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Independent Contractor Controversy, Uglier Than Ever (Part 2 of 3)

Posted by attorney Curtis Harrington

But wait. This is an amnesty. An amnesty is usually appropriate when you have done something clearly wrong and where you are given a chance to come in, take some punishment and then "make it right". But historically the dividing line between independent contractor and employee has been fractured, non-linear, and via the so-called "safe harbor" as an implied or implicit general acceptance that an improperly drawn dividing line should simply "stay that way". When did an awkwardly drawn line become a violation for which an "amnesty" is offered? Well, that gives some insight into the ugliness we can expect over the next half-decade at least. But shouldn't the public, many of whom are employers and independent contractors become outraged and march in the streets in protest of this? They should, but the average citizen seemingly has such a psychological aversion to anything relating to tax that they actively choose to avoid learning of it completely before learning enough to ignore it. (After a year and a half of offering free tax education to the public I should not have been surprised when none of the public attended.) The only way that the public will even consider this issue is when they are dealt with one-by-one in an audit. This Limited Amnesty Program for Employee Misclassifications is not a secret room in Guantanamo, it was announced quite publicly by the IRS in Announcement 2011-64. As with most changes in American life, the citizen comes to a final realization that the law has changed when the district attorney looks him in the eye and talks about a "very favorable plea bargain" (or in the case of tax, perhaps their first visit with an IRS representative). The second giant realization of the severity of the sea-change is the fact that this amnesty program is NOT an attempt to finely adjust the "independent contractor" versus "employee" dividing lines more precisely, but to SHOVE them in one direction only -- toward the status of employee rather than independent contractor. Employers have not, under Announcement 2011-64, been given an opportunity to "adjust those of its employees to independent contractor status after a reasoned investigation and thoughtful approach. Uncle Sam wants everyone possible to be an employee because that convenient classification reduces the effort necessary to deal with its citizens diverse and presently uncontrolled activities. The combination of what should be re-termed a Amnesty Program for Employees, combined with similar state programs, to force employers directly into operation of other statutes, both federal and local much before they are ready. An employer could wake up one morning to learn that instead of twenty or thirty statutes and rules to worry about, the employer has hundreds because his number of "employees" has skyrocketed overnight. The state rules on requirements to treat individuals and organizations as an employee will be bolstered by the federal shift forcing greater classification of workers as employees. This federal shift will be bolstered by government's own control of its own taxing system. When the IRS considers someone an employee for tax purposes, its a bootstrap argument that cannot be effectively refuted, much like the tax system's deductions are a matter of "legislative grace". Unfortunately, all the non-tax laws concerning who is an employee operate from the W-2. The effect is that if you are an employee for tax purposes, you will generally be considered an employee by everyone for every purpose imaginable. How can employers who will potentially be found "guilty" in this treasure hunt, and the independent contractors who may be forced to lose their independence, prevail against the tide before them? Every case is different. There are no guarantees anywhere. Further, because some businesses have restrictions that conflict with many of the factors, complete preservation of the independent contractor relationship will never be assured. Some mitigating factors might help hiring entities and independent contractors who wish to increase the probability that they are able to remain independent. Having a contract which embody mitigating factors may also be beneficial. 1. Eliminate whimsical provisions about when, where, and how to work. Some situations naturally dictate restrictions, so why mention them just to sound bossy? 2. Allow the independent contractor the maximum leeway to optimize his own operations. 3. Prefer to select independent contractors who also independently work for others (preferably not your competitors). 4. Define your trade secrets, identify them to your independent contractors and have the independent contractors sign the same arms-length non-disclosure and trade secret agreements that you force other contracting companies to sign. 5. Require independent contractors to be trained for contracted tasks before engagement. If an independent contractor want to progress to a higher paid and more demanding task, require that training be completed at the contractor's expense before engagement for that task. 6. Independent contractor contracts should have randomized non-contracted inter-periods as might be expected to occur between tasks or when other, different contractors were hired within break periods of other contractors. 7. Independent Contractor agreement should emphasize the result using a set of standards and possibly coupled with remuneration based upon achievement of those standards. 8. Hourly contracts are to be avoided. One of the hallmarks of an employee is the exchange of money for time during which they are under the control of their employer. The true value to the entity hiring the independent contractor is the result achieved. It should not matter to the hiring entity whether a result is reached in 50 hours or 100 hours (so long as time is not critical). 9. All other things being equal, the hiring entity should contract with an entity which may have the capability to provide different ones of its employees to do the task. Have the corporation guarantee that it is contracting as an independent contractor and possibly indemnify the hiring entity. It may be that the independent contractor entity can cover many of its guarantees with insurance and performance bonds (and not to mention that this change in the law may result in a greater variety of insurance products to protect against a mis-characterization by the IRS of employee status). 10. Avoid any integration of an independent contractor's human services into decision making levels in the hiring entity's business. Where in independent contractor is hired to make an evaluation, get another independent contractor to help implement the first independent contractor's recommendations. 11. Any control desired by the hiring entity should appear in the contract and should ideally be subject to bonuses and performance payments. Aspects of the independent contractor's results which are important should be identified and valued with an independent contractor's motive to conform to the hiring entity's wishes being an economic one. 12. Never require the independent contractor's services to be rendered personally. The independent contractor's team may have some individuals who can do the job quickly and others that can't. Any desired gradation in result should be handled with some form of bonus or penalty. (Continued at part 2)

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