Turn employees into contractors?

[Tonearm]

This article got me thinking about turning my US employees into independent contractors:

[inc.com...]

Of course, there are important IRS rules to follow. The article above links to this IRS page:

[irs.gov...]

Do you think I could rearrange the way my warehouse works to the point where I could have contractors shipping and receiving instead of employees?

The IRS page above says:

"Relief Provisions
If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977."

I'm not clear on the context in which this is stated, specifically the reference to "relief". Does this mean I can't have a contractor ship and receive if I have previously had an employee ship and receive?

[LifeinAsia]

You are telling people when and where (your premises) they have to work. And I assume you're going to tell them how to do their jobs. Sounds like employees to me.

Does this mean I can't have a contractor ship and receive if I have previously had an employee ship and receive?

Sounds sketchy... I'd definitely run it by a lawyer with experience in this area. Or actually, ask the IRS for a ruling. It doesn't matter what a lawyer says if the IRS still disallows it.

[lucy24]

I'm not clear on the context in which this is stated, specifically the reference to "relief".

This is where your knowledge of HTML stands you in good stead. All four paragraphs, from "Consequences of..." through "Voluntary...", are <h3> nested under the <h2> of Misclassification of Employees.

Now, IANAL and this is purely my interpretation, but to me

You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977.

translates as "In your dreams, mister." ;)

What you want to do instead is hook up with an employment agency and have them send you the workers. This approach has become enormously popular in recent years. The people work at your location, but for the agency. Just like the old-time temp agency except that you keep doing it forever.

[ssgumby]

If you treat them as contractors, you should only employ them for 1 year. There have been lawsuits where contractors worked as contractors for several years, then sued saying they were treated as FTE's and should have had benefits as such.

[sonjay]

Would your warehouse workers be able to set their own work days and hours?

Would they be able to subcontract the warehouse work to others at their own discretion, without your prior approval?

Would they be providing their services to other companies in addition to yours, or would they be working for you exclusively?

Would they be trained and expected to do the work according to your business's methods, or would they be free to choose their own ways of doing things?

Would they decide on their own what tools and equipment are needed to do the work, and provide their own tools and equipment?

Would there be an expectation on both sides that the work will be continued indefinitely, or would the work be for a specific project or period of time?

Those are just some of the questions the IRS looks at in deciding whether your workers are employees or independent contractors. IANAL, but I sure wouldn't try to classify warehouse shipping & receiving workers as independent contractors. I wouldn't even need to check with my accountant; I just wouldn't do it.

[votrechien]

I don't know how sticky they are about it in the U.S. compared to Canada (although I'm sure it's similar) but here this is one of the sure-fire ways to raise the eyebrows of the CRA. You're not the first person to think "Gee...I could save a lot of money if I just hired them as a contractor!". When taking a business law class, there were some scary examples of businesses getting hit hard.

If you were considering doing this, I would think warehouse staff would be one of the hardest positions to even remotely coming close to being able to classify as a contract worker. The very nature of their work probably means that you need them to ship out packages on set time schedules and receive inventory on set time schedules, all of which is one of the biggest determinants if they are employees or not.

[Tonearm]

Thanks for the advice guys. I think you're all right and it's impossible.

[dpd1]

My friend went through this. Worked for a company for ten years, then they laid him off... claiming they didn't have any work. They magically found the money to hire him back as a contractor a year later. They technically have to get rid of him and hire him back with a new deal every year or so. He has to pay for his own med and everything. Funny part is, they pay him more as a contractor than an employee. Typical corporate insanity.

[LifeinAsia]

Funny part is, they pay him more as a contractor than an employee.

That's standard. For an employee, (in the U.S.) the employer has to pay for 1/2 the FICA/medicare plus holiday/vacation time, unemployment insurance, workman's comp, plus any other benefits they offer to regular employees (health insurance, 401K, etc.). Those are significant costs that can easily be 25% or more of the employee's base salary.

[dpd1]

I think they gave him a raise of almost 25%, maybe more. But if you're almost breaking even... then what's the point?

[Tonearm]

They avoid some exposure and liability that way too.

[jwolthuis]

... then what's the point?

If this practice keeps their employee-count under 50, they are not subject to the ObamaCare employer mandate, requiring them to provide government-approved health insurance to their employees, or face a stiff penalty starting in 12 months.

[dpd1]

I guess we all knew there would be some kind of work-around for that. There always is.

[Tonearm]

They still have to meet the other requirements for designating an independent contractor.

I would think the firing/hiring thing every year would be really bad for morale.

[dpd1]

Yeah, that's my thinking. To me, it seems like it would potentially destroy any sense of family or camaraderie. I've noticed my friend now has a much more cynical attitude towards his job than he did before. Now, his attitude is more 'me', rather that 'we'.