Where independent contractors are concerned, know the rules
Architecture firms may need to lure extra hands for all sorts of reasons. One might be to staff up for a sweet opportunity that’s too good to pass up, but is just a bit beyond the capacity of the office. Another might be to get the benefits of a specialist whose skills are perfect for a current project but might or might not be needed in the future. Those sorts of situations always present principals with a dilemma: do you hire new staff permanently or expand temporarily using hired guns? At first glance it appears that if the good times won’t last and overhead will have to be shaved when the project ends, independent contractors may seem to be the solution.
But don’t think that just because you’ve decided not to withhold income and social security taxes from a person’s wages that the Internal Revenue Service will agree that you’ve truly retained an independent contractor. The IRS can be very picky about this and it has certain tests to apply to any given situation. It can hit you with penalties if it disagrees about whether someone has been working for herself or as an employee of your practice. This is not only because it wants to protect workers from unscrupulous practices, but it also wants a smoother flow of tax payments and, ostensibly, a fairer market. “Employers that improperly deprive workers of benefits disadvantage those businesses that bear higher costs in complying with the law,” said Massachusetts’ tax agency in a 2004 advisory explaining its strict attitude. “In this way, independent contractor misclassification undermines fair market competition.”
Architecture has become a more collaborative business as clients have sought sustainability, buzz, and new technology. The kind of expertise a practice needs to reach a new threshold often involves specialists—lighting consultants, irrigation experts, model-makers— who may only work for a short time. Hiring outside companies such as structural engineers need not induce the employee-or-contractor question: the firms must evaluate their own employment practices. But when architects take on individuals for short stints, tax questions and ethical ones intertwine. Many in the profession, leery of exploiting young and energetic designers, simply avoid taking on help during busy times without providing health benefits and insurance.
Who’s an independent?
Like it or not, somebody becomes an employee in the tax collector’s eyes just by showing up enough times, using your equipment, and willingly taking direction. And, nowadays, when many architects and specialists work freelance forever or between jobs, it is particularly important for large and small practices to document nonpermanent workers carefully.
Senior associate Polly Brazelton of Michael Van Valkenburgh & Associates, which keeps offices in New York and Cambridge, Massachusetts, consulted a lawyer after Massachusetts tightened its definition of “independent contractor” in 2004. On advice from counsel, the firm started withholding payroll taxes from a broader range of workers. Brazelton sums it up: “If they are working in our offices with our equipment for long stretches, even if they had a different expertise, we would classify them as an employee.”
The IRS also invokes a test, the “common-law rule,” to decide whether you have to withhold taxes from a worker. Essentially, it turns on how thoroughly the person follows the firm’s instruction and uses the firm’s resources. A firm can only control the results of an independent contractor’s work; they cannot control how the work is accomplished. Brazelton says her firm confers employee status via three tests: “If they are doing substantially the same work as our employees, if we are directing the process by which they work, or we are providing the location and tools for them to complete the work.” She advises architects to show their lawyers the firm’s hiring practices, policies, and procedures to make sure nobody triggers a meaningful penalty.
Also, have your lawyer draw up a menu of items that define what it means to be an independent contractor, and to go over the terms with every freelancer who comes to work in your offices, and possibly have them sign a statement that says they received the document. Among the items that might be covered are that the work is for hire; that taxes are the responsibility of the worker; and that the relationship can be terminated at will by either party. An adroit freelancer, says Rafael Pelli of Pelli Clarke Pelli, will “ask as many questions as possible.” But knowing what questions to ask, he adds, only comes with time and experience.
“There’s a lot of moving around of younger architects because it’s very easy for a small firm to get busy or a large firm to get unbusy,” says Ed Rubin, a principal in Manhattan’s Mullen Rubin Architects. (His office consists of the two principals, an architect, and a secretary.) “There are many firms that underpay because they bid too low on projects to pay wages that are acceptable.”
Rubin won’t pay freelance fees to anybody who works full days for his firm and doesn’t have other meaningful income. “Sometimes there’s a subtle difference,” he says. “If I am a draftsman and I do work for 20 architects, that’s one thing. If you just pay me a fee as a way of avoiding the withholding that comes with wages, that’s another.”