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The use of contract workers has long been an inexpensive alternative to staff employees and a boon to companies looking to hold the line on budgets. But some employment experts say the practice is being scrutinized anew by the Internal Revenue Service - and employers need to be versed in the rules.
Andrew Popler, vice president of Florida-based workforce consulting firm PrO Unlimited Inc., said that after years of turning a blind eye to the situation, the IRS is re-examining companies that bulk up on contract workers.
"A contract workforce is a very flexible way to engage workers," he said. "It's not only flexible, because a client or company can bring them on or off with very little effort, but it's cost-effective."
But many employers started misusing the contract designation or didn't realize that there are IRS guidelines that have to be met, Mr. Popler said.
Pushing the envelope on the issue has gotten employers in trouble before.
Microsoft Corp. and Time Warner Inc. were both hit with lawsuits and investigations for their accounting of contract workers during the mid-1990s, and both companies eventually paid multimillion-dollar settlements in 2000.
In Microsoft's case, the company settled a class-action lawsuit filed by former temporary workers for $97 million.
Brynn Mow, manager of software consulting firm Dallas Technology Group, said the Microsoft settlement spooked employers. Many now get their contractors through agencies such as hers.
"There are companies that try to go the cheaper route, and those are the companies that are probably under the IRS watch," she said.
Companies can add and subtract contract personnel much quicker and more affordably than they can hire and fire permanent workers because they don't have to pay out severance packages, deduct income tax, pay into matching 401(k) programs or offer health benefits. But rules do exist.
"A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor and not the means and methods of accomplishing the result," according to the IRS Web site.
In other words, employers can only tell their contract workers what they need to do. They can't tell them how to do it.
"If I tell you how to do it, when to do it, and I'm going to pay you by the hour whether or not you finish, you're an employee," Mr. Popler said.
He said companies that employ independent contractors should do three things:
- Locate all contractors within the company. (Some employers don't realize how many they have, Mr. Popler said.)
- Consult with the company's internal legal service or an outside expert to make sure all workers are properly classified as employees or contractors.
- Consider using contractors from an outside agency that hires the workers as W- 2 employees and then provides them to client companies.
Greg Bustin, president of business consulting firm Bustin & Co. in Dallas, said he wouldn't be surprised if the IRS did ramp up its investigations.
"It's not a surprise that this issue would come up, because people are trying to come up with more creative ways to get the work done without adding staff," he said.
Today's focus on cleaning up corporate accounting may influence more aggressive auditing of contractors, Mr. Bustin said.
"I think that the whole contract approach makes a lot of sense in certain circumstances," he said, "but like any good thing, there are some people out there who can find a way to abuse it."
E-mail vgodinez@dallasnews.com
Reprinted with the permission of The Dallas Morning News
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