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1099 Independent Contractors: The Assets and Liabilities of Engagement

Oct 17, 2016 10:00:25 AM

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There are plenty of excellent reasons to engage 1099 contractors (ICs) in the service of your organizational and operational goals. However, as with any tool or practice, there are benefits to be gained as well as pitfalls to be avoided. Understanding what the potential assets and liabilities are with regard to any activity can mean the difference between success and failure. Here is a good breakdown of the possible assets/benefits an organization may expect to yield when using IC labor as well as the potential for liabilities. Weigh these carefully when considering utilizing 1099 contractors.

Assets/Benefits

Engaging ICs often adds instant expertise in any particular field to your workforce. ICs generally tend to be very qualified in their particular area of expertise. This is precisely why an organization may seek to engage them in the first place.

There is usually a lower cost associated with an IC because 1099 contractors must carry their own benefits and tax administration. Ergo, there is no payroll burden or matching taxes for the employer to pay out.

Most “true” ICs are in the top 10-15% as far as knowledge goes within their space. As noted above, they bring instant expertise to the operation. That expertise can and should be used to train and inform full time employees who will remain on staff once the ICs contract term expires. 

ICs are often more content than other full time or part time workers. The reason for this is because although the employer does pay about the same in “billed” costs for the IC, because of the fact that taxes are not automatically withheld, the IC generally keeps more of the money he/she earns. Happy workforces are more productive and effective workforces.

Liabilities/Risks

Without the processes and practices in place to ensure proper vetting and collection of specific tax/regulatory documents, a company may be at higher risk for misclassification lawsuits and the costly penalties that often accompany them. Engaging ICs as a workforce strategy must only be done with a keen eye toward compliance risk mitigation. 

Best practices dictate engaging a 3rd party “Employer of Record” layer to indemnify the employer against classification challenges. The employer must develop a diligent vetting process. This adds a layer of complexity and administrative requirements to the process.

If a contractor turns out to be malicious, without having verified the proper levels of General Liability and Professional Liability, the hiring organization may have no recourse as a corporation for damages. In some cases the hiring organization can be held liable for any damages caused by the IC.

Without an MSP or EOR provider in place, the proper contractual terms may not be applied to the Statement of Work. In this instance, the hiring organization may be left with a half-finished product after having paid in full for the services not entirely rendered. Furthermore, without a dedicated methodology to track the progress of a project with consistent milestones, the project may be delayed or never completed. Avoiding this fate requires the hiring organization to invest significant time and effort into developing and enforcing project management strategies and processes. For organizations either not willing or poorly equipped to do so, there is greater risk for failure when leveraging ICs as a workforce strategy.

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 This post was provided by nextSource contributing writers, Jarret Gardner (VP of Business Development) and Anton Robb.

Topics: Blog, Compliance Services

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