Independent Contractors Treated as Employees in Tech (How to Prevent)?

If you are a direct contractor, it sounds like the IRS would consider you an employee. If you are actually an employee of a company that contracts you out to a 3rd party, then this doesn’t apply.

”The IRS developed the 20-Factor Test shown below to help employers evaluate whether a worker is an employee or an independent contractor. No one factor on the test is more indicative of employee status than another. If there is a high number of “yes” marks, then it will most likely indicate the presence of an employment relationship, a high number of “no” marks may or may not indicate a contractor relationship.”

https://www.regent.edu/admin/busoff/pdf/20-questions1099test...

Fully agreed. Question is, what's the best course of action? Is this common?

You’re treated as an employee because you are an employee (of the contracting agency). You aren’t an Independant contractor. And yes, it sucks depending on the agency.

You need to go contract Direct if you want to be treated as an “independant” consultant. The Agency usually makes you sign something that makes it near impossible to contract Direct for a company they place you at. You need to use your network to find your own contracts. This is easier said than done.

Wait a second. What if you're contracting via an LLC and they (the consulting agency) made you sign a contract that it's not an employee relationship?

I’m not sure exactly what your situation is but if you are paid “W2”, you’re an employee, end of story. If you’re working “1099” and leaving is an option for you, talk with the parties to your contract and renegotiate or clarify expectations if you can. I can tell you’re pissed (I don’t blame you) but you can’t bring that to the discussion/negotiations.

At the end of the day, you usually can’t make a bad client “behave”. You either pick good clients or leave.

It's 1099. It's indeed a situation of being treated like an employee. I was curious how people have experienced these circumstances. I'm thinking the same thing with regards to getting people to behave.

It sounds like they want to have their cake and eat it too. I.e. they want the advantages of of a 1099 contractor (not paying health insurance, etc) AND the advantages of having a 9-5 employee.

If you don't mind losing the contract, I'd discuss their options. Something along these lines:

"I don't think our expectations are lined up. I expected this to be a 1099 consultant position but you are treating it like it's a W2 position. Before the IRS gets all up in our business, how should be we fix this? Do you want to treat me as true independent consultant per IRS rules, have the subcontractor hire me on as a W2 employee and bill me out like we're doing now, or shake hands and go our separate ways?"

In reality, this is why companies go through contracting agencies. The agencies don't (really) offer true employee benefits but the client companies still get the advantages of a 1099 employee (easy to "let go" at the end of the contract).

IRS protocols very frequently override contracts in this regard. If they determine that you should be treated as an employee by the 20 Factor Test (see above), they will go after the company for their half of your back payroll taxes. The form to initiate such an inquiry is Form SS-8: https://www.irs.gov/forms-pubs/about-form-ss8

While an SS-8 is pending, you can file your taxes as if you were a W-2 employee by filing Form 8919: https://www.irs.gov/forms-pubs/form-8919-uncollected-social-...

I did this in Canada (long ago) with a former employer who contracted me but treated me as an employee, and the Canada Revenue Agency sided with me, regardless of the contract text. All I've read suggests that the IRS is similar in this regard.

Keep in mind that if you do this while you're still employed, they are likely to fire you. The ideal thing to do here, if you can negotiate with the employer in good faith, is to have them void the previous 1099s and file back W-2s for you, so you can then file amended 1040s and get back your previously paid tax. Unfortunately, an employer who would do this in the first place is likely just trying to avoid payroll tax liability, so I doubt you'll see much success going this route.

I believe the statute of limitations is 3 years, correct? I have been a case of being misclassified as an employee but paying me on 1099. But that happened over 9 years ago so I don't think I have a case anymore.

I'm not sure. There are limits on claiming a refund (e.g. if you are filing previously unfiled returns), but I'm not sure that they apply in case of a dispute. Let us know what you find.

Its pretty common for consulting companies to get requests to do 'staff augmentation' and lend their employees to another company 9-5. We try to avoid that at my employer but its still happened a few times.

Your observations are perfectly correct, the short answer is these are low quality (and sometimes exploitative) job shops. You should avoid.

What I think is going on is that consulting stratifies into two groups: high quality consulting exactly as you envision with high pay and freedom, and these consultancies which effectively are low quality labor.

Obviously avoid the later if you have no other choice. In addition to the shitty pay, you will suffer serious penalties to respect and the projects you’ll work on will be the least attractive (and sometimes shitty and dangerous in other ways).

There are usually some red flags:

- the language used during the sales process points to an employee-employer type relationship

- conditions like full-time and having to work at the client's office all the time

- the sales process itself is treated more like an interview process (you have to provide documents like a CV first etc.)

If you encounter these or other aspects that feel off: Walk away.

If the contract stipulates you be at their office from 9 to 5: Walk away

If the contract doesn't say anything about this but the client still tries to enforce such rules: Point to the contract and if the client still insists, again walk away.

If this sounds overly harsh or opinionated please keep in mind as a contractor / consultant you're running a business and an essential part of running a business is establishing long-term, trustworthy relationships. You can only do this by agreeing upon and adhering to clear conditions of how you do business.

I have been a victim of a 1099 misclassification scheme. At the time I had graduated just three months ago and taken a job at a small web development agency that was run on a very tight budget- mangement was "top heavy" meaning there was about 1-2 managers per in-house developer and designer, and the rest of the team worked in India.

They expected me to show up to the office every day 9-5, while I was working as an independent contractor, along with other treatment as employee (was given my own computer and desk, etc). As a few people have pointed out, yes this is common in exploitative job shops.

Unfortunately it was beyond the statute of limitations when I found out I could take action by verifying status with the IRS. But I still have the physical printed out contract with me. It says $15/hr on 1099 as contract-to-hire with conversion to $20 on a W2 after 3-6 months. I was never put on a W2 and I have worked there for at least 18 months.

Now to answer the actual question- how to prevent it? It's hard to say. The US has laws in place to prevent this but without acknowledgement of the problem, the bite is weak. A lot of these things occur due to simple ignorance of the victim's part.

Perhaps a general "professional development" course to be taken in a junior of senior year of college could help smooth things out? Then less college graduates will be left behind, and there's less risk for them to go through the school of hard knocks after graduation.

Such a course doesn't have to be limited to employee-employer or contractor relations. It can cover issues related to how to deal with workplace politics, understand what perception does to others at work, etc. There are many gotchas that people do not see entering the white-collar workforce.

Any software engineer should be able to find work as a W2 employee with benefits good enough that i.e. healthcare costs are not something that ever crosses your mind. I suggest researching compensation norms, as I suspect you are wildly underestimating your market value. If this isn't true in your location, you might need to move to a larger city. Our skills are in high enough demand that none of us should have to rely on legal protections to be treated well.

There are no job-security advantages to being a regular employee, by the way. Employment in essentially all of the US is at-will.

This is a very US-centric answer. In other countries there are absolutely job security benefits to being an employee.

This is the website of an American venture capital firm focused on a community that occupies a small stretch of coastal California. The poster did not specify a foreign country. Of course it's a US-centric answer.

I don't think that's strictly true. If any problems arise where they need to cut people, they might cut the contractors first.

Presuming this is long-term contract (3-6 months), you basically are going through same process as employee - need to interview the company first, need to read the contract, and not sign it if it's not acceptable.

If they're asking you for stuff that's not in the contract, say no. If they persist, walk away.

Learn how to say no. It's not complicated or difficult to avoid what you're describing.

Nothing about your situation says independent contractor. You work for an outsourcing sweatshop that sells labor as contractors to further reduce their rates.