Academic journal article Journal of Accountancy

The Down Side of Downsizing

Academic journal article Journal of Accountancy

The Down Side of Downsizing

Article excerpt

Many corporations have adopted the practice of hiring temporary employees, leasing employees or using independent contractors to increase profits. Such a practice has well -- documented tax and nontax advantages. On the tax side, employers are not responsible for federal insurance, unemployment and income tax withholding on payments to these workers. On the nontax side, the employer need not be encumbered by a large permanent payroll, can greatly simplify its a accounting burdens, can limit its tort liability and may avoid the laws dealing with unions, collective bargaining and certain state and federal laws. In addition, the employer need not provide medical insurance, pension benefits, workers' compensation, unemployment coverage, disability insurance, medical leave, vacation or holiday pay or any other benefit it normally might provide to its employees.

The problems involved in hiring nonemployees have been the subject of extensive discussion, litigation and legislation. Much of the focus has been on the tax ramifications, with the Internal Revenue Service's interest in ensuring appropriate taxes are collected and paid. Another issue (which could prove to be very costly to employers) centers on retirement plans and who may need to be included in them.


Many provisions of benefit plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which protects the interest of employees in different types of benefit plans via rules and regulations governing reporting, participation and vesting.

Plan participants. Determining who is an employee is important for ERISA purposes; independent contractors, for example, are not allowed to participate in employee benefit plans or bring suit to enforce their rights under such plans.

Another issue is workers wishing to receive plan benefits who might be considered employees based on their employment relationships but who are excluded from plan participation based on the plan language. Central to the analysis are two basic determinations: (1) whether a worker is a common-law employee of the employer maintaining the plan (using the usual) factors such as control, supervision, skill level and intent of the parties involved) and (2) whether, according to the plan language, the worker is eligible to receive a benefit under the plan. …

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