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Legal Implications for Using Independent
Contractors
The IRS and various state agencies take
a very firm stance on the issue of misclassification
of certain workers as independent contractors,
as opposed to classifying those workers as employees.
In years past, corporations could hire certain
technical personnel as independent contractors,
thus avoiding the tax liability associated with
these workers and affording significant tax
benefits to those workers.
Effective with the Tax Reform Act of 1986,
the IRS began to aggressively target both companies
and workers who engaged in this practice. The
resulting reclassification subjected those companies
to significant liability for withholding tax,
social security payments, penalties and interest.
In addition, such reclassification of independent
contractors as employees may entitle such workers
to retroactive employment benefits, including
unemployment compensation, health benefits,
paid time off, and even pension benefits.
The way for your company to avoid such liability
is to utilize a technical services firm that
only provides workers that are its bonafide
employees. Such employees should be paid on
a W-2 basis, should have all of their employment
tax and withholdings paid, and be treated in
a manner consistent with that of an employee/employer
relationship.
One of the benefits of working with a contract
service agency who acts as the employer of its
contractors is that the agency bears all responsibility
to report the contractor's income as well as
pay statutory and withholding taxes.
By contrast, when you utilize independent contractors
or agencies that provide contractors who are
not its employees, you may be responsible for
such taxes as well as substantial penalties
in the event the worker is subsequently reclassified
as an employee. Staffing your temporary needs
through an agency who pro-vides contractors
that are its bonafide employees eliminates your
worry of future liability.
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Accurate Records and Reporting
The employment agreement between the contractor
and the agency should require the contractor
to maintain and submit Pacific NetSoft time
cards approved by you. The approved time cards
comprise the basis on which you will be invoiced
by the agency and by which the contractor will
be paid. For your future contract employment
planning and budgeting, the agency should be
able to provide you with historical contractor
usage and spending reports. The contract service
agency is responsible for payroll and IRS compliance.
The contractor's approved time cards should
be entered and processed quickly and accurately.
The agency ensures that Federal and State Withholding,
FICA, SDI, and any other insurance and benefits
are calculated, deducted, filed, and reported
to the IRS. The agency is also responsible for
ensuring that the I 9 Employment Eligibility
Verification and W 4 Employee's Withholding
Allowance Certificate documents are completed
and accurately recorded.
One of the benefits of working with a contract
service agency who acts as the employer of its
contractors is that the agency bears all responsibility
to report the contractor's income as well as
pay statutory and withholding foxes-eliminating
your worry of future liability.
Intellectual Property and Confidential Information
Contractors will often work on your technical
projects, which contain classified or confidential
information. To safeguard intellectual property
rights, make sure that the contract service
agency has stipulated all copyright, trademark,
patent protection, contract developments, and
confidential information as your property in
the employment agreement which the contractor
signed.
Performance Evaluation
Your relationship with the contract service
agency does not end when the contractor starts
work. The contract service agency should conduct
periodic follow up meetings with both the hiring
manager and the contractor to ensure that the
performance evaluations are satisfaction, and
that work meets expectations. If needed, they
will act in concert with you to counsel the
contractor to modify his behavior. In short,
through frequent communication the agency should
strive to ensure that all expectations and terms
of the agreement are met.
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