David Klimaszewski discusses considerations for providing benefits to independent contractors in an article by SHRM

David Klimaszewski, a partner in Culhane Meadows’ Dallas office, was recently interviewed for an article by SHRM which discusses what employers need to beware of when using benefits as an inducement to hire independent contractors.

Here are some excerpts from the article:

Gig work—project-based assignments performed by people operating as independent contractors—became more prevalent as the COVID-19 pandemic led rising numbers of employees to leave traditional full-time jobs. But the shift toward a gig-dependent economy predates the public health crisis and is expected to continue post-pandemic.

Employers benefit from gig work by gaining access to skilled talent at a time when hiring full-time employees has become more challenging. Gig workers, also known as contingent or contract workers, benefit from flexibility and access to new opportunities that might not have been available before.

While gig workers have not traditionally been able to partake in employee benefits packages, that’s starting to change as employers realize that to attract talented gig workers in a tight labor market, they need to review and potentially revise their benefits options.

Employers, however, must remember a critical fact: Gig workers are not employees, and there are significant consequences for treating them as such, including when it comes to benefits offerings.

When determining individuals’ status as either employee or independent contractor, employers will need to consider the duration of the contract, whether the individuals are self-directed and in charge over their hours worked, and whether they are receiving the same benefits as employees.

“Misclassification is a key issue for companies that utilize independent workforces because the penalties associated with this can be extraordinarily high,” Cade said.

One way to avoid this risk, she explained, is for employers to keep doing what many have been doing: continuing to provide “a set of products, or a platform, that independent workers can access to build the right insurance portfolio to protect themselves, their business and their families”—essentially a “centralized marketplace for buying benefits that are otherwise available in the open market.”

These won’t be the same benefits employees typically receive, with group-level pricing, she said, but gig workers will benefit from access to products that can help meet their needs.

There’s a key distinction between “gaining access” and “receiving benefits,” pointed out David Klimaszewski, a partner in the Dallas office of law firm Culhane Meadows.

The mistake that some employers make, Klimaszewski warned, is “trying to provide the same types of benefits that they provide to employees to gig workers, and they generally can’t.”

A foundational best practice for employers when it comes to benefits administration and contract workers is to be aware of and follow the rules related to IRS reporting requirements, financial and legal advisors caution. Companies and gig workers both bear risk if something of value is received by gig workers, operating as contractors, but not reported by them or the companies they work with.

There are significant penalties for those who fail to follow these rules. But, Klimaszewski said, the risks are greater for organizations, which are far more likely than individual contractors to be audited. Companies also tend to have much deeper pockets for paying penalties than individuals do, which can attract regulators’ interest.

Employers can play an important role in communicating to contractors what the contractors’ tax responsibilities are, Klimaszewski said. The government must collect income taxes from somewhere—either through organizational withholding or contractor reporting.

“Basically, when you’re an independent contractor, everything you receive—whether it’s in cash or other goods, is all taxable,” Klimaszewski said. “[As an employer, you] need to make it clear to contractors that they are responsible for reporting the income they receive from you; this includes the value of any benefits you are providing.”

The complete article can be found here.


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