroll at that time. An expert will know how to establish and document this for you.

The revealed fifth choice

You go to a good auto mechanic to get your car worked on why not a compliance expert to help with your misclassification issues?

A top level expert, like Collabrus, will help you select the best option and guide you through its implementation. This expert will also insure there is proper documentation to protect you should it ever be challenged. There are many reasons to turn to Collabrus so keep driving and know an expert is there when you need to check your breaks.

It’s the old story of the relative who came to visit for a weekend and is still living with you a year later and now complains if you don’t fix his favorite food for dinner.  In the business world the permanent house guest is the IC consultant who has been working exclusively with your company for a year or more. To take the metaphor further, the “business house guest,” instead of complaining about dinner, may eventually look around the workplace and think “I’m just like the employees here except I don’t receive the fringe benefits…”

Long term IC’s expose your company to risks.

This long term IC will eventually expose your company to increased risks for possible civil lawsuits including; overtime, health benefits, retirement, stock options and other fringe benefits. Also long term IC’s are waving a huge red battle flag in the faces of tax enforcement agencies, such as the IRS or EDD. Finally, you’re gambling there won’t be a work-related injury.

How does it happen?

Often, this is a story of a true independent contractor, engaged to complete a specific limited term project that works out so well he/she is used again for a follow up project. A new contract is drawn up and a new set of deliverables are spelled out. The consultant is being paid for the time worked and the project is a full time effort, which precludes any other clients. That contract expires and the process is repeated a few months later. Maybe this time the contract has some open ended expectations, or maybe the consultant is managing or administering the project he/she was originally responsible to design and implement. To someone from the outside the consultant begins to resemble any other employee in the company. He has a workspace, a computer, a phone, a company ID, works regular hours, attends employee meetings, and soon becomes operationally indistinguishable from a regular employee. In the meantime, this consultant has not performed any work for any other company and is not seeking other clients. Basically, he/she shows up, follows a set routine and goes home day-after-day; week-after-week; month-after-month…

Even though the consultant is still being paid and handled for accounting and benefit purposes as an IC, your consultant has gradually evolved into a misclassified employee-putting your company at risk.

What’s the solution?

Depending on the exact circumstances, I can offer five choices:

1. Change nothing.  Continue using the consultant as a misclassified IC and hope you aren’t caught up in an employment tax audit, workman’s comp claim, or civil lawsuit.
2. Adjust the relationship back to an IC if possible.
3. Send the IC packing.
4. Put the consultant on your payroll as an employee.
5. I’m saving the fifth option for next week. Any guesses?

There are generally three typical responses to these first four options:

For 1 & 2 above:  “The arrangement is working as is-we’ll take the chance and leave it as is.”
For 3 above:  “The consultant is too important to lose.”
For 4 above:  “If we put him on the payroll now isn’t that a red flag for the IRS and EDD?”

I’ll talk about these options next time.

This is a follow up on my post earlier this week, regarding when the Internal Revenue Service and the Department of Justice announced the agreement allowing the IRS to receive an unprecedented amount of previously private information on United States taxpayers who have accounts at the Swiss bank UBS.

Why the extension?                                                                  

The most recent news release stated, “IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests.”

Swiss banks don’t promise secrecy any longer.

In August the IRS announced, “In addition, the Swiss Government has agreed to review and process additional requests for information for other banks regarding their account holders…”

There’s a more aggressive, hungry IRS.

It’s no secret the federal government needs as much revenue as it can get.  The IRS has been criticized recently for not doing its share, and this appears to be part of the IRS’ response.  You may expect other aggressive actions in the future.

They gave taxpayers more time, but at a price.

The IRS is allowing a little more time for taxpayers “who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it,” stating, “The extension will allow tax preparers and attorneys the necessary time to interview and advise their clients with these hidden accounts…”

The press release also stated that, “Those taxpayers who do not voluntarily disclose their hidden accounts by the deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.”

Are you ready?

It doesn’t take a Tax Rocket Scientist to know both state and federal tax agencies are getting tougher and more aggressive in finding and collecting all the taxes they can-including misclassified workers.

Once sacred information will now be used to close the Tax Gap.

In January of this year, I reported that the IRS is increasing efforts on closing the International Tax Gap. The IRS defines the International Tax Gap as the difference between the amount of tax that international taxpayers should pay and the amount that is paid voluntarily and on time.

The UBS information which will be obtained by the IRS has been guarded by Swiss law, until now. As a result of this agreement the IRS will receive confidential bank information on an estimated 10,000 UBS accounts of US persons.

The IRS has been investigating and preparing to take action since before 2009.

When I first reported on this in the beginning of this year, I wrote that, “In my experience, when any government agency is publically talking about an issue, they have already been studying it quietly for some time.”

It seems the IRS had actively been investigating International Tax Gap cases when it announced in January they were looking at the issue. For example;

On Feb. 18, 2009, “UBS AG-Switzerland’s largest bank, entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the Internal Revenue Service (IRS).”

To have entered an agreement in February means the process had been going on long before that date.

The IRS was pursuing actions against the Swiss bank in 2008.

According to the IRS, the Justice Department filed papers earlier this summer, “seeking an order from a federal court in Miami, Fla., authorizing the IRS to use a John Doe summons to request information from Zurich, Switzerland-based UBS AG about U.S. taxpayers who may be using Swiss bank accounts to evade federal income taxes.”

Voluntarily compliance is no longer an option.

By the time the IRS had issued the press releases informing the public they were looking at the International Tax Gap, they had most likely already entered into a secret agreement to obtain the information and account information was already being transferred to the IRS. 

In fact, in an August 2009 press release, it states, “To date, the IRS and the Department of Justice have successfully prosecuted four United States customers of UBS whose information was provided to the IRS by UBS as part of the Deferred Prosecution Agreement.”

Thousands of accounts are being turned over to the IRS.

The IRS press release also stated, “Under the agreement, the IRS will receive information on [thousands of] accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.”

There will be both civil and criminal prosecutions from this action.

The press release states, “Information provided to the IRS through this process will be thoroughly examined for all potential civil and criminal tax violations. The IRS will assess any additional tax, interest and a number of applicable penalties….The IRS will also recommend criminal prosecution in those cases where the facts warrant such an action…”

This is the level of aggressiveness you may expect from tax enforcement agencies.

It doesn’t matter if it is income taxes or employment taxes.  Both federal and state tax agencies have proven over and over they will aggressively use every tool possible to enforce the tax laws and to close the tax gap-both domestic and international.

That’s why you need to protect your business with the assistance of a proven expert.

• Over 70% of all employment tax audits result in finding misclassified workers?
• The EDD and the IRS win 90% of the cases that go to hearing or trial?
• During this recession, the EDD and the IRS have been getting increased funding to enforce IC compliance?

It is too late to prepare for an audit challenge after you receive the letter or a phone call from the auditor.  The time to prepare is now.

Why?

Audits review past records, where most statutes of limitations for an audit are three years.  That means how you classified your consultants three years ago will be scrutinized today.  Will you be able to prove today what you did three years ago was correct?

You have a good attorney.

Upon receiving a notice of an audit, many companies will call an attorney. Not a bad idea. However, at that point it may be too late; the cow is already out of the barn.

A good attorney (one with experience in the area of employment tax and labor law) can minimize the inconvenience and possibly some of the liability (except his fees); however:

• The audit will still happen.
• The assessment will still be issued.
• The audit results will be shared with other enforcement agencies.
• Misclassified workers may file civil suites.
• Word may get out to your customers and investors.

At best, what any attorney can do is minimize the damage, but the worst damage has already been done.

Wouldn’t it have been better if the audit never happened in the first place?

Enforcement agencies screen businesses to identify and select only those that appear to be misclassifying workers for an audit. Agencies like EDD have special units whose sole purpose is to identify businesses that appear to be misclassifying workers. Enforcement agencies like to know they will make a tax assessment before they contact you. They almost never perform survey, or random, audits.

It’s always possible something will cause your company to be selected for an audit. An expert will know the information and level of detail required to protect you in the event of a challenge. The correct documentation can protect you.

React before you receive the letter.

You should call an expert like Collabrus before that letter arrives. We have the ability and experience to cost effectively help you attract the best talent and properly classify and document their status. But don’t wait until after an auditor or the investigator has called you.

Stay ahead of the curve.

The predictions.

I’ve been studying various surveys, reports, opinions, news and other indicators searching for clues about the economy. It’s no surprise I found mixed predictions about the economy. They range from:

• We haven’t seen anything yet - the doom forecast - it’ll get worse.   
• The economy is getting better. The signs are everywhere.
• It’s already better, but we don’t see it because of the lag in measuring and reporting of sales and hiring.
• The economy is at the starting gate for a full recovery with a leaner - meaner business environment.

I like the “We’re at the Starting Gate with a Leaner-Meaner Business” prediction.  Why?

The economy depends on spending and people’s belief in the future. It’s a function of expectations and confidence. If you think the economy will be bad then you hold back on spending, hiring, new risks and other activities that tend to support the Gross Domestic Product (GDP). Spending stimulates the economy and creates jobs. Not spending has the opposite effect. So our perception of what will happen is the most important factor in determining the future of the economy.

It is a self-fulfilling prophecy and most perceive the economy is about to take off again. 

Who’s perceptions?

• The American Research Group, Inc. performed a telephone survey of 1,100 randomly selected adults, 18 years and older. Their report dated August 20, 2009, indicated 41% of Americans say the national economy is getting better, which is up from only 26% who said that in July. This shows movement towards a positive mass.
• The Bloomberg News reports that, “The U.S. economy shrank at a slower pace in the second quarter” (speculating this is) “a sign that the worst recession since the Great Depression may be winding down.”
• The Department of Labor and California’s EDD reports the UI rate is hovering at 11.9% in California and 9.4% nationally. Many predict unemployment has leveled off and will begin to fall - meaning the competition for highly qualified workers will soon begin.
• U.S. stocks are slightly higher, which is a precursor to recovery of the labor market. Specifically, as of this writing the Dow Jones Industrial Average is up 20 points, at 9301, and the S&P 500 index is up 3 points at 997.
• The Bank of Canada believes the world economy will be improving for the remainder of this year and 2010. It issued a news release on September 1, 2009, stating, “There are now increasing signs that economic activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system… the recovery is [coming into existence].”

Are you positioning your business to take advantage of the positive surge in the economy and the business environment? 

Are you prepared to:

1. Operate in the new leaner-meaner economy?
2. Capture a larger share of the market?
3. Attract the best workers?
4. Avoid making costly mistakes?

Be a leader - don’t run with the pack.

Collabrus is in a position to cost effectively help you attract the best talent and to avoid costly mistakes.  Now is the time to act. Don’t wait until everyone else is doing it.

Waiting is just running with the pack.