Contractors will likely always be used by the federal government—but these days they’re definitely facing more competition for Uncle Sam’s business.

The success of a recent NASA initiative suggests crowd-sourcing—soliciting the help of the American public—is poised to become a government-wide practice.

When NASA scientists were stuck trying to devise a formula for predicting solar flares last year, instead of hiring a contractor to do the work for them, they posted their challenge online and welcomed anybody to solve it.

The result: A retired radio frequency engineer from New Hampshire answered the call, offering analysis that may help the agency predict when solar particles might endanger astronauts. This solution came in less time and at a cheaper cost than it would have taken for a contractor to complete the task.

This method of citizen engagement pays only for performance, meaning an agency might receive an enormous amount of potential solutions, but need only pay for return on investment.

In a memo sent last March, the Office of Management and Budget’s Jeffrey Zients issued guidance on the use of prizes and challenges and called for the creation of a new website that agencies can use to post their challenges. That website, challenge.gov, was unveiled to the public on Monday.

Legal issues, like whether a challenge will involve intellectual property rights, will be addressed on the site.

Alan Chvotkin, executive vice president and counsel for the Professional Services Council, called for a balance between the use of crowd-sourcing and the traditional procurement process. There is currently no system in place to ensure such a balance exists.

Which method would you prefer? Is the challenge, crowd-sourcing method too informal? Or is it a welcome alternative to the sometimes tedious procurement process?

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For any large organization, managing the risks of using independent contractors is a tremendous burden. The whole question of 1099 vs W2 worker classification is perplexing, and the coemployment aspect of 1099 risk plus the fear of contractor lawsuits makes things even murkier.

But for federal contractors — those organizations that do business with our government — the bar is set much higher, and the consequences for getting things wrong are far more worrisome.

So what’s so special about 1099 risk for federal contractors?

Two things: Enforcement of Tax Compliance, and the new E-Verify rules.

Tax Compliance

Every year, the federal government pays more than half a trillion dollars to contractors  from a wide variety of goods and services. Yet, the GAO has discovered that tens of thousands of contractor companies owe the government over $5 billion in unpaid taxes . . . and are still permitted to bid for and win lucrative federal contracts.

In January, President Obama signed an executive memorandum calling out federal contractors that fail to pay their taxes. The action would allow the IRS to share tax information with contracting officers and block federal contractors from winning future contracts if they are seriously tax delinquent.

Those of you who read our Contract Talent Blog regularly may already understand that a company that misclassifies workers as independent contractors — whether knowingly or unknowingly — can end up seriously tax delinquent. Getting worker classification right, and applying the correct independent contractor test to ensure 1099 compliance, is critical.

It may be inconvenient for a regular business to have to jump through the compliance hoops to properly handle contract labor and contractor compliance, but for a federal contractor heavily reliant on doing business with the government, this is no longer an option.

Next steps: If you have reason to believe your business is mis-classifying employees as independent contractors, it is time to do a full contractor assessment. Seek the guidance of a third party Independent Contractor Engagement Specialist if you do not have the compliance expertise in house.

E-Verify

The second unique aspect that federal contractors face with regard to independent contractor use is E-Verify.

Federal contractors out of compliance with E-Verify can face debarrment from federal contracting, bottom line. And yet, many (if not most) major federal contractors are using independent contractors that would likely not pass a reclassification audit.

These may seem like separate issues, but they aren’t. If you are not correctly classifying your workers, and have misclassified employees sitting in the 1099 contractor bucket, then guess what . . . . you have not used E-Verify on those workers.

Next steps: Be sure that the hiring of independent contractors and sub-contractors is highlighted in your business as an area of tremendous risk. Centralizing a compliance process for independent contractor classification should help. Be certain that you implement new risk management processes going forward, and then go back and take care of incumbent 1099s working in your organization.

The Take Away

Independent contractor compliance is, for many businesses, the weakest link. For a federal contractor, the stakes are even higher. Failure to properly classify workers (1099 vs W-2) may be the end of your ability to do business with Uncle Sam in the short term or the long term. Whether the determination comes from the IRs and your tax delinquency, or if it comes from DHS and your failure to use E-Verify on all required employees, you are now being held to a higher standard of compliance.

Unfortunately, 1099 risk isn’t going away any time soon. In fact, at every level — legislation, enforcement, lawsuits — the climate is getting more rigorous.

The best practice is to perform your own internal audit now — leveraging the expertise you need from specialists in contract talent risk mitigation — before a regulatory agency steps in and does it for you.

Or as Nat King Cole sang so memorably, “Straighten Up and Fly Right!”

Bonus: Click here for your complimentary PDF download of, “E-Verify Requirements for Contractors.” This paper, jointly produced by MBO Partners and Michael Best & Friedrich, LLP, highlights the special concerns federal contractors should attend with regard to using Independent Contractors and the current E-Verify rules. No registration required for full text access.

Is your business concerned about the new Obama memo on tax delinquency? Or are you confused by the E-Verify requirements?

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