An IC stole from clients. Now what?

Mark Pestronk

Q: One of my agency’s independent contractors (ICs) uses my agency’s name on her email signature and business cards. She collected checks from the parents of a large school group that plans to travel to Europe this summer, and she has now apparently embezzled all that money. Is my agency legally liable for the loss? What can I do now to recoup the money? How can I prevent something like this from happening in the future?

A: Legally, you are not liable for the acts or omissions of your independent contractors. Nevertheless, the group, the school and possibly the local district attorney and the state attorney general may think you are and may decide to pursue civil or criminal cases against your agency.

The school district or the attorney general may threaten to file lawsuits, and the district attorney may threaten criminal prosecution. You will have to decide whether to fight them, which may well result in bad publicity for your agency, or to absorb the cost by making supplier payments out of your own pocket.

If you absorb the cost, you can go after the rogue IC to recoup the funds. Ideally, the IC would have earned enough on other transactions so that you can deduct your loss from her commission split.

More likely, you’ll have to sue the IC, or at least threaten to sue. One thing you cannot do is to threaten criminal prosecution in order to get the IC to pay, as such threats are illegal extortion, even if the money is owed to you. However, you are free to ask the prosecutor to go after the IC for theft.

Anyone who would embezzle school-trip funds is someone you never should have retained in first place. For the future, here are four steps that you can take to lessen the chance that you will get stuck again:

First, before you retain any IC, get a complete work history and check the IC’s references. If the IC has no work references or has date gaps that cannot be explained easily, give serious consideration to declining to retain the IC, no matter how large a client base the IC claims to have.

Second, do criminal and credit checks before retaining the IC. Although you don’t need the prospect’s consent to do the checks because this will be a business-to-business relationship, it is still a good idea to try to get consent because you should not retain an IC who refuses.

Third, in your IC agreement, consider either prohibiting the IC from using your agency’s name in marketing and sales or requiring a statement that the IC is an independent contractor of your agency.

Fourth, also in your IC agreement, require that all sales be by credit card or by check payable only to you, not the IC. While such a clause may not stop the determined IC from taking checks payable to the IC anyway, it will prevent other ICs from yielding to the temptation to spend clients’ deposits. 

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