Avoid the risks of working with independent contractors by using a structured consulting/projects company that is a true Corporation or a Staffing Agency

A 1099 contractor, or an “independent contractor”, is a legal and tax-related term used in the U.S. to refer to the type of worker that contracts their services out to a business or businesses.

When hiring a 1099 contractor, employers may face complicated tax issues, claims of misclassification, employee vs. contractor scenarios that create penalties, liabilities and various types of insurance. The employer is more vulnerable when paying them directly using the 1099 form method vs. using a structured Consulting/Projects Company that is a true Corporation or a Staffing Agency.

Know to avoid: risk scenarios

The following are different scenarios of situations a company may face when hiring 1099 contractors and the risks involved when doing so.

Scenario 1: The 1099 independent contractor may not pay their State or Federal taxes, payroll taxes or other.

Risk: The IRS can force the hiring company to pay all withholding taxes, plus interest. The IRS State/Federal can go back up to seven years and request all funds for a company’s 1099 workers.

Scenario 2: Companies could misclassify workers as “independent contractors” that according to the federal government guidelines should actually be classified as employees. In an article published on the front page of the N.Y. Times on February 18, 2010, entitled “A Crack Down on ‘Contractors’ as a Tax Dodge”, it was stated that the Obama Administration, along with State officials, plans to crack down on this misclassification to avoid losing tax dollars that are lost because the “independent contractors” are not reporting all or a portion of their revenue as taxable income.

Risk:  This can expose Employers to fees, back taxes, insurance fees, and stiff penalties from multiple agencies: the Internal Revenue Service, Employment Development Department, Workers Compensation Appeals board, Immigration and Naturalization Service, the U. S. Department of Labor, and the State Labor Commissioner.

To cover or not to cover: Insurance

Scenario 3: The 1099 independent contractor may get injured while on company premises, without having health care coverage.

Risk: Contractor will most likely sue the Employer to pay for their medical expenses. If it gets into the court system, it is unlikely that a jury will deny an injured person from being paid by a company.

Scenario 4: The 1099 independent contractor could contract an infectious or debilitating disease.

Risk: The contractor could sue for medical costs. There has been precedence set by the Hewlett Packard Aids case several years ago. A 1099 contractor contacted HIV and sued HP for health coverage, claiming to be an HP employee. HP settled the case. Although rare, when cases like this occur, handling the situation can be quite costly.

Scenario 5: Providing Workers Compensation insurance is a California state law. The employer must carry this coverage on all of its employees. The California Labor Board would not like to find that an independent contractor was injured on the company premises without Workers Compensation insurance.

Risk: If a person working at your premises gets hurt and does not have Workers Compensation (or perhaps Health Insurance), then this worker may take the employer to court to cover all the costs of that injury. Those costs can become high very quickly.

Scenario 6: A fellow person at the worksite may get injured near the independent contractor’s workplace, placing the blame on the independent contractor.

Risk: Business Liability insurance would be needed. This also applies to property damage. The legal issues surrounding these events are time-consuming and expensive. If the independent contractor does not have the proper insurance, all parties involved may turn to the Employer to cover all damages and costs.

Risk: Errors and Omissions insurance (sometimes called E&O) is required in the event that the 1099 independent contractor’s work causes some issue that hurts someone else at work or damages something. Also, any of the other injured parties are likely to sue the company because of the perception of “deep pockets”. This type of insurance is expensive and usually never carried by independent contractors.

Scenario 7: The 1099 independent contractor could be driving to or from work or while driving somewhere for the company and incur in an injury or cause an injury to others or damage property.

Risk: Auto Insurance coverage is another issue with owned and non-owned vehicles. It is not a question of “if”, it’s a question of “when” a traffic accident will occur.

Scenario 8: The independent contractor may get involved in dishonesty in the workplace by stealing and/or lying.

Risk: The Employer will incur any and all costs and ramifications from all the worker’s illicit actions. With no insurance coverage, the company will have to bare the entire cost of the transgression.

Who’s who when claiming company benefits?

Scenario 9: 1099 independent contractors can claim that they are an employee of the company and that they have rights to benefits after working for the company for several months.

This occurred in the landmark case involving Microsoft in 1999, where contractors claimed rights to stock options and health coverage because they performed the identical tasks as the direct employees of Microsoft and the company didn’t have a clear definition of who an “employee” really was, therefore the “independent contractors” exploited Microsoft in this particular situation. Since this incident, Microsoft and other knowledgeable companies have had their benefit plan documents revised.

How safe is your company’s Intellectual Property?

Scenario 10: The contractor may claim rights on intellectual property.

Risk: Without the right protective language, the 1099 independent contractor may attempt to force the client company to pay royalties on Intellectual Property or designs that they have created. They may also claim rights and royalties on items or technology that is patentable.

In today’s economic climate, many employers are “doing more with less” and this translates to their workforce. Many Employers bring on people as needed, or outsource work from time to time. If your company hires 1099 independent contractors or outsources work and something goes wrong, it can be costly and time consuming to settle these situations. Could an issue like this cripple your company or project? Can you take that risk?

Avoid them ahead of time by using a knowledgeable and experienced organization. Read more about how Creative Solutions Services can help you eliminate the risks of working with 1099 independent contractors.

References: http://www.nytimes.com/2010/02/18/business/18workers.html