Can I have an Independent Contractor come in to do the same work as an existing employee?
Independent Contractors (ICs) can be powerful resources in your total workforce mix. With unemployment at a record low— the U.S. jobless rate dropped to 3.6% last month, the lowest since December 1969— many businesses are increasingly turning to ICs to help them achieve their objectives.
However, the exposure to legal and financial risk with classification of Independent Contractors is very real. The IRS has been dramatically increasing its hiring of additional field agents to conduct substantially more IC audits based on employer classification. Forbes asks, Is your company on the hit list? Again, if just one of your ICs is found misclassified, no matter your intention, years of records are summoned, and the penalties, legal fees, and back taxes are charged to you with interest. And that’s just the IRS; State Departments of Revenue, The US Department of Labor, and State Departments of Labor all have jurisdiction when it comes to auditing these records. If just one misclassification is uncovered, you can be sure that all current and previous ICs will come under review.
So, is it worth it to bring in an Independent Contractor?
Generally, the answer is yes, as long as you manage and monitor your IC population appropriately. The Salem Group has partnered with a virtual whos-who of enterprise clients over the years to help them manage and monitor thousands of independent contractors, and to date not a single Salem determination has been contested or overturned.
It is important not only for hiring managers but also for all employees interacting with an IC to understand what differentiates them from a standard employee to ensure they are managed appropriately and their IC status is not jeopardized:*
• The IC should be able to dictate their own hours.
• The IC should be able to actively engage in offering their services to other clients.
• The IC should be able to earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment.
*This is by no means an exhaustive list, as there are multiple Federal and State organizations with jurisdiction over this matter often with similar, but still different, interpretations (and potential repercussions) in addition to local ordinances (such as the Cook County Earned Sick Leave Ordinance in Chicago) which have their own determination process.
As a rule, an Independent Contractor should not be hired to perform the same tasks as an existing employee.
ICs can be a smart addition to teams where unique, specialized knowledge or certifications are required to accomplish a project with a definitive scope and timeline. Think of ICs as a surgical tool in your workforce toolbox, not a hammer. The work should not be a core service of the organization, since it then becomes difficult if not impossible for the IC to have sufficient control over means, manner, and method of the final product. The Department of Labor (DOL) maintains that one of the key factors they investigate when determining if an individual is an employee or an Independent Contractor under the Fair Labor Standards Act (FLSA) is the skill, initiative, judgment, and foresight required to perform the task.
It is important —no, imperative— that any employer considering utilizing ICs within their organization remember that The Supreme Court has said that there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA). Instead, each regulatory agency (Federal or State) uses its own analysis to determine the underlying economic reality of the situation and whether the individual is economically dependent on the employer.
If you already have Independent Contractors working for you, Salem can safeguard your company.
If you have current or future IC candidates who do not qualify under all applicable guidelines, Salem has a process to help. We can convert your ICs to Professional Service Employees (PSEs). Salem Managed Services is a specialized division of The Salem Group – a privately held, multi-divisional strategic staffing and workforce management company headquartered in Oakbrook Terrace, Illinois – experts in Independent Contractor review and verification. Salem’s IC/1099 status determination and compliance management help you correctly classify your ICs so you can avoid penalties, fines, and payment of back taxes.