Are you Classifying Your Consultants Correctly?

Make sure you are classifying your employees and independent contractors correctly. The law firm of Cook Brown LLP will be putting on a seminar about this important issue this Thursday in Sacramento. Here is information from their website, and a link to register.

Worker Misclassification:

If you use independent contractors or have employees exempt from overtime, now is the time to perform an internal review of your practices. The IRS and Department of Labor are stepping up efforts to target employers who treat workers as independent contractors or as exempt from overtime under 2010’s “Misclassification Initiative.” An IRS audit, or claim by a single employee, can lead to a class-action lawsuit or a company-wide examination by the Department of Labor. Many companies inadvertently misclassify workers in these categories because of a misunderstanding of the appropriate factors to use in setting up the relationship. The California Labor Code, Wage Orders, federal Fair Labor Standards Act, the California Employment Development Department’s criteria, as well as, the IRS’s “20 factor” test must be analyzed to determine the appropriate classification.

Join attorney Stephen McCutcheon for a hands-on discussion about determining correct contractor and exemption status, and how to conduct an appropriate evaluation of pay practices to avoid government scrutiny.

WHERE:Holiday Inn – Capitol Plaza
300 J Street, Sacramento, CA
(Hosted parking in city lot adjacent to hotel)

WHEN:June 10, 2010
Registration and continental breakfast between 8:30 and 9:00 a.m.
Program from 9:00 a.m. to 10:15 a.m.

Click here for the event invitation and registration!

Hiring a Consultant? Some Things to Consider

Consultants are a great resource for companies to bring in expert advice or to handle specific projects. There are a lot of winery professionals that call themselves consultants, but as an employer and a company, there are a few things you need to think of when bringing on a consultant.

The IRS offers an online 12 point checklist to use to make sure you are hiring a consultant. A consultant is a business person who is responsible for their own business, taxes and marketing. A winery does not have any responsibility to a consultant other than that outlined in a consulting agreement. The general rule of thumb is that a person is an independent consultant if the hiring company has the right to control or direct only the result of the work, not what the work is to be done or how the work will be done.

The basic items the IRS checklist covers are:

• Behavioral Control: An independent consultant is not directed and controlled by the client. The client can only direct and control the work.
• Financial control: A contractor has a financial stake in the work, and will incur expenses that the client does not need to reimburse for. Also, a consultant can show a profit or incur a loss for their business, unlike an employee who is compensated with a salary.
  
• Relationship of the Parties: A contractor must maintain their own benefits, insurance and business activities. A consultant is not an employee, and therefore is not entitled to the same benefits an employee is.

Why is this important? There have been rulings in the past where independent consultants did not meet these requirements, and were eligible to receive the benefits of a regular employee. Microsoft and several other large companies were found to be misclassifying regular employees as independent consultants. These were landmark rulings, and have caused independent consultants to come under scrutiny with the IRS.

A 20 point checklist has been created to see if a consultant is really able to be classified as a consultant. Here are the questions:

For the following questions, a "yes" answer means the worker is an employee.
1. Does the principal provide instructions to the worker about when, where, and how he or she is to perform the work?
2. Does the principal provide training to the worker?
3. Are the services provided by the worker integrated into the principal's business operations?
4. Must the services be rendered personally by the worker?
5. Does the principal hire, supervise and pay assistants to the worker?
6. Is there a continuing relationship between the principal and the worker?
7. Does the principal set the work hours and schedule?
8. Does the worker devote substantially full time to the business of the principal?
9. Is the work performed on the principal's premises?
10. Is the worker required to perform the services in an order or sequence set by the principal?
11. Is the worker required to submit oral or written reports to the principal?
12. Is the worker paid by the hour, week, or month?
13. Does the principal have the right to discharge the worker at will?
14. Can the worker terminate his or her relationship with the principal any time he or she wishes without incurring liability to the principal?
15. Does the principal pay the business or traveling expenses of the worker?

For the following questions, a "yes" answer means the worker is an independent contractor.
16. Does the worker furnish significant tools, materials and equipment?
17. Does the worker have a significant investment in facilities?
18. Can the worker realize a profit or loss as a result of his or her services?
19. Does the worker provide services for more than one firm at a time?
20. Does the worker make his or her services available to the general public?
(from TaxProphet.com, http://www.taxprophet.com/apps/active2/indep-mm.html).

Making sure your consultant is a true consultant and not a quasi-employee will allow you to have them bring their expertise to the company, and allow you the flexibility to maintain the appropriate compensation and employment relationship.

These points were previously discussed for consultants on WineTalent's employment blog at Avoid the Taxman: http://winetalent.blogspot.com