Contract Labor Agreements

Written by Helen Glenn Court
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The bottom line in the debate about consultants versus employees is fairly straightforward. The Internal Revenue Service can collect more tax revenue if an individual works as an employee than if he or she works under a contract labor agreement. It therefore tends to scrutinize contract labor arrangements closely. The penalties for misclassifying an individual are, or at least can be, steep. As a result, many companies choose to purchase contract labor agreement forms created by experts in order to make sure they have their bases covered in this situation.

Toeing the Line with Contract Labor Agreements

Topping the list are criminal charges, which could include fines of up to $100,000 and or imprisonment. It therefore behooves anyone drawing up a contract labor agreement to be very careful with the terms of the agreement. Just as classification as an employee is in the government's favor, classification as an independent contractor is in the company's favor--no benefits to pay, labor unions to answer to, and any number of other averted headaches.

The primary criteria for distinguishing between employees and contractors are financial control, type of relationship, and behavioral control. Financial control refers to whether an individual is reimbursed for expenses related to the work, whether an individual is provided with the necessary tools to perform the work or must provide them, how the person is paid, and whether the person can recognize (at tax time) a declared financial gain or loss. The type of relationship is defined in part by the benefits (health, retirement, disability) that we commonly associate with employment. But there is more than that. IRS publication 15-A explains in detail.

The behavior control phrase is key to distinguishing between employees and contractors. It is little more than government-bureaucracy speak for the authority to tell you not only what to do but how to do it and, to some extent, when. As far as the when is concerned, a deadline is a deadline for completion of a project, after all, whether one is an employee or a consultant or the CEO. As far as the how is concerned, an independent contractor is bound only to deliver the job as defined, where an employee might have to be specifically trained or otherwise qualified, and perform the work according to certain protocols.

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