I recently read a case whose facts indicated the employer, Affinity Logistics Corporation (Affinity) committed a fatal faux pas when instructing independent contractors (ICs) on how to set up and structure their businesses. This case is a great example of why companies should not direct their workers on how to structure their business.
While every driver operated as a separate business entity, the Court found that Affinity told the drivers they needed a fictitious business name, a business license, and a commercial business checking account. They even prepared the paperwork for the drivers, leaving only blank spaces for their signatures. The Court found that “these businesses were in name only.” Ruiz v. Affinity Logistics Corp. (9th Cir. – June 16, 2014).Typically, ICs must present documentation that they operate and market themselves as a legitimate business.
Although this case was raised by delivery truck drivers, it illustrates the point that the kinds of documentation and evidence contractors present play a key role in how a worker is categorized in a contract outlining a working arrangement. It’s never a good business practice to advise or direct your ICs on how to structure their business.
Other good tips for working with ICs are:
- Make them duke it out for your business – ask for competitive bids!
- Set up payment based on deliverables or milestones, and write up a contract detailing out the scope of the project and due dates
- Avoid treating workers as ICs who must be under your direction and control.
- Have the IC pay for their own insurance and business expenses. If they’re representing themselves as a business, responsible ICs should have this anyway.
- Don’t use ICs to fill vacancies that are normally filled by employees, integral to your business, or for positions that are responsible for managing or supervising other employees. For example, ICs shouldn’t be used to fill in during maternity leave.
- When in doubt, have your tax or legal professional on speed dial
- Apples are not oranges. Establish parameters between employees and ICs. ICs shouldn’t get employee benefits, standard employee training (except safety or mandated training), and they shouldn’t be at the company Christmas party.
- ICs should include their travel and other out of pocket expenses in their bid. Avoid having them follow company travel rules or guidelines – again, apples aren’t oranges.
ICs are an important part of the contingent workforce. It is still possible to engage their talent and expertise, but the degree of direction and control over the work will be directly linked to how the worker is classified. Having a contract is one of many facts the Courts will consider in determining worker status.
To learn more, check out the full article, “Another Logistics and Delivery Company Found to Have Misclassified its Drivers as Independent Contractors”, from independentcontractorcompliance.com.Disclaimer: The materials contained on this site are for information only should not be considered as, or a substitute for, accounting, tax or legal advice.