One of the most common and controversial issues I encounter during Independent Contractor evaluations is the topic of expense reimbursement. This subject ties into the idea of financial control, one of the three categories that are closely examined during an alleged misclassification.
The Big Idea: Treat Independent Contractors Like Vendors
Smart businesses seek to keep their overhead low and costs down. Many have therefore implemented expense reimbursement policies that employees must follow. Often, we see agreements where this reimbursement policy is pushed to independent contractors. This should generally be avoided. Would you require vendors to follow a reimbursement policy? Would you forbid your vendors from allowing their visiting employees to fly first class? Would you require them to supply receipts to your company?
Hopefully, the answer is usually no. Because you would not dream of reimbursing these vendors. They understand it is the cost of doing business, and any lavish spending will affect their own ability to earn a profit. As a general rule, you should treat your Independent Contractors as you treat your vendors, not your employees.
“Reimbursable Expenses” vs. “Project Cost”, A Little Smoke & Mirrors?
Additionally, we advise our clients that any items that represent a project cost that are not part of a deliverable may be included. However, the “costs” should be labeled as such and not as reimbursable expenses. If your plumber bills you for the pipes and tile installed in your bathroom, these are merely project costs that he should have bid to you during his initial estimate. He’s running a business and will be able to write off the expenses. If he can’t swing it, there might be reason for concern in the stability or validity of his business.
Deal-Breaker? Perhaps not. . .
On a final note, I would like to point out that this factor on its own will not likely cause a contractor to be found misclassified. Some companies choose to ignore this recommendation based on the anticipated cost savings. However, if the relationship is somewhere in between employee and contractor, this may just be the factor that tips the scales (reversing any previous cost savings). It is best practice to structure your agreements in a manner where both your cost and your risks have been minimized.