Independent Contractor or Employee—it’s NOT the Worker’s Decision!

(Editor’s Note: This is the next in a series of guest blog posts about contract staffing, courtesy of Top Echelon Contracting, the recruiter’s back-office solution.  Similar posts will appear in future issues of The Pinnacle Newsletter Blog.)

Many of the questions we receive from recruiters revolve around the proper classification of workers as either 1099 independent contractors or W-2 employees.  One recent inquiry we received was particularly interesting, and we thought other recruiters could learn from it, as well.

The recruiter in question works for a large firm. This particular recruiting firm has a standard practice of asking each contract candidate whether they would prefer to be paid on a 1099 as an independent contractor or on a W-2 as an employee.  The recruiter believes that this practice is WRONG, and he called us asking whether he could be personally liable by continuing to allow contract candidates to classify themselves.

Our immediate reaction is that this, of course, IS wrong.  Worker classification is NOT the worker’s choice.  To support our view and get some insight on the personal liability issue, we spoke with three attorneys.  Their reactions were pretty dramatic, almost as if we had dumped cold water on them.  They confirmed that you should NEVER ask workers how they would like to be classified.  You should always let the IRS guidelines be the determining factor.

As we have discussed in previous blog posts, one key factor when determining the proper classification of a worker is whether the company has the right to control and direct the worker.  The IRS looks at a number of factors to determine the extent of a company’s right to direct and control and has divided those factors into three categories: Behavioral Control, Financial Control, and Type of Relationship. These categories are explained in detail at http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

But the question at hand is whether or not this individual recruiter could incur personal liability for following this firm’s practice.  Well, according to the attorneys with whom we spoke, the principals or owners of a recruiting firm would be liable.  A recruiter working for the firm who does not have a financial stake in it would likely not be held liable.

This may be a relief to a lot of recruiters out there, but there are many who are running small recruiting firms that could be on the hook.  And the risk is higher now than ever.  The IRS, Department of Labor, and state agencies recently agreed to share information about worker misclassification, and the DOL requested $46 million in the Fiscal Year 2012 budget to step up worker misclassification enforcement.  The Employee Misclassification Act against worker misclassification was also recently reintroduced into the House.

The recruiter who contacted us is taking this information back to his recruiting firm, along with a copy of our recent blog post about the Voluntary Worker Classification Settlement Program, which allows employers to only pay a small amount of back taxes if they voluntarily reclassify their independent contractors as employees.

If you believe your firm—or a firm for which you’re working—is incorrectly classifying contractors, now is the time to speak up.  Even if you don’t own the firm, you still have a vested interest in making sure it stays in business.

(This article is for informational purposes only and should NOT be considered legal advice.)

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