Volume 13 Issue 6
Protecting IK Status
© by Tax & Business Professionals
The last newsletter delved into
Independent Contractor ("IK")
issues, and we promised to explore ways to establish that status. We will start with the following scenario.
say you use a delivery service in your area to deliver your special brand of
kielbasa. Jeff, your UPS
deliveryman, loves your kielbasa, which is why he is overweight and smells like
garlic. Jeff is aware that you ship
tons of kielbasa and is keenly interested in forming his own delivery service to
deliver, primarily, your kielbasa.
Your company, K-Basa, Inc., is interested in hiring Jeff's
new company but does not want to assume the risks associated with delivery
vehicles. Since Jeff's
new business will be largely delivering your product, how can you use Jeff's
new company and avoid the risk of Jeff, or his employees, being deemed employees
A New Name
One of the first protective measures would be to insist
new business be incorporated or organized as a Limited Liability Company (LLC)
and report its business activities independently of K-Basa. As incredible as it may sound, there are delivery businesses operating as
sole proprietorships without the protection of limited liability gained from
incorporating or forming an LLC.
Liability considerations aside, many large companies hire
former employees as consultants after they retire. In such cases, the former employers often insist that the
former employees form a new business (corporation or LLC) and that the newly
formed business provide the consulting services, so that the individual could
not be construed to be an employee.
The IK Agreement
Most businesses that retain IKs, particularly in situations
go further and have IK Agreements signed by both parties. An IK Agreement generally specifies the relationship between the Parties
and the services to be performed. The
Agreement may describe how Jeff will be paid and what he is to
represent to third parties regarding his relationship (or that of his company)
to K-Basa; namely, that Jeff's
workers are not employees of K-Basa.
Most IK Agreements will provide that Jeff's
workers are free to deliver the kielbasa at reasonable business times using
their own equipment. Importantly,
the Agreement will spell out that Jeff's
company is responsible for its own insurance, taxes, employee withholding, and
all federal, state and local taxes relating to the delivery service.
Typically, each Party will agree not to take positions
inconsistent with the IK Agreement. Such
language is needed mainly to prevent Jeff's company from arguing that it is
merely an agent of K-Basa, should there be a tort lawsuit or insurance or tax
audit and Jeff's
company did not do the things it was supposed to do B
like pay its taxes.
Suppose there is an IK Agreement between Jeff's
new company and K-Basa. K-Basa,
realizing it has the upper-hand economically, begins directing Jeff, the only
employee of Jeff's
new company. As time goes by, K-Basa
begins to direct Jeff more and more, and begins telling him what to do and when
to do it. Eventually, the K-Basa
trademark B neon
green gloves B
are mandated for Jeff when he makes all deliveries, not just those for K-Basa. Under these circumstances, green-gloved Jeff could be legally
or administratively deemed to be an employee of K-Basa despite the existence of
an IK Agreement.
So what is the message? Have an IK Agreement and honor it, or risk having an alleged IK become an
Sellers of items that need to be installed, like roofing
products, rugs, windows, siding, etc., routinely use IKs and sometimes screen
them for performance and workmanship skills. It is likely such companies will have a standard IK Agreement that it
uses. Such a form IK Agreement
allows the Company to process a large number of orders without having to prepare
new paperwork for each new assignment to the IK.
If you or one of your Clients needs a sample IK Agreement
form, contact us or click here. To return to the
first newsletter on Independent Contractors, click here.
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