Your Solo-K Plan & Independent Contractors

I recently wrote blog series on independent contractors and how they are defined. More importantly, on how knowing the difference between an independent contractor and an employee can have a huge, potential impact on your business and your 401(k) plan.

Attorney Chris Combs (Combs, Gottlieb & MacQueen, P.C.) recently  wrote a blog post on “Distinguishing a Contractor from an Employee”.  Not only is it a good short Q & A blog post, it is right on point as to why all of us might have the need to know the difference between an independent contractor and an employee.  Not only does it potentially impact one’s business, it could have a drastic impact on your 401(k) plan (more on that in a bit).

In Chris’ blog, it appeared (excuse me for opining) that the contractor in question was, should we say, misguided at best.  Some might suggest that due to his injury, he was trying to take advantage of the people who retained his services and taking the “it’s not my responsibility…it’s yours!” approach.   Chris correctly pointed out that based on the question he received, the individual was probably NOT an employee.

The good news, while not being an attorney (or necessarily knowing all the germane issues in the question), is that it would appear that the contractor was not an employee for possibly all of the following:

1)  Equipment — As a contractor, it would be likely that he was using his own tools and equipment, versus those of the people who retained his services (most likely a strike against the contractor);

2)  Ability to Work for Anyone? — As a contractor, it would be hard to believe that he only worked for the people who retained his services.  In short, he most likely had the ability to not only perform work for them, but any other person who wished to retain his services (most likely a strike against the contractor);

3)  Services Publicized? — As a contractor, does he promote his services in any manner in the public?  Does he have a business email, telephone, etc.?  Does he have any ads (yellow pages, Facebook, etc.) for his business and his services?  If so, a good chance he is independent (most likely a strike against the contractor); and,

4)  Training? — As a contractor, I would sincerely doubt the people who retained his services are training him for the work they wanted done.  He is a contractor responsible for his own training and expertise in his field (most likely a strike against the contractor).

There are certainly other indicators that would probably show in this scenario that the contractor was not an employee of the people who retained his services, but an independent contractor.  As stated, my opinion is that the contractor was trying to intimidate the people who retained him by threatening this entire issue.

So, why is this important, and why am I tying this in with the 401(k) issue?  First, let’s assume the people who retained his services were self-employed.  Unfortunately, like many in this lawsuit-driven society, an individual must be cognizant of individuals who will scream the “I will sue” excuse when you did nothing wrong.  Secondly, if in this example, the contractor would have been considered an employee, the business owner could also be subject to a potential legal claim (of course, bogus in my opinion) that not only was the individual an employee but, if an employee, would also need to be included in the self-employed business owner’s 401(k) plan!  Is this possible?  Yes.  Based on the facts of this case, would it be probable?  No.

The bottom line is if in this situation the contractor was somehow considered an employee, they may have been entitled to receive worker’s compensation, medical expenses and even paid time for disability.  And, possibly even being considered to have been permitted to participate in the business owner’s 401(k) plan.

As always, the information provided is intended to be educational in nature.  It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice.  You must always consult with your respective professional.