As advisor to mid-market company presidents, I often recommend the use of independent contractors to cover capacity shortfalls or to gain expertise in residence at their companies. That's why recent moves by the government to target employee classification as a revenue source caught my attention.

The US Department of Labor (DOL) and the IRS in their respective FY11 department budgets plan an intensive increase in targeting companies to assure compliance with Appendix D of the IRS Independent Contractor Test. That means DOL is hiring 17,800 full-time equivalent employees (FTE) tasked with this increased oversight.

The initiative is positioned by the Department as a top Administration priority as it seeks to spur growth in the U.S. economy, important to promote the creation of "good jobs" and protect workers. Parenthetically, the federal government predicts this new effort on employee misclassifications will reap at least $7 billion in federal revenue over the next ten years.

Consultants as independent contractors must review their own status with clients. Company owners retaining them along with other skilled workers are well served reviewing the new regulations. One change the administration made is to shift the proof of status burden onto the company and away from government. The caution here is that a DOL challenge to labor practices will be costly either by retaining outside counsel or using internal resources.

The IRS formerly used what was known as the "Twenty Factor" test. Under pressure from Congress  it has recently attempted to simplify and refine the test, consolidating the twenty factors into eleven  and organizing them into three main groups: behavioral control, financial control, and the type of relationship of the parties. This IRS publication is useful in assessing current practices and well worth the time for a quick read.


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