The following is the transcript of the podcast on Total Picture Radio
TotalPicture Radio Transcript: Nathan Gibson, Randstad Sourceright
Airdate: June 10, 2014, Big Picture Channel.
Does your company hire contract or contingent workers? If so, you’ll want to have to listen to this podcast.
According to Aberdeen Research, 27% of the total workforce is expected to be contingent labor by 2015. That’s next year, people. Since attending the HR today forum in Philadelphia, I’ve developed a renewed interest in the free agent nation, a.k.a., the contingent workforce.
This is Peter Clayton reporting. Welcome to a Big Picture Channel podcast on TotalPicture Radio. It started with Gene Zaino, President and CEO of MBO Partners. His presentation at the conference got my wheels spinning, resulting in an interview with Gene and a blog post on recruitingblogs.com with a catchy headline, “screw your cubicle farm.” Gene came to our interview loaded with statistics and advice. We’re going to follow that up today with another expert in the contingent workforce Nathan Gibson, Vice President of Payrolling and Contractor Solutions at Randstad Sourceright.
Nathan wrote an article for the May issue of HRO Today Magazine titled, “Declaring Independent Workers.” As Nathan noted in his article, federal and state regulators are focused on independent contractors for a number of reasons, and we’re going to learn about that today.
Nathan, welcome to TotalPicture Radio.
Nathan: Peter, thanks for having me.
Peter: You warn in your article in the HRO Today Magazine that engaging independent contractors can present very significant risks if it’s not done carefully. Can you give us some examples of what you mean?
Nathan: Well, right now independent contractors are being scrutinized by a lot of different government agencies for different reasons. The IRS is interested in whether workers are classified as an independent contractor or employee because they’re looking for companies to withhold payroll taxes from workers. So if you’re an employee, your company will withhold your social security taxes, your Medicare taxes, your income taxes, but if you’re an independent contractor the company doesn’t do that. So the IRS loves employees and really is skeptical of independent contractors because they prefer the ability to collect the taxes.
The Department of Labor, on the other hand, is more interested in protecting workers rights under various labor laws. An employee has protections for overtime, for workers compensation, family and medical leave and those protections aren’t given to independent contractors. So the Department of Labor is interested in pointing out if you classify someone as an independent contractor or an employee because they want to protect the workers and they’re worried that companies are going to classify workers of independent contractors to avoid giving them some of the labor law protections.
State agencies are also interested in the classification because they collect unemployment taxes off of employees but they don’t collect unemployment taxes off of independent contractors. So with the recent recession, a lot of the state unemployment funds have really been depleted, and so state agencies will be looking at whether or not you classify someone as an independent contractor or an employee because they want to collect more in terms of unemployment taxes.
Finally, the independent contractor himself may one day wake up and say, ‘hey, you know, I should have been an employee all along. I worked tons of overtime. I’m going to now sue the company because they should have paid me overtime.’ Or they may wake up and file for unemployment claims after the assignment is over and then all of sudden that may trigger an audit with the state agency.
For all these different reasons, people are looking at the classification between of a worker that’s either an independent contractor or an employee, and if you don’t do it right then you can get yourself in trouble and people will come in and audit your company and spend a lot of time and hassle when really it could have been avoided if done right upfront.
Peter: So following up on that and quoting from your article, “If the company has the right to control the manner and means of how the work is performed, the worker is an employee.” And I’d like you to expand on that a little bit.
Nathan: The right to control really is at the heart of the question of whether or not a worker is an employee or an independent contractor. Really the question is, is the worker independent, and the core of the independent question is, how much control does the company have.
All of the tests around independent contractors look at how much control the company has over the worker. The IRS looks at things like behavioral control and financial control and then the relationship of the parties. Many states have adopted what is known as the ABC test. The first part of that test is that the individual must be free from the direction and control of the company. He really must be working independently. And so it goes back to a concept in tort law where if you were an agent of someone and they had the right to control you, if you caused damage then the principal would then be responsible for the damages.
So this goes back a long way in terms of if somebody working for you and if they cause damages then are you responsible for it? So control factors include things like, do you provide training to the worker? Do you say the worker has to work on your premises? Do you set the hours that the worker has to work? Things of that nature really define how much control the company has over a worker and whether or not they’ll be considered independent contractor or not.
Peter: So obviously things like being a seasonal temp worker mean that you are an employee.
Nathan: Right. One of the classic examples we talk about is a receptionist. The receptionist almost always is going to be an employee. The company sets the hours, tells him or her where they ought to sit, how to answer the phone and then trains them on how to use the phone system and they usually get paid hourly.
In contrast something like a web designer could easily be an independent contractor. The company would say, hey, I need a website; the web designer could off and work, set his own hours, work from whenever he wants, he doesn’t receive any training and provides the result at the end of the project and gets paid a lump sum for the project.
Peter: I want to get back into your article here. You list best six practices for compliance and I want to discuss several of them with our audience today, starting with number one, “Document all engagements with a written agreement.”
Nathan: A written contract is really enormously helpful in documenting the relationship between the parties. It’s not an absolute safe harbor because regulators will look at to see what really what happened and what were the realities with the situation but it becomes extremely useful to show what the parties intended and what elements of control are there. All the elements of control we talked about earlier you can put into a contract and use that to defend your classification of a worker. You can say where the worker has to work, can the worker pick their own hours, things of that nature enables you… if you do unfortunately get audited you can say this is what the relationship is, you can see by the contract we did not exercise much control, it gives the auditor something to work from he will then basically document what’s in the written contract. He may ask you certain questions, he’ll ask the worker certain questions, and if all ties together and is explained in a written document, it gives you a terrific defense if you end up in an audit.
Peter: And you caution that employers should hire independent contractors who have established themselves as a business.
Nathan: It’s another key thing to do. It’s not that you can’t hire someone the first time out. You can’t be their first job but it just makes things an awful lot harder. It’s always better to engage with an independent contractor who has been around for years and has lots of clients. A lot of states have what they call the economic reality test. They look at the economic reality of their situation and if they are someone who is working only for you and working 40 hours a week for you and working multiple years for you, they’re going to take a look at that and say, you know, the reality of the situation this person really is just working for this one client and they really should be considered to be an employee. There’s a specific part of the ABC test where the third part specifically asks, is the worker customarily engaged in independent established trade? So you really are much better off if you find someone who has been in business for a number of years who has multiple clients who is relying solely on you for their income or for their work because that enables you to say look, this person really does have independence here, which as I said, is the heart of the question about an employee versus independent contractor.
Peter: Right. And obviously companies like Gene’s like MBO Partners and many of the temp staffing agencies out there provide that firewall to employers because you’re not hiring that person directly. You’re hiring that person through another agency.
Nathan: Absolutely. We highly recommend using a staffing firm or Gene’s company or somebody who is well-versed in the classification of workers, who understands the ins and outs of state laws and the federal law to make sure people get classified properly.
In some states for example, I live in Massachusetts, and Massachusetts has a one rule for independent contractors for the purpose of payroll taxes the revenue department and a different rule for independent contractors for the Department of Labor and what’s enforced by the attorney general. So even though in Massachusetts we’ve got two different rules for how to classify independent contractors, and so we highly recommend using or consulting with people who are highly skilled and are familiar with the ins and outs of the laws.
Peter: Here’s one that should raise red flags but I would guess some of our listeners you say, “exercise extreme caution when contracting with former employees.” I know a number of people who boomerang back into a former employer in a consulting role.
Nathan: It is. It’s a common occurrence and it’s one that raises lots of red flags. If you are working for a company in January and you have a certain set of responsibilities and perform certain tasks, and then you retire and come back in March as an independent contractor basically doing the same tasks and the same responsibilities, the IRS is going to say, well, what changed? If you were an employee in January, why aren’t you an employee in March? And the answer usually is, well, I didn’t want to have them take out taxes. That’s not a good reason for the IRS. The IRS is going to say…
Peter: I’m sure.
Nathan: … well, I’m now an independent contractor. Why did you become an independent contractor? Well, I didn’t want to pay all those taxes. Boom. And then you’re done.
If you’re doing the same thing as what you were doing before, or if you’re doing the same thing as somebody you’re sitting right next to and you’re an employee and the other person is an independent contractor that makes it really hard to say – to defend to the IRS or another agency that this person really is independent and that they’re doing the same thing that they used to be doing when they were an employee.
Peter: Number 5 on your list is, engage independent contractors for non-core work. Unpack that for us, please.
Nathan: Core work is really the main business to business does. A CPA firm hires accountants, a law firms engages with lawyers, a hospital engages with nurses. It is hard in those settings for the CPA firm to hire an accountant to work for them full time who is not an employee. It’s hard for a law firm to hire a lawyer and say that he is not an employee. If you’re doing what the business really is set out to do and they’re doing the main focus of the business then that’s really going to be a core work and it’s going to be hard to say that person is exercising a lot of independence because it’s really your core business.
On the other hand, if a law firm hires somebody to clean the offices at night or to paint the offices, that’s really not their core business. They don’t do cleaning on a daily basis. They don’t do painting on a regular day-to-day basis. It’s a lot easier to justify that person for bringing in a special skill that the company doesn’t have to come in and perform services that the company doesn’t usually perform. It’s a lot easier to be able to justify that and say, yup, that person is independent. We don’t know much about what they do and therefore, we don’t have a lot of control over what they do. They are independent from what we do.
For your core business, it’s hard to say you don’t want to exercise control, you don’t have the skills or the knowledge or the expertise to control that area. Your core business is stuff you ought to be up to speed on and you ought to exercise control over it because that’s your core business.
Peter: That’s really interesting. Back to your early example, if a CPA firm brings in a web developer to design a website for them that’s certainly something that could be viewed as an independent contractor.
Nathan: Absolutely. My favorite example is the plumber. When you hire the plumber to come to your house, he comes to your house, he’s got his truck, it says Dave’s Plumbing. You tell him the toilet upstairs is all backed up. He brings his own tools, he goes in, he fixes it and then he sends you a bill. That really is the essence of an independent contractor.
On the other hand, if I’m hiring somebody to watch my kids and I tell them I want you to pick them up t at 2:30, I want you to take them to the park, I want you to feed them this for dinner, then you’re giving an awful lot of instructions and that person really begins to look like an employee.
Peter: So I guess the moral of this story is that this is very complex and different states have different rules and regulations and you really have to be very, very careful in embracing the free agent nation that’s growing out there.
Nathan: You’re absolutely right. I think this is a very challenging time for companies because there are more and more highly skilled individuals who are entrepreneurial, who want to establish their own business, want to be out on their own. At the same time, you have a lot of scrutiny for those type of positions. So you want the skills and there are number of studies out there that show that there is a skills gap between available talent that’s out in the market and what companies need. So you want the skills and you want to be able to engage with these highly skilled people; at the same time you need to be careful because either the IRS or the Department of Labor or any number of people are looking at these arrangements to make sure that you’ve done it correctly.
Peter: Nathan, thank you so much for taking time to speak with us today on TotalPicture Radio. Is there anything else, any other recommendations you’d like to share with the audience?
Nathan: I think you’ve covered an awful lot of it. Documenting the work in a written agreement, being very careful about how you set up the arrangement and not exercising a lot of control over independent contractors, and really in hiring employees for your core work are really a few of the basic things that we advise people to do. Again, we strongly suggest using people who are well-versed in this area to help you walk through this if you’re going to be engaging with independent contractors.
Peter: Yeah, people like yourself!
Nathan Gibson is Vice President of Payrolling and Contractor Solutions at Randstad Sourceright. Nathan, thanks again for taking time to speak with us today.
Nathan: Peter, thanks for having me. I appreciate it a lot.
Be sure to visit Nathan Gibson’s show page for a complete transcript of this interview, resource links and much more information available in the Big Picture Channel of TotalPicture Radio, that’s totalpicture.com. While there, sign up for our newsletter. It’s quick, easy and free. Connect with our TotalPicture Radio community on Facebook and follow me on Twitter @Peterclayton and @totalpicture. I’m happy to connect on LinkedIn to our listeners; just be sure to indicate that you listen to TotalPicture Radio.
Thanks for joining us today.