As independent contractor compliance and engagement specialists, we are frequently asked by enterprise clients to help them manage the risks surrounding professional services vendors who perform work on a SOW basis for the benefit of the client company. Part of the solution is to educate our clients on the definition of an independent business.
In a previous article we explained that engaging with a corporation to have work done does not automatically protect your company from worker misclassification risks. We also revealed a common phenomenon in enterprise programs: the individual worker who “steps outside” their own corporation (or the one he/she works for) and instead performs work as a common law employee for another company.
As these topics reveal, proper worker classification can be confusing and fraught with risk for enterprise buyers of talent. Many people wonder why there isn’t a commonsense, straightforward approach to understanding the difference between an independent business/contractor and someone who is misclassified.
While there are differing federal and state guidelines for proper worker classification, and many of the factors are not definitively going to indicate employee versus IC, there are some foundational considerations that will help to shed some light on the topic.
The answer is easier than most people realize; there are clear ways to view how truly independent businesses operate. These differences help to define the factors for the proper classification of independent contractors.
To start, let’s just focus on corporations. What are the traits of an independent corporation? (By the way, these very same traits also apply to an individual consultant who is working as a qualified independent contractor. They are, in fact, a “business of one.”)
- The corporation provides skills not generally available in your company. The consultants provided by the corporation are most likely not providing the same services performed by your traditional employees. The work is also not typically part of the ongoing business operations but instead may be something of a one-time project or special nature.
- Typically, another business is hired to perform a specific service — a definable end product or deliverable — not just compensated for time worked.
- You may have learned about this corporation through their advertising, or word-of-mouth, or even a referral from a competitor. The business most likely actively markets itself to attract new clients.
- Corporations have a business name, business license, insurance, possibly a physical establishment (although this is not as significant for a consulting firm), and have made a capital investment in their business infrastructure (office equipment, tools, supplies). One way to look at this is they have invested in things other than an individual’s time and skill.
- The corporation decides how it will perform the service you’ve contracted for. It can make business decisions about the job that can affect its profit or loss. If it completes the job more efficiently then it can make a greater profit. If it does not operate as efficiently, it could actually lose money completing a job. An independent business has the potential for a true risk of loss in delivering the contracted outcome.
- Generally, a successful business does not depend on a single client for its financial existence. In the case of a single, independent consultant, they may work for multiple clients through a series of individual engagements over time. As one project comes to an end, another begins — with different clients. Doing this demonstrates multiple clients even when there is only a single project at any time.
- Another heavily weighted factor is the ability to assign or reassign the consultants who perform the actual work on the project. If the corporation is large enough it may assign different consultants to work on a project, so in effect the client is not hiring an individual to perform work, it is engaging another independent company to provide the contracted service.
This list is by no means complete, but it provides a good overview of what defines an independent business. By extension, this also helps to define an independent contractor, who is essentially a “business of one.”
There is an old saying in IC compliance circles: “if it walks like a duck and quacks like a duck, then it is probably a duck.” This adage definitely applies to the proper classification of independent contractors. When you observe the significant differences between how employees operate and how corporations operate, you’ll see that these differences are what truly separate an employee from an independent contractor.
If you’re in doubt, then you’ll want to work with an experienced independent contractor compliance and engagement specialist, like TalentWave, who can help you evaluate your vendors and identify any lurking worker misclassification risks.