Independent Contractors: The Solution is a Problem

August 4th, 2005 by

The Insider is intrigued with the issue of independent contractors. Some might say we are obsessed. Truth is, in the ever changing world of business, with conventional definitions being challenged every day, yesterday’s straight-forward distinction has become today’s ambiguity.
Take the case of Michael Rowe, outlined by Andi Esposito in the Worcester Telegram and Gazette (PDF file — and in the interests of full disclosure, the Insider is quoted in this piece). An entrepreneur, Rowe started his business, Claims Outsource, Inc., to help insurance companies handle over-flow claims. He secured the services of 50 independent contractors who, working from home on their own schedules, handled claims passed from the insurer, to Rowe, to the contractor. Rowe thought it was a good solution to an old problem. Unfortunately, he ran into a new solution to another problem, which resulted in the abrupt demise of his business.
When work slowed down, one of Rowe’s “independents” filed for unemployment insurance. At the hearing, Rowe asserted that all the claims handlers were truly independent. But the examiner determined that the attorney general’s new criteria for independence were not met. So Rowe was slammed with a retroactive bill for $56,000 for unemployment insurance. Stunned and defiant, he shut the business down.
Thus far, Rowe’s only problem is unemployment insurance. I wonder what will happen if one of his contractors decides to file a workers compensation claim for an “on the job” injury. Then he will be faced with an additional bureaucratic nightmare, this time involving failure to cover “employees” for work-related injuries.
Nationwide Problem
The tightening of criteria for independence is well-motivated. States are tired of footing the bill for injured subcontractors at construction sites, where no one seems to work for anyone else, but the house gets built nonetheless. In trying to force insurance and benefit coverage deeper into the construction world, Massachusetts has cast a very wide net that is pulling in entrepreneurs like Rowe, who is not really trying to deceive anyone. Rather, he is pursuing a flexible business model that just happened to run into a buzzsaw on the compliance side.
Neighboring state Rhode Island has tried to solve the subcontractor dilemma in a different way. They require “independent contractors” to sign a form self-certifying that they are indeed independent. I thought that sounded like a good approach, until I heard from an investigator in Tennessee, which has a similar program. According to the investigator, general contractors abuse the system by forcing their subs to sign the documents, even though they are not truly independent. Every solution, it seems, triggers unintended consequences.
The beleaguered Mr. Rowe points angrily to FedEx drivers, who are classified as ‘Independent contractors.” If his handful of at-home claims consultants are employees, then FedEx drivers are employees, too. He is right, of course, but it’s an argument that won’t solve his problem. A little guy facing enormous financial liabilities, he’s already thrown in the towel. The big guys such as FedEx have plenty of legal clout. They are prepared to fight the battle one court room at a time, and then appeal and appeal, all the while delaying any ultimate losses while they pursue their merry — and profitable — ways.