Q: Our nonprofit group home has to downsize and as part of our reorganization we are considering changing some of our employees into independent contractors as a cost-saving measure. If we did that, we wouldn't have to pay for benefits and we'd have more flexibility - we could match our personnel to our workload. What is the potential downside to making that change?
A: It is possible to transition an employee to a contactor if the worker truly meets the legal tests for independent contractor status. What you need to watch out for is the possibility of a payroll tax audit or the potential for various benefit-related claims. Your group home can incur significant liability if a worker is inappropriately designated an independent contractor - and it is typically the employer's burden to prove that the worker is properly classified if there is a challenge.
Different laws establish different tests and factors for defining whether a person is an independent contractor or an employee, but the main concern is who has the right to control or direct what and how work is to be done. If your nonprofit can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your worker might be appropriately established as an independent contractor.
If the work is a core service of the nonprofit, it is less likely that the worker would have sufficient control over the work product to establish independent contractor status.
Let's look at two examples.
We Are Family Group Home has decided to lay off its bookkeeper Kim since it now uses a payroll service and it doesn't have enough work to employ a bookkeeper full time. Kim has mentioned her interest in setting up her own bookkeeping business and continuing to do the books for We Are Family. Kim sets herself up as a separate business and buys all necessary equipment, does the books for other businesses, has her own insurance, and does the monthly accounts receivable and payable using her own software but gets the monthly reports back to We Are Family as requested. This transition to independent contractor would likely withstand any legal scrutiny.
We Are Family Group Home has recently lost a number of residents so it decides to lay off two case managers, Rosa and James. When the number of residents increases again ABC decides to contract with Rosa to just handle one or two clients until there are enough residents to warrant the hiring of an additional case manager. Rosa performs the same work as she used to perform: meeting with the residents in the group home, attending team assessment meetings with other staff, and bringing any problems to the treatment team manager. She uses We Are Family forms to write her reports; however, she writes her reports at home using her home computer and no longer has a desk at We Are Family. She does not perform case work for any other nonprofit and does not have her own insurance. Rosa is performing We Are Family's core business under its direction and control and is not likely to satisfy any of the tests of independent contractor.
Paying a worker under a 1099 and a W-2 in the same tax year is a common trigger for a payroll tax audit. Other potential liabilities for worker misclassification include claims for unpaid overtime, employee benefits, workers' compensation coverage, and unemployment compensation, not to mention all the penalties that can be assessed.
While successfully establishing an independent contractor relationship with former employees is possible, it is critical that such workers are given the right to control the manner and methods in how the work is to be performed. If the nature of the work prevents delegating the control over the work to a third party due to the required supervision and oversight, then nonprofits should stick to hiring employees, and consider hiring temporaries or part-timers if there is a reduced work load.
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