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Contracting with Independent Consultants

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Not all contractors are created equal yet most corporations treat them that way. This brief presentation explains how corporations can contract with professional independent consultants in a way that ...

Not all contractors are created equal yet most corporations treat them that way. This brief presentation explains how corporations can contract with professional independent consultants in a way that mitigates co-employment risk while getting more value for their money.

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  • ObjectiveClearly explain PrōKo’s value proposition so that the reader/audience wants to source independent professional talent through PrōKo.
  • Definition Strictly speaking, co-employment is the situation in which two legally distinct employers have an employer-employee relationship with the same person. More broadly, co-employment risk is when a corporation may be liable for misclassifying a worker as an independent contractor when the worker is actually being treated like an employee.  The largest and most well-publicized case was against Microsoft which settled its case in December 2000 for $96.9 million.  Presumably, if Microsoft was willing to settle for this amount, its potential liability was much, much larger.   Clearly co-employment risk is a big, big issue!
  • How a person is paid has nothing to do with who controls or directs the work. The staffing firm or contingent workforce management firm certainly isn’t directing the consultant’s work so the corporation still has risk!Many contingent workforce management firms have a poor contracting process. The IRS is clear that whether an individual is classified as an independent contractor or employee turns on the nature of the relationship of the individual to the employing or contracting entity. Whether the individual is an employee of another entity (such as a staffing firm) is irrelevant to this determination. The law clearly recognizes that an individual can be employed as a W-2 employee by more than one entity at the same time for the same work. Where two entities simultaneously exercise direct or indirect control over the work of an individual, they will be found to be the “joint employer” of the individual and both entities are the individual’s W-2 employer. Simply showing that an individual is employed as a W-2 employee by another entity does not protect the employing or contracting entity from a determination that it is not also an employer of the same individual for the same work.The contracting entity (the corporation hiring the consultant) is protected only by demonstrating that the individual is an independent contractor with respect to the work performed, not how they individual is paid. Currently the IRS focuses on three factors in making this determination: a) Whether the employing or contracting entity exercises “behavioral control” over the individual (i.e., the right to direct and control how the work is done); b) Whether the employing or contracting agency exercises “financial control” over the individual (i.e., the right to control the business aspects of the individual’s job such as whether the individual offers his or her services to the general market); and c) The type of relationship that exists between the employing or contracting entity and the individual (i.e., is there a written contract between the parties). Only by demonstrating the existence of these factors can the contracting or employing entity ensure that it will not be found to be the individual’s W-2 employer. These factors all focus on the relationship of the individual to the employing or contracting entity and not on the relationship that individual has with other, unrelated entities, such as whether the individual is a W-2 employee of another entity (such as a staffing firm). PrōKo’s subcontracting process is very clear about the relationships between all of the parties. In fact it is a cornerstone of the PrōKo model.
  • There is definitely a difference between a professional consultant and someone from Accountemps or a freelance graphic artist. Note: these characteristics align with the IRS definition of an independent contractor!
  • Professional Independent Consultants want to stay independent to enjoy the tax advantages of being paid on a 1099 basis. In fact, some will even turn down a project if it means being paid on a W-2.Three years ago PrōKo’s founder did her taxes on TurboTax two different ways – as a sole proprietor and as if she were paid as an employee through a third party. She paid $8,000 less in tax by taking typical business deductions and contributing to her self-employed IRA. This is why many professional independent consultants will actually decline work if it requires payment on a W-2 basis. In fact, throughout the PrōKo network we have an informal motto: “Friends don’t let friends W-2!”Detail re: SEP-IRA vs. 401(k)Much higher ceiling than a 401(k) or regular IRASEP-IRA: $49,000 (2011) or $50,000 (2012)401(k): $16,500 (under 50) or $22,000 (over 50) for 2011 $17,000 (under 50) or $22,500 (over 50) for 2012Traditional and ROTH IRA: $5,000 or $6,000 (under/over 50)Contributions lower “adjusted gross income” so taxable income is lessMoney to your SEP-IRA has a high rate of returnLowering your taxable income is an immediate return on that moneyThe money will grow tax-deferred until you retire
  • The clear and transparent contracting process is central to the PrōKo model as this is one of the keys to mitigating the corporation’s co-employment risk. The other key to mitigating the co-employment risk is to make sure that the consultant directs their own work. This is why PrōKo only represents highly experienced and well trained senior level consultants. The corporation is hiring us to diagnose and solve a particular problem or resolve an issue. They hire us for our expertise, methodologies and tools – if the corporation knew how to solve the issue or problem they wouldn’t need to hire a PrōKo consultant in the first place!Because PrōKo is a virtual company withvery low overhead, we don’t need to charge the typical 30-40% mark-ups on our consultants. Let’s say you have a budget that will allow for a billing rate of $200/hour. If you hire a consultant through a typical consulting agency (e.g. a boutique firm or a company like Resources Global or M-Squared Consulting) you’re going to get a consultant that is willing to work for less than $140/hour. In our experience, these are people with less than ten years of experience or people without training at a big firm like Accenture or Deloitte. Under the PrōKo model, however, your same budget of $200/hour will get you a consultant who typically earns around $180 or more. These are the higher caliber consultants. (Note: A typical PrōKo consultant through one of the global firms like Accenture or Deloitte would easily cost you twice as much. Those large firms have an awful lot of infrastructure, partners and overhead!)Bottom line: The PrōKo model does a better job of mitigating a corporation’s risk while at the same time enabling them to afford higher quality talent!
  • Many companies that require all of their independent consultants to bill through a contingent workforce company or staffing firm are overpaying for a service that is under-delivering when it comes to getting quality consulting talent and mitigating risk.We’re not saying that you shouldn’t use a contingent workforce company. For the majority of your contract labor it probably makes sense. What we’re saying is that not all consultants are created equal. PrōKo consultants are highly skilled professionals, most with advanced degrees and over 15 years of training and experience, similar to attorneys. Companies don’t make their outside counsel go through a third party to be paid on a W-2 basis. The PrōKo model enables professional independent consultants to be retained and paid like the professionals they are.

Contracting with Independent Consultants Contracting with Independent Consultants Presentation Transcript

  • Contracting with Professional Consultants: Information & Education All rights reserved PrōKo Consulting LLC, 2013 1
  • Co-Employment Risk What It Is  A corporation may be liable for misclassifying a worker as an independent contractor when the worker is being treated like an employee. Why You Should Care  Government audits are increasing; fines are huge  Misclassifications often lead to class action lawsuits ($$$$)  Companies are scared and often over-compensate by making independence hurdles ridiculously high (the compliance process)  Misinformation and lack of understanding is resulting in excessive service fees and poorly mitigated risk 2
  • Co-Employment Risk Misconception “We use a contingent workforce management company so we have mitigated our risk.” Reality  Co-employment can still exist even though the independent contractor is paid as a W-2 employee through a third party.  How a person is paid is irrelevant. It depends on who controls how, where and when the work gets done!  A professional consultant directs their own work including what needs to be done, when and how.  Setting up a W-2 relationship does not protect the corporation as well as a written contract between the parties.  A W-2 contractor can still be found to be an employee of the corporation under the joint employer theory of liability. 3
  • Professional Independent Consultants Professional Consultant Contractor Freelancer PrōKo consultants are sole proprietors  Are not “between jobs”; consulting is their job  Have extensive training and experience  Are hired to diagnose and/or solve specific business issues  Determine how, when and where to do their work  Provide their own tools, templates and methodologies  Are their own small business Not all consultants are created equal! 4
  • Professional Independent Consultants Misconception “Consultants don’t care how they are paid as long as they are paid.” Reality  Professional independent consultants want to stay independent to take advantage of significant tax and retirement benefits!  SEP-IRA significantly better than a 401(k) • Higher contribution ceilings ($50,000 vs. $17,000) • Contributions lower their adjusted gross income which lowers their tax  For tax purposes professional consultants want a 1099, not a W-2 Friends don’t let friends W-2! TM 5
  • The New PrōKo Model PrōKo is more of a talent agency than a consulting firm.  Agency representation mitigates risk     The client corporation determines which consultant is the right fit Client corporation enters into a contract with PrōKo Consulting LLC PrōKo sub-contracts the work to the preferred consultant This clarifies relationships as well as provides necessary insurance coverage.  PrōKo Consultants are world-class  Have at least ten years of experience in their field  Have worked for large, “gold standard” consulting firms and Fortune 500 companies  Are screened and vetted by PrōKo  Extremely low service fee of 5-10%; not the typical agency mark-up 30-40%  Enables the client to afford higher caliber talent 6
  • Precedents for the PrōKo Model Misconception “All consultants need to bill through our contingent workforce partner.” Reality  Other professional services are likely handled on direct contracts  Outside counsel (attorneys)  Consultants working through large firms are often subcontractors  PrōKo Consultants are more like attorneys  They direct their own work  Provide their own tools, templates and methodologies  Specialize in particular areas of expertise  Perform work for more than one client 7
  • Who Likes the New PrōKo Model?  Professional Independent Consultants  Get to maintain their sole proprietor status for significant tax advantages  Project Managers  Higher caliber talent for the money  HR  A source for high-quality professional consultants  Legal  Better mitigation of co-employment risk  Procurement  Same services for less cost due to extremely low mark-ups The new PrōKo model is win/win situation! 8
  • For More Information  www.ProkoConsulting.com  White Papers  Mitigating Co-Employment Risk: W-2 vs 1099  The Philosophy of “Sweet Spots”  Conversation (Call 888-627-7656)  Liz Steblay, Managing Officer  Henry Telfeian, General Counsel 9