Company won't give work as a consultant because worry of misclassifcation

[beege]

I have an interesting issue. My spouse and I are FI but she wants to continue working. She recently left her company after working part-time for awhile, but plans to go back as a consultant for even more flexibility. This company employs numerous consultants. My spouse enjoys working and isn't ready for all-out RE. The only hiccup with the plan is that the company will not bring her on as a consultant unless she proves she has a second client. From what I understand, they are worried about being dinged by the IRS for having an employee-like worker as a consultant.

It's kind of weird because I could see that argument if the position was low-paying, like a Walmart greeter position, but this is high-dollar work. I'm guessing my spouse would be charging around $100/hour as a consultant. My spouse has pressed back on this issue but the company is firm on the decision.

My friend has an LLC and suggested something along the lines of my spouse and/or myself forming an LLC and "paying" my spouse the dividends from our own investment portfolio, but I'm not sure how that would work in practice. In the mean time my spouse is looking for a part-time secondary employment - even if she just works a few days - to show she has some other client. It's a weird situation; has anyone every encountered anything like this? Any ideas?

Thanks!

[Metalcat]

It has nothing to do with high or low pay, here in Canada you can get nailed to the wall for classifying someone as a contractor if they should be categorized as an employee, and the penalties are nasty.

If she would be doing exactly the same work for the company that she used to do as an employee, and if they would hire an employee instead of her if she weren't offering to consult, then they *should* be antsy about paying her as a consultant.

[beege]

Yeah I you're right. After some reflection it shouldn't matter based on the pay rate but after reading a few state's employee or independent contractor definitions this sentence stuck out to me:

The "economic reality" of the work relationship determines the worker's status, meaning is the worker economically dependent on an employer who can allow or prevent an employee from working?

The point I was trying to make was it seems FI mustachians might be a unique case because we are not economically dependent on the employer, but I don't think that argument is going to hold water without evidence; hence we will acquiesce to their request to show proof of a second client/income for my spouse.

[Metalcat]

Yeah I you're right. After some reflection it shouldn't matter based on the pay rate but after reading a few state's employee or independent contractor definitions this sentence stuck out to me:

The "economic reality" of the work relationship determines the worker's status, meaning is the worker economically dependent on an employer who can allow or prevent an employee from working?

The point I was trying to make was it seems FI mustachians might be a unique case because we are not economically dependent on the employer, but I don't think that argument is going to hold water without evidence; hence we will acquiesce to their request to show proof of a second client/income for my spouse.

That's not really what that means though. Economically dependent means that the employer has power over how that person makes money. Whether the person needs that money is irrelevant.

The president of the United States is an employee, whether he needs the money or not.

The question is whether the company has control over how the person works and earns.

If a person has control over their own hours, isn't subject to normal staff policy, and can take or leave work with the company as they see fit, they are likely a contractor. Their work and earnings are the product of independent self-employment, the people who pay them are clients, not employers.

But if she was always an employee and will be expected to work as an employee exactly as she did before, with the company deciding how she works, when she works, and she's subjected to the same expectations and policies as she was before, she's not self-employed, she works for the company as an employee.

The fact that she is wealthy enough to quit just means she can quit being an employee if she wants, it doesn't make her magically self-employed.

Does that make sense?

There are major implications for companies when someone is an employee. Companies would LOVE to be able to categorize all of their staff as "contractors" and suddenly be free of all of their tax, benefits, safety, etc, obligations.

That's why it's SUPER illegal to just start arbitrarily categorizing employee work as contract work. It's like bypassing labour laws and obligations.

So as I said, if she wasn't willing to do the work as a "contractor" and they would instead hire an employee to replace her, then the work cannot be considered contact work.

A company can ONLY contract out work that they would not hire an employee for.

[Michael in ABQ]

So as I said, if she wasn't willing to do the work as a "contractor" and they would instead hire an employee to replace her, then the work cannot be considered contact work.

A company can ONLY contract out work that they would not hire an employee for.

I agree with all the rest but there are many instances where a company could choose to contract work they would hire an employee for.

I'm in the process of hiring a graphic designer as an employee. I had previously hired a freelancer (contractor) to do the same type of work. However, that contractor had other clients and was running a business as a graphic designer for hire. I was not her sole and exclusive client.


In the US the IRS has multiple tests they look at to determine if someone is an employee or independent contractor. Do they provide their own tools? Do they provide their own workspace? Do they have other clients/employers? Do they set their own work schedule?
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

[Metalcat]

So as I said, if she wasn't willing to do the work as a "contractor" and they would instead hire an employee to replace her, then the work cannot be considered contact work.

A company can ONLY contract out work that they would not hire an employee for.

I agree with all the rest but there are many instances where a company could choose to contract work they would hire an employee for.

I'm in the process of hiring a graphic designer as an employee. I had previously hired a freelancer (contractor) to do the same type of work. However, that contractor had other clients and was running a business as a graphic designer for hire. I was not her sole and exclusive client.


In the US the IRS has multiple tests they look at to determine if someone is an employee or independent contractor. Do they provide their own tools? Do they provide their own workspace? Do they have other clients/employers? Do they set their own work schedule?
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

Yeah, sorry, I phrased that totally wrong. I meant that if the role is an employee role, they can't just convert that same role back and forth from employee to contactor at will because they feel like it at the time.

At least in Canada you could get nailed for that.

[Smokystache]

I have been a contractor for several companies. I always set up the work contract so that it specifically covers the IRS criteria point-by-point. (You don't set my hours, you don't give me evaluations, I assume the costs of X,y,z, etc.).

It seems like they are honing in on a specific point, which is (taken from the IRS website): "If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed."  [https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee]

Right now, it doesn't sound like your spouse is holding themself out as a contractor who could be hired by others. I'm assuming that if another company came along and said, "Your skillset is really valuable to us, we'll pay triple your current rate" that she would say yes. To open the door to even better gigs and to satisfy the IRS rules, I think it would help if your wife made a one-page website that advertised her services as a consultant. She could list herself on some consultant directories, and change/create a LinkedIn profile that states that she is a consultant and even make some regular posts that a consultant would do. Now if she is busy enough with one client, it doesn't mean she has to take on any new clients and can be very selective if she does. Perhaps showing that she is serious about possibly landing another client would be enough to satisfy them. 

IANAL.

[hoodedfalcon]

This happened to me due to HR rules that an employee cannot be brought on as a contractor within 12 months of leaving employment. The workaround we came up with is that I was reclassified as a temporary employee. I don't get healthcare benefits but I do get a 401K and match. Unfortunately, this arrangement is capped at 12 months, or I convert to a regular employee (which I don't want for various reasons).

[GuitarStv]

At least in Canada you could get nailed for that.

In my experience (at least with engineering jobs) this is theoretically true, but very rarely a legal reality.  I know people who have worked at the Bruce nuclear plant for a decade and a half who come in to work every day in the same office, doing the same job, under the same managers, using the same equipment as the full time employees.  The main difference seems to be that they have an easier time firing the contractors and don't give them benefits.

[Metalcat]

At least in Canada you could get nailed for that.

In my experience (at least with engineering jobs) this is theoretically true, but very rarely a legal reality.  I know people who have worked at the Bruce nuclear plant for a decade and a half who come in to work every day in the same office, doing the same job, under the same managers, using the same equipment as the full time employees.  The main difference seems to be that they have an easier time firing the contractors and don't give them benefits.

Yes, it happens all the time, but I worked for a staffing company back in the day providing contractors for companies, and we absolutely saw multiple cases of major fines for companies that did this for years and got caught. Just because a lot of companies do it and don't get caught doesn't mean they aren't taking a major risk.

Rule and enforcement are separate issues.

[dandarc]

FWIW - I'd take this as a sign the company just isn't super eager to retain your spouse's services. Because if they really wanted to, they'd make this contracting arrangement happen. That's been my experience anyway.

In any event, +1 to the legal aspect being potentially a big deal for the company, and also +1 to it working out fine for all involved regardless of that more often than not. If both parties are happy with the arrangement and pay their taxes correctly, it is very unlikely to be reported and thus stopped by anyone.

[bacchi]

Late posting but I've encountered a similar situation. I was using my own computer, at my home office, part-time, setting my own hours, skipping useless meetings when and where I want, and the 3rd party payment processor still wanted to see another client, end of story.

A friend has her own company and I sent an invoice to it for 0.5 hours of work (fixing a fence). Problem solved.