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Congratulations! You've made it through the recession. Economic indicators say the recession is over and things are going to start looking up. And now you're about to start hiring again.
But beware: Your first steps toward recovery could generate a raised eyebrow from the taxman. After all, you're not the only one who has suffered during the past year and a half. So has the State of California, which saw many of its tax revenue streams shrivel drastically. The state is looking for new revenue streams to make up the difference. And, guess what? It found one.
The downturn meant layoffs and belt-tightening for most Silicon Valley companies. And whether you're a dot-com or a tech giant, you're likely feeling a little cautious about hiring. However, you probably find yourself dabbling with the idea of bringing back staff.
As a temporary measure, you might be considering hiring independent contractors. And, why not? This option is less costly should projects be canceled. And the flexibility offered by temporary contract labor is too attractive to dismiss.
Scores of "free-lancers" are available at the click of a mouse. Disenfranchised dot-commers can be had for only their hourly rate. No muss, no fuss. No obligation to pay benefits, no long-term commitment. Just in for your project and then out. And you're off the hook. Right?
Well, not so fast.
The Employment Development Department, which oversees collection of employment taxes in California, knows something you may not. They know that tech companies are the biggest users of independent contractors. And they know that more than 70 percent of Silicon Valley companies are guilty of misclassifying workers they hire as independents, when those workers may actually be functioning as employees. In a post-recession economy, that number comes closer to 90 percent.
In California, it's not easy to do it right. You need to determine if the individual you're hiring is a "business," according to guidelines issued by at least six federal and state agencies, each with their own definitions. California has 13 specific common law standards to be met, as well as a tricky "economic reality" test. State and federal auditors can review your contractor relationships at any time -- even if you have only one independent contractor. And they routinely expand their reviews to look at all independent contractors you've hired in that tax year or longer.
Beware of a new law, Senate Bill 542, which requires you to notify California within 20 days of hiring an independent contractor. While the law's stated purpose was to catch "deadbeat dads" who owed child and spousal support, the effect is to provide the state's auditors notice at the time of hire, enabling closer monitoring.
But why would they concentrate on Silicon Valley? Because technology uses more independent contractors and consultants than any other sector of the economy.
Assessments can reach hundreds of thousands of dollars, even for small operations. If you're hiring dozens of independent contractors, and doing it wrong, the financial hit could be in the millions. And your contractors will be in trouble, too, because they'll owe for the taxes they should have been paying all along as employees.
So welcome back -- finally -- to a growing economy in Silicon Valley. Just make sure that in your efforts to ride the wave of recovery, you don't create more problems downstream by faulty hiring.
Take a critical look at each consultant, and make sure you can prove he or she is indeed a legitimate "business." Monitor consultants' ongoing relationships with your firm. Pay them for deliverables, not hourly. And, if you have a large number of contractors, consider having a company that specializes in this area do it for you.
If you take the right precautions, your use of these individuals should pass the scrutiny of the most zealous state or federal auditors.
So, embrace the value of using a contingent work force. The best and most profitable companies all do.
Terrie Weinand is executive vice president of PrO Unlimited, which helps Silicon Valley companies keep in compliance with federal and state regulations regarding their contingent work forces.
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