New Study Details Strategies for Managing the Contingent Labor Umbrella, Including Independent Contractors

The latest research on contingent workforce management from Aberdeen highlights a new trend in independent contractor and statement of work consultant management: a dramatic increase in the use of 3rd party Independent Contractor Engagement Specialists (ICES) that help businesses reduce the risks of engaging independent contractors and other contract workers, including misclassification and co-employment risk.

Herndon, VA (Vocus) August 12, 2010

Aberdeen Group, a Harte-Hanks Company, announced the release of its latest contingent workforce management study, Contingent Labor Management: Strategies for Managing the Complexities of the Contingent Labor Umbrella.

The new research report tracks the evolution of the modern-day centralized contingent labor program and its inclusion of crucial workforce categories, such as independent contractors, statement-of-work (SOW) consultants, project-based services, and “classic” temporary workers. The research delves into strategies utilized by Best-in-Class companies to effectively mitigate misclassification and co-employment risk and better manage all aspects of their contingent workforce.

“The trend is clear: over the last year, we’ve seen a 20% increase in the use of contingent labor. It is more important than ever to manage the complexities of each sub-set of contingent labor, such as independent contractors, Statement of Work (SOW) labor, services and ‘classic’ temporary labor,” said Christopher Dwyer, research analyst, Aberdeen.

The report also highlights the growing use of outsourced Independent Contractor Engagement Specialists (ICES) by organizations looking to better manage this category. According to the report, the 3rd party solution facilitates all components of independent contractor management, including classification determinations, 1099 auditing, and compliance, and drives down the risk of co-employment. Historically, ICES solutions have improved compliance rates by nearly 80%, according to the study.

Says Dwyer, “The use of Independent Contractor Engagement Specialists (ICES) has increased over 50% in the last 18 months, and there are compelling reasons why organizations are bringing their focus here. ICES utilization, especially when combined with MSP and VMS solutions, can enhance Best-in-Class management of the contingent labor umbrella and ensure that all other facets of this program, including effective management of Independent Contractors (ICs), SOW consultants, and services vendors, are driving significant value to the organization.”

Download your complimentary copy of the new Aberdeen contingent labor study.

About Aberdeen Group, a Harte-Hanks Company
Aberdeen provides fact-based research and market intelligence that delivers demonstrable results. Having queried more than 30,000 companies in the past two years, Aberdeen is positioned to educate users to action: driving market awareness, creating demand, enabling sales, and delivering meaningful return-on-investment analysis. As the trusted advisor to the global technology markets, corporations turn to Aberdeen for insights that drive decisions.
http://www.aberdeen.com.

About MBO Partners
Since 1986, MBO Partners has been driving innovation in the way independent contractors and their clients work together. The leading Independent Contractor Engagement Specialist (ICES), MBO offers enterprise solutions for contingent workforce management that make it safe, easy, and efficient for organizations to utilize the valuable services of Independent Contractors (ICs), SOW consultants, and small services vendors. They provide 1099 risk mitigation and independent contractor compliance solutions. http://www.mbopartners.com

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Freelancers Fight State’s Independent Contractor Law
By Andrea Shea

BOSTON — Let’s say you’re an independent contractor based in the Berkshires, and you work from home as a freelance writer. Then let’s say you get an e-mail from one of your main clients, a big, out-of-state publishing company. You’re informed they won’t be giving you any more assignments. In fact, the company has pretty much blacklisted Massachusetts independent contractors altogether.

“All the industries we’re trying to grow in the creative economy, we’ve now just put up a huge roadblock,” says Kathy Bitetti.

Bitetti calls this a horror story that’s playing out across the state. She’s a tireless arts advocate, constantly roaming Beacon Hill’s halls, cornering politicians, going to bat for artist health care and housing. Now she’s obsessed with the Massachusetts Independent Contractor Law.

“We’ve been very quiet about it because we’ve been trying to fix it,” Bitetti says. “But now it’s just like, forget it, you know, this is really a problem, and the fact that our writers cannot get work, and it’s going to start hitting our graphic designers, our illustrators.”

Longtime freelance illustrator Ken Dubrowski says he’s already feeling it. Some of his out-of-state clients are in a tizzy. They’re confused by the state law.

“It’s like a stigma, you know, the Scarlet Letter,” Dubrowski says. “It’s like, ‘Oh my God, I’m from Massachusetts, what does that mean?’ This tax law, this Independent Contractor’s Law.”

So, what exactly is the law? And how did we get here?

“It’s a law that went into effect in 1990,” says Waltham employment attorney Robert Shea, who consults corporate clients about this law all the time. “And it was tweaked in 2004 to deal with a concern about the use of independent contractors in the construction area, and the tweak has had a lot of unintended consequences.”

In a 2005 article, Shea predicted the “tweak” would reach beyond the construction industry. It has.

But in a nutshell — if complex law can ever be put into a nutshell — the law was created to prevent worker exploitation. Companies hiring, say, a carpenter would classify him or her as an independent contractor to save money on payroll, taxes and benefits. Under the tweaked law, that carpenter must be granted employee status unless he or she performs duties “outside the usual course of business.” What that means, exactly, can seem gray. And there are other criteria that must be met.

Critics say the law is broadly written, making it susceptible to open interpretation.

But, bottom line, classifying workers as independent contractors now requires major hoop-jumping. If employers get busted classifying incorrectly — say, giving a worker a 1099 form at tax time rather than a W-2 — they’ll face hefty fines. The attorney general’s office is charged with enforcing the law.

“This law applies to so many different businesses that use so many different types of independent contractors,” Shea says, including bike messengers, delivery drivers and accountants. And it protects a lot of them. But, the attorney adds, writers and artists are a different breed. “I mean, they’re a clear victim of this change in the law,” he says, somewhat bemused.

Artist Bitetti says — whether by design or by accident — the law needs to change. Not every worker wants a W-2.

“Most of us are independent contractors and we want to be because once you’re classified as an employee you don’t own any rights to your intellectual property,” she says, “whether you’re a visual artist, a dancer, an engineer, videogamer.”

Bitetti is endeavoring for an amendment to acknowledge this. But Frank Callahan, president of the Massachusetts Building Trades Council, is wary.

“At the risk of sounding very stubborn, we’ve been working on this very hard for over six years,” he explains, “and we’re always open to any change that could address legitimate concerns without impacting the workforce as a whole in a negative manner.”

Callahan was a prime mover on the 2004 amendment. He represents 74 local unions and says the law is doing exactly what it was intended to do — especially in the drywall and painting industries.

“I haven’t seen the unintended consequences that you reference,” Callahan says. “We heard this argument back in 2004 and 2005. They trotted out a number of different groups — the hair dressers, the bike messengers.”

And they’re fine, he says. But state Rep. Smitty Pignatelli, D-Lenox, is concerned about the law’s unintended impact ripping through his district. Many of his constituents are indie artists, and he says western Massachusetts — and the state as a whole — really can’t afford to lose its creative workforce because of this law.

“This creative economy is certainly putting people back to work and all I know is out in the Berkshires, if it wasn’t for the creative economy, I’m not sure where the Berkshires would be on the radar map at this point,” he says.

Pignatelli also co-chairs the House’s Cultural Caucus, which is organizing an upcoming forum at the State House to educate legislators and artists unions on the contractor law — a lot of people don’t know the law exists. Or how it really works. But Sen. Thomas McGee, D-Lynn, does. He voted on the more restrictive version back in 2004.

“There’s strong, legitimate arguments on both sides of this issue, so you don’t want to blow up a piece of legislation that’s doing what it was intended to do,” McGee says.

At the same time…

“We have been able to clearly recognize — particularly in the arts and in freelance writing — that there is an impact that is not an intended impact and that we are trying to address,” he adds.

McGee, also chairman of the Committee for Workforce and Labor Development, introduced a draft of a new amendment to the law a few weeks ago. It didn’t make it out of committee, though. Bitetti calls it a nice try, but says “it doesn’t even come close to fixing it.”

While Massachusetts tries to figure it out, other states are also starting to crack down on companies that incorrectly classify independent contractors. And there’s movement on the federal level to do the same.

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Freelancers can face difficulties with one of the most rewarding aspects of their work: getting paid. Now new legislation under consideration in Albany would grant independent contractors in New York protections against companies that don’t pay up for completed work.

The language of the bill, first introduced in the Senate earlier this month and sponsored by Assembly Speaker Sheldon Silver this week, sets a two-month window for freelancers to be paid following the completion of a project. The legislation also gives the State Department of Labor new powers to take action against businesses that violate work agreements with freelancers or fail to pay full compensation within a reasonable amount of time.

In the case of disputes between freelancers and businesses, what counts as “reasonable” would be adjudicated by Labor Department officials. Sara Horowitz, the executive director of the Freelancers Union, says that the “reasonable” standard for freelancer compensation would function much like the “just cause” standard that governs the firing of employees. State officials evaluating disputes would make decisions that gradually create recognized standards.

“There have been zero standards for freelancers, and that’s why this is so important,” Horowitz explained. “Right now, it’s so unclear what the law actually is on hiring freelancers. I think businesses would look forward to having guidance.”

Her nonprofit group, which has 90,000 members in New York, supports the legislation. They have made unpaid wages the centerpiece of an advocacy campaign launched in April along with a spate of subway advertisements. The Freelancers Union website also includes a space for disgruntled freelancers to name and shame companies that haven’t been prompt with payment.

State Sen. Daniel Squadron, who sponsored the bill, was once a freelancer himself. (Check out his biographical tagline in this 2005 op-ed for proof.) He worked as a writer on Sen. Chuck Schumer’s 2008 book as an independent contractor, although he says New York’s senior senator never stiffed him on wages.

“I always had something in writing,” he said of his work agreements with Schumer, “but I never had to use it.”

But the problem of delayed or unpaid wages is very real for New Yorkers, according to Squadron. Freelancers “come up to me all the time when I’m out on the street” to talk about the issue, he said in an interview.

The Freelancers Union cites a survey it conducted of 3,000 independent contractors across the country which found that 77% had not been paid for an assignment.

Squadron insists the legislation won’t unduly hamper small businesses that rely on freelance workers. “A lot of the businesses that contract with freelancers are small businesses or even individuals, so there’s a real attempt in this bill to make it manageable even if you don’t have an HR department,” he said. “The only folks who will be negatively impacted here are the ones who don’t pay.”

The legislative session is winding down in Albany amid a crippling impasse over the state budget, so there is little chance that the freelance-wage legislation will come up for further debate any time soon. But Silver’s support is pivotal in the Assembly, and Squadron is optimistic that his Senate colleagues will back the legislation.

“Everyone represents an increasing number of freelancers,” he said.

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Time for a trucker declaration of independence?
by Jim Park

TORONTO — There’s a huge push underway south of the border to redefine independent contractor status.

At the federal level, a bill sponsored last year by Senator John Kerry (D-Mass) proposes to eliminate Section 530 of the Revenue Act of 1978. Known in some circles as the “safe harbor“ provision, it allowed companies to rely on the test of long-standing, recognized practice to determine whether a worker is an employee or an independent contractor.

If passed, the bill would reverse the burden of proof, forcing companies to show they have a “reasonable basis” for not treating an individual as an employee.

As American Trucking Associations (ATA) deputy general counsel, Robert Digges Jr. puts it, “…a motor carrier would need to spend significant resources to defend independent contractor classification under a fact-intensive review. That would, in some instances, be prohibitively expensive.”

It would probably also push out of the industry plenty of owner-ops — many already on the endangered species list — since there was something appealing to buying their own equipment in the first place.

Note that President Obama himself strongly supports efforts to outlaw employee misclassification and has made it a priority. In Canada, where unions are already allowed very lenient guidelines to collectively bargain on behalf of owner-ops (even against their will), can a push to strip them of independent status be far behind?

Maybe it’s time we took a fresh approach to the tired old labor/management relationship that exists between carriers and owner-operators, if not just to forestall the challenges that are bound to arise following the American initiative, but simply to strengthen the bond between what are really business partners.

How about a franchise model? Many do not see the carrier owner-operator relationship in that light, but taken to its logical conclusion, that’s what it is. So why not solidify it without all the confusion and encumbrances. Set them up as franchisees.

The typical franchise model doesn’t work perfectly for owner-operators as currently defined, but with a little imagination, it could. Owner-ops are extensions of the carrier. They often fly the company colors and they are certainly beholden to the carrier in terms of policy and procedure, compliance requirements, and more. The carrier does most, if not all of the marketing and the owner-op — in theory — benefits from an association with a strong business model and recognized brand.

The franchisee operates at arm’s length from the franchisor, but is obliged under terms of the agreement to operate in a certain manner. This relieves the carrier of the burden of proof in terms of the employee/ contractor debate, while providing both parties with a degree of both autonomy and obligation.

Current owner-op/carrier relationships really don’t serve the owner-op well, but the confines of Part III of the Canada Labour Code don’t give either party a lot of latitude to make change.

As for unions who scrutinize the amount of control a company has over an independent worker, it can be easily argued that corporate McDonalds, for example, has more oversight and control over a retail franchisee than a carrier ever would over an owner-op.

A bone fide franchise deal for owner-ops would take the Labour Code right out of the equation, and allow two independent businesses to maximize their strengths and help each other achieve certain goals without complication.

All it takes is a little imagination.

- By Jim Park

(For more on how drivers and owner-ops are dealing with today’s hyper regulatory environment, check out our weekly online Feature, The Case of the Disappearing Drivers, click here).

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Lawmakers targeting businesses ducking employee taxes
By Cy Ryan

CARSON CITY — In these tough economic times, some employers have found a way to cut expenses by avoiding the business tax and not contributing to the fund that finances benefits to the unemployed.

The businesses are improperly classifying some workers as independent contractors and skipping the tax and the state assessments.

A legislative subcommittee has voted to recommend imposing hefty fines on employers that misclassify their workers.

Assemblywoman Bonnie Parnell, D-Carson City, said the practice is widespread and the state is losing a lot of revenue.

Jack Mallory, director of government affairs of the painters union in Las Vegas, said legitimate contractors are pushed out of the market because they cannot compete with those who break the law.

He said these contractors reduce their labor costs by as much as 30 percent by not paying various employment-related taxes or providing workers compensation insurance.

“This does not foster fair competition,” he told the Subcommittee to Study Employee Misclassification.

As a recommendation to be forwarded to the 2011 Legislature, the subcommittee agreed the employer should be fined for the first offense at $5,000 for each employee who is misclassified as an independent contractor.

A fine of $15,000 for each employee misclassified would be imposed for a second offense. And the fine for a third offense would be $25,000 and loss of their business license for three years.

The state imposes a tax on businesses based on payroll. By having employees classified as independent contractors, that tax is lowered. And the business would not have to pay into the unemployment trust fund or the account for coverage for workers injured on the job.

The subcommittee accepted the suggestion of member Yindra Dixon to give employees who are misclassified the right to file suit to collect money they were due but did not receive.

Labor representatives have testified that some employees who were misclassified were not paid minimum wage.

Dixon, of Las Vegas, said an employee who filed a complaint with a state agency would have to wait 120 days before filing suit. That would give the agency time to process the claim. If there was no decision, the worker could carry the case to court.

The subcommittee, headed by Sen. Shirley Breeden, D-Henderson, also is recommending to the 2011 Legislature that state labor law posters including definitions of employees and independent contractors be placed in areas where work is perform or employees congregate.

The subcommittee also wanted to ensure that audits are being made of employers to see if they are properly classifying workers. Subcommittee member Fran Almarez of Las Vegas said that is how other states have found money due in lost taxes or assessments.

Donna Clark, chief of contributions at the state Division of Employment Security, told the subcommittee that it conducts 4,000 random audits of employers a year, and about 12 percent of those are for misclassified workers.

The subcommittee, on the recommendation of Parnell, who is subcommittee vice chairwoman, approved a plan for civil penalties against a person who advises an employer to misclassify workers as independent contractors in an attempt to lower costs.

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Got nonstandard?
by Liz Kofman

Classifying today’s workers can make your head spin.

As a society, we like to name and categorize things. It helps us make sense of a chaotic world. When we see a baby, we want to know if it’s a boy or a girl–even though the bald blob of human can’t talk or do anything remotely “girly” or “manly.” When we can’t put people in neat categories, we freak out a bit. (Consider the controversy surrounding South African runner, Caster Semenya.)

Categorizing workers has long been the domain of the Bureau of Labor Statistics, the government department charged with tracking the U.S. labor force. They’re the ones responsible for producing the unemployment figures we trumpet and debate endlessly.

In exploring the world of coworking, I’ve discovered just how damn confusing and important the task of categorizing workers has become. Follow along to figure out where you fit in. Step one: deep breath.

Next, are you “standard” or “non-standard”? If you are employed full-time by one employer, and have a formal contract that you expect will last at least one year, congratulations, you are normal. If, not, don’t fret, you’re not alone. In fact, the sheer quantity and scope of nonstandard employment in today’s work force is pretty striking, accounting for an estimated 33% of all employment in the U.S.

On we go. Are you a “contingent” or  an “alternative” worker? The first conjures up images of migrant farmworkers–though, technically, anyone who doesn’t have a contract for ongoing work and expects their current job will last for less than a year qualifies–and the latter, I don’t know, maybe an employee with piercings?

Actually, alternative workers include independent contractors, consultants, freelancers, on-call workers, temps, and workers provided by contract firms. You can be self-employed and/or a wage or salary worker. According to February 2005 current population survey data (the most recent BLS data available), 14.8 million workers, or about one in 10 employees, fall into the alternative arrangement category, including 10.3 million independent contractors, 2.5 million on-call workers, 1.2 million temporary help agency workers, and 813,000 workers provided by contract firms. 
These numbers have almost certainly risen during the Great Recession. Hello, permatemps.

One difficulty with accounting for the nonstandard workforce is, well, that they’re not very standard. At the coworking establishment I’ve been frequenting in LA, a web designer might be a freelancer one month and an independent contractor working for just one company the next. Or a non-profit consultant slash on-call actor slash frequenter of temp agencies during rough times.

But the most confusing categorization I’ve encountered here is for small business owners, which the BLS categorizes as employees of their own firms and therefore standard workers. In some ways, this makes sense. Some of the independent workers I’ve met at “LAco” really see themselves as business owners, even if they don’t have employees or even an LLC to tack on. This sense of identity as a business owner is especially the case if they feel like they’re responsible for generating employment for others, even indirectly, like a talent manager getting actors work or a production company of one outsourcing to other freelancers.

On the other hand, sole proprietors and even start-ups with a few employees (more commonly, contractors that are “1099′d”) have needs more aligned with nonstandard than standard employees. Both “alternative” workers and small business owners are drawn to coworking spaces like LAco; both may lack the resources necessary to start and maintain an office of their own. Both have to secure their own health insurance and rarely have access to unemployment benefits. They may be taxed at higher rates than standard employees and have fewer resources in dealing with non-payment from clients.

The Freelancer’s Union is actively addressing some of the issues nonstandard workers face. But they’re limited by geography (though they successfully fought against the Unincorporated Business Tax for freelancers in New York City, my sense is that they don’t have the resources to wage similar campaigns across the country) and, perhaps more importantly, by their own target audience. Divergent self-identities–freelancer vs. consultant vs. creative vs. business owner–keep about a third of the workforce from realizing they’re in a pretty similar, shoddy, safety-net-less boat.

- Liz

Employee versus Contractor – The Debate Escalates
By Rob Duncan, Chief Operating Officer, contactual

Virtual contact centers have historically been split when it comes to the classification of their agents. While some companies, like Alpine Access, have always hired agents as employees, other centers use independent contractors to handle their call volumes. The employment status of agents may not seem like an important distinction for companies looking to outsource their customer care operations. However, the type of model used by virtual centers directly impacts the services they provide and qualifications of their agents.

The “employee versus contractor” debate has recently made headlines due to a federal campaign against misclassified workers. With record budget deficits, the government has stepped up its investigation and enforcement activities, with plans to recoup $7 billion over the next 10 years from companies illegally passing off regular employees as contractors. While contractor-based virtual centers have not yet been convicted of intentionally misclassifying workers, several companies have switched to the employee-model to avoid potential lawsuits and increased governmental scrutiny.

Unclear Guidelines and Fraud Lead to Worker Misclassification

According to a federal study, each year 3.4 million workers are wrongly classified as contractors. Some companies purposely try to cut costs by passing off regular employees as contractors. In doing so, they avoid paying minimum wage, overtime, Social Security, Medicare, healthcare and other benefits. To catch these businesses, the IRS has hired additional enforcement agents and begun random audits of 6,000 companies for compliance with the law. If found guilty, these companies could pay fines of up to $5,000 per misclassified employee.

Companies, on the other hand, say the problem stems from the fact that there is not a bright-line test to determine who fits the definition of an independent contractor. Without a single clear, simple, and objective standard, mistakes inadvertently happen. For some assistance, the IRS developed a 20-Factor Test to help recognize if an employer/employee relationship exists. Also, the U.S. Tax Court established a 7-Factor Test to clarify if a worker is an employee or self-employed for income tax purposes. Due to differing interpretations and tests at the federal and state level, there continues to be misunderstanding and frustration over the issue.

Impact On Virtual Contact Centers

Employee misclassification is a reality in nearly every industry, including the virtual contact center market. In one class-action lawsuit, at-home agents alleged that the call center they worked for violated the Fair Labor Standards Act by misclassifying them as independent contractors, failing to pay the federal minimum wage, overtime pay and training pay. Over 30,000 agents were ultimately certified into the class, helping to prompt a Department of Labor investigation into the company’s alleged misclassification of home agents as independent contractors. While the lawsuit is in the process of being settled, the legal and financial risk posed by the contractor model compelled the company to terminate more than 13,000 independent contractors and switch to an employer-employee relationship.

Employee vs. Independent Contractor Model: Which to Choose?

To be clear, virtual contact centers – whether employee-based or using independent contractors – provide legitimate solutions to address business needs. Both models offer clients compelling cost savings, improved operational efficiencies, and enhanced flexibility that cannot be obtained through the use of standard brick-and-mortar call centers. While there are some similarities between the two models, there are also significant differences that business leaders need to take into consideration. To select the right customer care partner, executives need to match the appropriate model with the needs of their industry, their business and their customers.

As a general rule, virtual contact centers with independent contractors are primarily engaged for straightforward, scripted call types that require minimal training. With thousands of contractors available at a moment’s notice, these virtual centers are typically deployed by businesses with extreme fluctuations in call volumes. For these reasons, the independent contractor approach is most often used in the direct response TV and seasonal retail markets.

Virtual contact centers with agents as employees, on the other hand, are the best choice for companies with complex, unscripted call types that require weeks or months of training such as sales, technical support, collections, and bilingual interactions. The employee model is also well-suited for clients that need an extremely dedicated and committed workforce that can be scheduled and managed, which legally cannot be done with independent contractors. Due to these benefits, Fortune 500 organizations in the communications, financial service, technology and healthcare sectors have embraced the use of employee-based, at-home call center agents.

As the above comparisons demonstrate, there are many variables when evaluating a virtual contact center partner. For companies with simple calls, minimal training, and little need for management oversight, the contractor model may be a good fit – legal and tax risks notwithstanding. For organizations that require more control and management of a highly trained and dedicated workforce with service level adherence and KPI commitments, the employee model has proven to be the best option. Only after careful consideration of the characteristics of both models can executives determine which approach will deliver the most appropriate solution and best service offering for their callers.

Rob Duncan is Chief Operating Officer of Alpine Access, Inc. a nation-wide provider of call center services using home-based customer service and sales employees. Alpine Access clients include Fortune 100 companies in a wide variety of industries.

Edited by Patrick Barnard, TMCnet.com columnist

IRS ‘contractor’ study raising big concerns
Observers feel certain a new definition will emerge; businesses, contractors will use flexibility during tough time

by Chad Eric Watt, Staff Writer, Dallas Business Journal

The Internal Revenue Service has launched a hard look at how companies count contractors and full-time employees, prompting business advisers to urge companies to take a look before the revenue service does.

“I’m guessing the use of independent contractors and contingent workers has expanded a lot in the last 25 years,” said Mike Abcarian, an employment law attorney at Fisher & Phillips in Dallas. “For the IRS this is an issue of a lot of money not finding its way to the federal government.”

The study, which began in March, will involve three years of intensive audits of businesses and workers, and will be used to help the IRS determine the difference between how much tax it collects and how much goes unpaid, said Clay Sanford, an IRS spokesman.

The study will also be used to look for tax cheats on both sides of work arrangements, Sanford said.

An IRS program manager told industry publication Tax Notes Today that 20 Texas companies are part of the first wave of companies being studied, despite the companies being randomly selected. The IRS manager was not immediately available for additional comment.
Speed bump for growth

The study comes at a hard time for businesses looking to grow and be flexible during a stop-and-start recovery.

“A lot of employers are looking for ways to be more efficient,” Abcarian said. “If you use independent contractors, you can price your product lower because you have less administrative costs.”

Add in the prospect of additional health care costs tied to regulatory reform, and government changes are giving companies even more reason to avoid new hires, said J.R. Gonzales, former president and CEO of the U.S. Hispanic Chamber of Commerce.

“The economy’s not making it any easier (to hire), and more restrictions will make it more difficult,” he said.

Independent contractors are concerned, too.

“When you’re looking for a flexible work force this is an ideal situation,” said David Dunnigan, executive director of the Dallas-based Coalition for Independent Contractor Freedom. “In many cases, you can make more money as an independent contractor because there’s not a ceiling there.”

If the IRS redefines how contractors are classified, that flexibility and upside for entrepreneurial contractors could be challenged, he said.
A more aggressive IRS

Fundamentally, it’s easier for the IRS to collect employment taxes from companies and their full-time employees, Abcarian said.

That creates a bias in the IRS toward counting workers as employees rather than contractors, said Jim Smith, an accountant with Smith Jackson Boyer & Bovard PLLC in Dallas.

“They are increasingly auditing (small and mid-sized businesses) that are reporting a large number of contractors,” he said. “It’s not a program, it’s a pogrom,” Smith said.

If a company has accidentally misclassified full-timers as contractors, it should simply correct that mistake, said the IRS’ Sanford. But if a business has “no reasonable basis” for misclassifying a worker, it can be held liable for all the workers’ employment taxes, not just the portion typically paid by the company.

Companies could also face penalties and interest. In extreme situations, a company could face class action lawsuits on behalf of misclassified workers claiming they haven’t been properly paid for the hours they’ve worked, Abcarian said.

He said he expects to see a more aggressive IRS even before the study is done, and businesses should get ready.

“This is a very appropriate time for employers to do their homework in terms of classification of employees to be sure they’re doing it right,” he said.

cwatt@bizjournals.com | 214-706-7123

Say goodbye to full-time jobs with benefits
By Chris Isidore, senior writer, CNNMoney.com
June 1, 2010

NEW YORK (CNNMoney.com) — Jobs may be coming back, but they aren’t the same ones workers were used to.

Many of the jobs employers are adding are temporary or contract positions, rather than traditional full-time jobs with benefits. With unemployment remaining near 10%, employers have their pick of workers willing to accept less secure positions.

In 2005, the government estimated that 31% of U.S. workers were already so-called contingent workers. Experts say that number could increase to 40% or more in the next 10 years.

James Stoeckmann, senior practice leader at WorldatWork, a professional association of human resource executives, believes that full-time employees could become the minority of the nation’s workforce within 20 to 30 years, leaving employees without traditional benefits such as health coverage, paid vacations and retirement plans, that most workers take for granted today.

“The traditional job is not doomed. But it will increasingly have competition from other models, the most prominent is the independent contractor model,” he said.

Doug Arms, senior vice president of Ajilon, a staffing firm, says about 90% of the positions his company is helping clients fill right now are on a contract basis.

“[Employers] are reluctant to bring on permanent employees too quickly,” he said. “And the available candidate landscape is much different now. They’re a little more aggressive to take any position.”

Cathy, who asked that her last name not be used, lost her job as a recruiter for a financial services firm in February 2009. She started working on a contract basis four months later. She believes that many employers are taking improper advantage of the weak labor market.

“I work in HR, I understand that sometimes you need to hire a contractor because you have a project and you won’t need the person when it’s done in three months,” she said. “But that’s not what’s happening here.”

Cathy said her co-workers who had permanent jobs didn’t treat her differently, but she still felt like a second-class citizen.

“At one job they were giving out H1N1 flu shots but the contract workers weren’t eligible to receive them,” she said. “I said ‘You guys are still in trouble if I get the flu.’”

Much of the change is due to employers’ desire to limit their costs. Stoechmann equates the shift to the one seen in retirement plans, in which employers moved away from the traditional pension plan toward defined contribution plans, which passes more of the burden onto the employee.

Demographic factors are feeding the shift as well. Stoechmann said many younger workers are more open to the idea of not tying themselves to a single employer.

And as baby boomers reach the age when they are eligible for Medicare and not dependent upon their employer for health insurance, many are more open to contract work.

Health care reform legislation passed earlier this year, which will create a mandate for employers to provide health benefits for employees but not contractors, will also feed the trend.

“Once you have an employer mandate in place, you create an incentive for employers to get around that mandate,” said Susan Houseman, a senior economist studying labor issues at the W.E. Upjohn Institute.

Houseman also believes the jobs market could stay tilted in favor of employers for much of the coming decade, because of the depth of job losses and the lingering weakness in the economy.

Sara Horowitz, the founder and executive director of the Freelancers Union, an advocacy group for freelancers and independent contractors, said that employment laws and protections have been slow to recognize the shift. For example, independent contractors aren’t eligible for unemployment benefits. And they have to pay both the employee and the employer match on their Social Security taxes.

But Horowitz said not everyone who works as a freelancer or independent contractor is unhappy with their situation.

She estimates about 30% are satisfied with the arrangement, about equal to the number who desperately want to find a full-time job with benefits. The other 40% are somewhere in the middle, feeling pleased by aspects of their job and unhappy about others.

“It’s not that most want to be freelancers or don’t want to be freelancers. They’re just following the work, and the work itself is evolving,” she said.

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The eyes of IRS are on Texas
Tuesday, May 25, 2010

The Internal Revenue Service has Texas companies in its sights.

The agency is kicking off a major research project on employment taxes this year, and has lined up about 50 companies nationally for some very extensive audits, says Kevin Johnson, a former IRS agent and tax lawyer with Chamberlain Hrdlicka in Pennsylvania.

Of those 50, 20 are Texas companies, or 40%.

Yes, Texas is a big state with lots of companies, but so is New York. Only one New York company is getting the extra special audit treatment, Johnson says.

Johnson couldn’t name names, but the 50 businesses generally are pretty big businesses, but not megacorporations. Wal-Mart and Exxon get extra-special IRS attention year-in and year-out, he says.

From an employer perspective, the most important thing coming from the IRS study is the independent contractor question; the IRS suspects that companies are treating people who ought to be employees as independent contractors.

Don’t say you haven’t been warned.

cwatt@bizjournals.com

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