Excluding 1099 Employees

We have a new potential client that may pay most of it's employees through 1099.  I assume if the bulk (let's say 75% are paid that way), we're going to create discrimination issues?  They were pushing back against me saying someone else told them it wasn't an issue, so I just wanted to confirm

Run!

5 minutes ago, david rigby said:

Run!

I think they are trying to hang their hats on compensation being "W2 compensation".  I agree, but I'm just trying to make sure!

Employees are paid on a W-2; Independent Contractors are paid on a 1099.

Who has responsibility for determining whether or not payment reported on Form 1099 is proper for the designated persons, who would not be employees if the Form 1099 reporting is proper?  If not you, are you sure you will not be implicated and are you willing to accept the suspicious determination and being at least indirectly involved in the potential troubles and recriminations that may well result?  If you sleep with dogs you often get up with fleas.  Or, is you inquiry inspired because, as suggested by David Rigby, your lower body motor functions are appropriately inspired?

Yup the term "1099 employee" doesn't legally exist.   You are an independent contractor (IC) or an employee.   As pointed out ICs are issued 1099s and employees are issued W-2s.

More importantly this isn't something you get to just decide or negotiate.   Either a person is an employee under the law or they aren't.   If they are an employee issuing them a 1099 just means you are breaking the law by not treating them correctly not that they are ICs.  

So to answer your question:

ASSUMING the ICs are legit there is no coverage issue as they aren't employees and most likely are excluded by the plan provision that allows IC to be excluded. 

The bigger problems come into existence if the assumption they are properly treated as IC is not right. 

As pointed out is how much are you responsible for the IC vs employee determination?

Also, assuming this plan has a provision that say if the IC are later determined to be employees they are still excluded will make coverage testing a problem. 

So what do you and your firm need to do to make sure you are protected if this goes bad. 

Further along the vein of what ESOP Guy was alluding to, never accept the label that your potential client slaps on a worker as being correct unless a more thorough inquiry is made by you or a legal professional on what the worker's true status (employee or independent contractor) is likely to be. Only after determining that a worker has been vetted through the worker classification test and determined to be either employee or independent contractor can one confidently say whether the label will or will not be accepted by the IRS or a court. Anyone can slap a label onto any workerr. Blindly accepting the label without more will subject yourself and your client to untold trouble and liability from which you may never recover. As David Rigby so aptly put it, RUN!!!!!