Tax & Business Insights

Protecting Independent Contractor Status

Volume 13 Issue 6 --  November/December 2001

The last newsletter delved into Independent Contractor (IK) issues, and we promised to explore ways to establish that status.  We will start with the following scenario.

Let=s say you use a delivery service in your area to deliver your special brand of kielbasa.  Jeff, your UPS deliveryman, loves your kielbasa, which is why he is overweight and smells like garlic.  Jeff is aware that you ship tons of kielbasa and is keenly interested in forming his own delivery service to deliver, primarily, your kielbasa.

Your company, K-Basa, Inc., is interested in hiring Jeff=s new company but does not want to assume the risks associated with delivery vehicles.  Since Jeff=s new business will be largely delivering your product, how can you use Jeff=s new company and avoid the risk of Jeff, or his employees, being deemed employees of K-Basa?

A New Name

One of the first protective measures would be to insist that Jeff=s new business be incorporated or organized as a Limited Liability Company (LLC) and report its business activities independently of K‑Basa.  As incredible as it may sound, there are delivery businesses operating as sole proprietorships without the protection of limited liability gained from incorporating or forming an LLC. 

Liability considerations aside, many large companies hire former employees as consultants after they retire.  In such cases, the former employers often insist that the former employees form a new business (corporation or LLC) and that the newly formed business provide the consulting services, so that the individual could not be construed to be an employee.

The IK Agreement

Most businesses that retain IKs, particularly in situations like Jeff=s, go further and have IK Agreements signed by both parties.  An IK Agreement generally specifies the relationship between the Parties and the services to be performed.  The Agreement may describe how Jeff will be paid and what he is to represent to third parties regarding his relationship (or that of his company) to K-Basa; namely, that Jeff=s workers are not employees of K-Basa.

Most IK Agreements will provide that Jeff=s workers are free to deliver the kielbasa at reasonable business times using their own equipment.  Importantly, the Agreement will spell out that Jeff=s company is responsible for its own insurance, taxes, employee withholding, and all federal, state and local taxes relating to the delivery service.

Typically, each Party will agree not to take positions inconsistent with the IK Agreement.   Such language is needed mainly to prevent Jeff=s company from arguing that it is merely an agent of K-Basa, should there be a tort lawsuit or insurance or tax audit and Jeff=s company did not do the things it was supposed to do B like pay its taxes.

Home Free?

Suppose there is an IK Agreement between Jeff=s new company and K-Basa.  K-Basa, realizing it has the upper-hand economically, begins directing Jeff, the only employee of Jeff=s new company.  As time goes by, K-Basa begins to direct Jeff more and more, and begins telling him what to do and when to do it.  Eventually, the K-Basa trademark B neon green gloves B are mandated for Jeff when he makes all deliveries, not just those for K-Basa.  Under these circumstances, green-gloved Jeff could be legally or administratively deemed to be an employee of K-Basa despite the existence of an IK Agreement.

So what is the message?  Have an IK Agreement and honor it, or risk having an alleged IK become an employee.

Recurring Situations

Sellers of items that need to be installed, like roofing products, rugs, windows, siding, etc., routinely use IKs and sometimes screen them for performance and workmanship skills.  It is likely such companies will have a standard IK Agreement that it uses.  Such a form IK Agreement allows the Company to process a large number of orders without having to prepare new paperwork for each new assignment to the IK.

If you or one of your Clients needs a sample IK Agreement form, contact us or click here.  To return to the first newsletter on Independent Contractors, click here.

Copyright 2001
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