Expense Reimbursements vs. Cost of Doing Business

One of the most common and controversial issues we 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.  This post explores the risks associated with expense reimbursements for Independent Contractors, and offers some suggestion for best practices.

The Big Idea: Treat Independent Contractors as You Treat Vendors

Smart businesses continually seek out ways to keep costs down.   Many have therefore implemented expense reimbursement policies for their employees to follow.  Often, we see agreements where this reimbursement policy has been pushed to independent contractors.  Requiring ICs to follow employee policies should generally be avoided.  Would you require your larger vendors to follow a reimbursement policy?   Would you forbid your vendors from allowing their visiting employees to fly first class?  Require them to supply receipts to your company?

Hopefully, the answer is no!  This is because you would not consider reimbursing these vendors.  In most cases it is understood as the cost of doing business, and any lavish spending will affect their own ability to earn a profit.  As a general rule, you should consistently treat your Independent Contractors just as you treat your other vendors,  not as you treat 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.