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Submitted by Greg Kaupp on 14 June 2011

Salaried consultants vs 1099 independent subcontractors for ERP

There has been a growing and troubling trend for companies that implement Enterprise Resource Planning ("ERP") projects to use 1099 independent contractors versus salaried consultants. What most companies do not realize is that this creates a potentially significant liability for both the company employing the independent contractors as well as for the clients for which they perform services.

Traffic sign saying, Risks AheadWhile this article is not intended as legal advice it should help both the companies that employ independent contractors as well as the clients they serve to better understand the issues and potential liability related to hiring and working with misclassified employees.

Our experience comes from implementing Microsoft Dynamics NAV or Navision for over a decade. However the practice of misclassifying consultants is not unique to our specific corner of the industry but is an issue for any technology project that spans multiple months and involves onsite client work.

The primary factors in determing an employee versus an independent contractor are independence and degree of control. The evidence that supports the employee classification falls into the three broad categoris of behavioral, financial, and type of control.

The behavioral evidence would look at whether the company controls or has the right to control what the worker does and how the worker does his or her job. The financial evidence would look at the business aspects of the worker’s job and how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc. Finally the type of control evidence would determine if there are written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.) Also whether the relationship will continue and is the work performed a key aspect of the business?

Increasingly the courts as well as state and federal legislators are taking aim at employee misclassification and even looking past who pays an independent contractor to hold both the company paying the independent contractor as well as the client using the services of the independenct contractor liable.

Two new pieces of legislation were introduced last year, The Employee Misclassification Prevention Act (EMPA) and the The Fair Playing Field Act of 2010. These two bills highlight the attention that this topic is receiving not to mention the additional enforcement actions that federal and state authorities are taking against companies that misclassify or use misclassifed employees.

Almost every company implementing an ERP project should realize that independent contractors would almost certainly fail the independence as well as degree of control tests. The behaviorial evidence at a minimum almost always makes an independent contractor look more like an employee than an independent contractor. Finally the longer a project continues the more like an employee the independent contractor becomes and the potential liability from the misclassification may be shared by all.

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