Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Why companies like independent contractors

- by Alan Duvall 

Published in Dayton Daily News  February 4, 2007 

 “The illusion of freedom will continue as long as it’s profitable to continue the illusion.”  Frank Zappa

FedEx has recently been under siege from its drivers, many of whom have been classified as independent contractors, shutting them out of benefits offered company employees.  The financial stakes are massive and are particularly relevant as FedEx continues its ongoing struggle against United Parcel Service. 

Use of independent contractors is widespread and particularly prevalent in the computer and transportation industries.  Companies declare workers independent contractors so firms don't have to spend money on benefits.  Executives also think the use of independents provide additional legal protection from customers. 

Categorizations become really blurry with triangular business arrangements.  These are agreements  where temporary employment agencies are used to supply a continuous work force for client companies.  Generally, such temp workers are considered employees of the agencies, but the rules are not uniformly applied.  For instance, if the temp agency fails to pay a worker's employment taxes, client companies can still be held responsible despite having paid the fees that cover the taxes. 

The IRS utilizes a 20-factor test to determine the true employer of an individual worker.  Several common themes flow through the conditions – namely the company’s control over the worker’s time and manner of performing services as well as the worker’s performance of services for more than one business in the same duration. 

For example, an extreme risk of employee classification is generated by a company unilaterally determining the time, location and manner of services performed by a worker who provides services solely for the firm.

Even the almighty Microsoft was held by courts to have crossed the line in improperly classifying workers as independent contractors.  The courts held the workers “common law employees” of Microsoft retroactively eligible for inclusion in the company’s stock plans.  The ruling cost Microsoft a reported $97 million in stock compensation plus years of legal fees.

It is curious to note the courts held those same workers to be employees of their respective temp agencies (and not Microsoft) with respect to payroll taxes and other benefits such as health care.  As a result, we are left with the interesting conundrum: the same workers are legal employees of two businesses at the same time depending upon which benefits are at stake.        

“At the point the illusion becomes too expensive...they will pull back the curtains...and you will see the brick wall at the back of the theatre.”  Frank Zappa

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.