The savings strategy that’s backfiring bigtime

File it under “seemed like a good idea at the time” — in an attempt to save money a company reclassifies existing workers as independent contractors or starts hiring more ICs. Could save you a bundle … or cost you one.

Just ask the folks at Allstate insurance. Last week they were back in court defending themselves against claims by some of its agents that they were wrongfully reclassified as independent contractors, robbing them of health insurance, vacation and sick pay and other benefits.

Allstate maintains they took a legal cost-cutting measure.

No one knows how this will turn out for the insurance giant, but you can make sure your company isn’t at risk for a similar misstep, no matter how well-intentioned it begins.

3 common scenarios

First, think about all the different ways this can happen:

• A company brings in someone as an independent contractor rather than an employee and pays them through Accounts Payable. You get the extra people-power, without many of the extra costs associated with a new hire.
• An employee retires but decides to stay on in a “consultant” role, so he or she is switched to independent contractor status and removed from the payroll.
• A manager, facing pressure to cut costs, decides that some of its department can be reclassified as independent contractors.

Any one of those scenarios may be legit. But they may also be illegal.

It’s estimated that 3 million workers are currently misclassified as independent contractors. And if someone who works at your company thinks he or she is one of them, you could be in for a big (and possibly expensive) headache.

That’s something you want to call to all supervisors’ attention ASAP.

All comes down to control

It’s also a good idea to remind supervisors of the three factors IRS uses to determine how a worker should be classified. It all comes down to three types of control:

1. Behavioral. If your company tells this person how to work and/or trains that individual, he or she belongs on your payroll.

2. Financial. Does A/P reimburse for this person’s business expenses? Does this individual bring his or her own tools or equipment? Does this person directly make a profit or loss?  The way your company answers these questions means the difference between and employee and an independent contractor.

3. Type of Relationship. Any written contract you have is important here. Key point: If that person is free to perform his or her services for other companies at the same time he or she works with you, that’s a strong indicator that person is truly an independent contractor.