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High-tech companies and other employers can add another layer to the thick stack of papers they need to maintain to do business: A new state law aimed at tracking deadbeat parents requires employers to report the hiring of independent contractors within 20 days.
But while a recent survey of Silicon Valley high-tech companies showed many employers didn't know about the new rule, companies in the Sacramento area said they're either following the rule or leaving recruiting of independent contractors to staffing services.
The status of independent contractors is a key issue for technology companies because they often use independent contractors to supplement their permanent work force, said Terrie Weinand, chief operating officer of PrO Unlimited, Inc., a contingent workforce management service in Burlingame that did the survey.
PrO Unlimited's study of Silicon Valley revealed that almost two-thirds of the respondents don't know about the new Independent Contractor Reporting Law that took effect on January 1, 2001. The survey also showed that three-quarters of employers familiar with the law had no system in place to comply with it.
Michael Dourgarian, franchise president of Manpower of Sacramento, finds that puzzling - especially in light of recent high-profile court cases involving tech companies using independent contractors.
His company is a staffing service with high-tech clients.
"The exposure in the tech world of issues involving independent contractors has been at a high visibility for a couple years," Dourgarian said, citing the lawsuit filed by independent contractors against Microsoft for benefits. "The state EDD (Employment Development Department) and other tax agencies are out campaigning regularly about issues surrounding the use of independent contractors."
Dourgarian said the evolving legal definition of independent contractors is muddying the waters when it comes to reporting laws.
"It's actually very difficult to classify an independent contractor these days," he said. "There's about 20 conditions a contractor has to meet to be a true independent contractor."
With the high-tech economy on shaky ground this year, employers may overlook compliance with the new law, Weinand said. "No one is talking about anything," she said, "but getting through the next six months."
Bill Mueller, a spokesman for Hewlett-Packard, said the company is "well aware of the independent contracting law and is meeting those requirements.
David Landry, chief executive officer of Cal-Staff in Sacramento, said he's aware of the rule too, but said the company doesn't place independent contractors because of the liability and risk. The staffing service formed an information technology unit to supply temporary workers to tech firms.
"There are so many rules that apply to the relationship between an independent contractor and employer, and the definition is subject to interpretation," he said. "Our clients prefer our employees."
While independent contractors must pay their own taxes, staffing services withhold taxes and workers' compensation payments from checks, which makes them more attractive - and costlier - to employers, Dourgarian said.
The Independent Contractor Reporting Law requires employers to report contractors being paid $600 or more a year and whose annual pay is reported on a federal income tax form 1099. The main purpose of the law is to better track deadbeat parents who may be behind in child-support payments and are hiding income, said EDD spokeswoman Suzanne Schroeder.
While the sate used to get annual reporting of independent contractors from 1099s, now they get notification within 20 days. Schroeder said reporting independent contractors won't trigger an audit. Investigations usually are initiated after someone files for unemployment compensation or disability insurance, when workers claim they were employees and not independent contractors.
When that happens, she said, EDD may audit a company if it suspects an independent contractor should be classified as an employee.
Under state and federal law, workers are considered independent contractors if they have their own businesses, offer a service to various companies, and have more than one client, among other conditions. If the state finds a worker to be an employee rather than an independent contractor, the company could be fined for failure to withhold federal income taxes, and could be liable for the taxes due.
For Dourgarian, the new law means extra paperwork for his business.
"This increases the amount of government reporting, and it increases the frequency from annually to monthly," he said.
Dourgarian said technology firms traditionally use independent contractors. While some small technology firms still tend to hire from outside the company, the larger companies have shied away from independent contractors, instead opting to hire temporary workers from staffing services.
"My customers are very specific in saying they want my employees," Dourgarian said. "They're very concerned about what I do to enforce that employer/employee relationship, and we know we're judged very closely on our compliance."
If a company files an unusually large number of notices of new independent contractors, that could also get the agency's attention, Schroeder said.
The reporting requirement is just one of many layers of paperwork Dourgarian's company has had to get used to. Since he got into the staffing business 20 years ago, government reporting and the new wage-and-hour laws have made his business more complicated.
"Is this requirement itself burdensome? No," he said. "It's the whole tidal wave of reporting requirements. It raises the cost of doing business and my cost to my clients. I have to have extra staff to handle all the paperwork."
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