Richard Watkins

Richard Watkins
Senior IC Compliance Specialist
Location: San Francisco, CA
Linked In: richardfwatkins

Richard Watkins, Senior IC Compliance Specialist, KellyOCG, is currently responsible for conducting independent contractor evaluations and vendor/business qualification reviews for client organizations. With nearly 15 years in the contingent workforce consulting arena, Richard has provided high-level subject matter expertise, counsel and advice on industry standards pertaining to the development of independent contractor compliance programs and has led internal and external training regarding liability assessment, risk management analysis and compliance assurance procedures. He graduated Cum Laude from San Francisco State University with a Bachelor’s Degree in English.

The Road to Misclassification is Paved with IC Intentions

Richard WatkinsI recently read an article that expounded on a number of practices a business or company should take in order to keep from getting into hot water with the IRS. One recommendation was to establish the intent of the relationship as being between the company and an Independent Contractor (IC).

The problem with that approach is while the motivations for establishing that intent may be good—not living up to the intent could result in being condemned to misclassification hell.

What gets most companies in trouble is the language that’s used in reference to Independent Contractor relationships, regardless of whether that language is written (in terms used in an agreement), or actually spoken out loud.

For example, this particular article (and I have read countless others that do this too) referred to “hiring” an IC as opposed to “engaging” or “contracting with” or “procuring the services of.” Sure, it’s easier and quicker to say “hire,” but when it comes down to it—“hire” is a term that is associated with employees.

If the intent is to fully distinguish and describe an Independent Contractor relationship, but the term “hire”—which again, is reserved for describing an action or relationship between a company and an employee—is used consistently to describe the action or relationship between the company and the IC, an auditor could determine that the intent was really to think of that worker as an employee, based on all of the inferences, assumptions, and implicated meanings of the term “hire.”

Another point made in this article with regard to establishing IC intent was to have a written agreement that attempts to spell out that the worker is meant to be an IC. And by doing so, aspects that may otherwise be considered employee-like would not be able to stick.

The thinking is that agreements or contracts should specifically state that the worker understands and acknowledges that he or she is an IC, and not an employee (establishing the intent of both parties), and that the IC was not eligible for benefits normally afforded employees. By doing so, a lot of companies think that because of this “intent,” if any employer-employee-like actions occur, they are protected because of the language in the contract.

However, that isn’t necessarily true.

Let’s say that a company has an agreement with a worker that states that he or she is an IC, and the worker so understood and acknowledged that to be the case.

But in a different section of the agreement, there were terms and conditions that mandated the worker to adhere to company policy for travel, and use the company’s preferred agent to arrange for the travel, and that IC will be reimbursed the cost of expenses for the airfare, hotel stay, food, etc. The company, as well as the worker, based on language that says everyone and their mother considers the worker to be an IC, might feel the overall established intent would be enough to protect the relationship.

Unfortunately for the company, the worker, and all the mothers out there, the mere fact that an agreement may be put in place that says the worker is an IC does not negate the potential risk of misclassification.

It is well-established that Independent Contractors, as businesses, are allowed to deduct or write off certain business related actives on their taxes, travel expenses included. So, if an IC is allowed to write off the expense of travel from the IRS, there is no justification for the IC to be reimbursed by the client for any incurred travel expenses because, basically, that reimbursement is satisfied on the tax end.

Furthermore, forcing an IC to adhere to company policy regarding travel removes the ICs’ right to make business decisions for themselves and experience a profit or loss as a result. In the grand scheme of things, a company should not care if the IC flies first class or with chickens. Nor should they be concerned if every meal involves Champaign and caviar, or a Quarter Pounder Extra Value Meal.

In the end, IC relationships are primarily based on the facts, not on the contracts. An agreement can say anything it wants to try and establish the IC classification of a worker, but it is the execution of the relationship that really matters. If the worker acts like an employee, or is treated like an employee, the assumed protection of intent would likely be struck down.

As you can see, while establishing intent of the parties isn’t something to be overlooked, a company shouldn’t place all of its misclassification eggs in that lone basket. It is more important to be intentional about maintaining that defined relationship than just defining it, and the language and words used throughout the course of the relationship play a huge role.

I already mentioned a few alternate options for “hire,” but there are also a lot more options for different words or phrases commonly found in IC agreements, and are more appropriate for describing employees, not ICs. For example, one should use the term “project” or “engagement” instead of “assignment” or “job.” Also, use “cancel” or “terminate” instead of “fire” or “quit.”

Other IC-friendly terms include: “client” instead of “employer;” “consultant” or “contractor” for “employee;” “services” for “duties,” “tasks,” or “responsibilities;” “oversee” or “administer” as opposed to “manage,” “supervise,” or “direct;” and “payment schedule” instead of “pay rate.”

While in each of the instances above the words mean almost the same from a dictionary-definition standpoint, they have completely different connotations when associated with Independent Contractor compliance.

And for as small and seemingly insignificant all of these examples may appear, when you add them up, it could spell trouble. That’s why it’s always best to watch what you say about ICs.