Ex-CEO's (Like Jack Welch) Who Consultant to Former Employers are Independent Contractors, Not Employees -- Changed Worker Status Means They Lose Rights to Benefits and Perks They Enjoyed as Employees

 On Monday, September 16, the Wall Street Journal published a letter from GE’s retired CEO Jack Welch. His letter has been described by various reporters and analysts as Mr. Welch’s way of “coming clean” about his lucrative consulting agreement with GE after his retirement. While Jack Welch is in the media spotlight today, countless other CEO’s are benefiting from such lucrative post-retirement consulting agreements. While the media focus highlights investigations by Congressional Committees and the SEC as the latest chapter of corporate CEO greed, we hear few comments about how blatantly these consulting agreements violate IRS rules governing independent contractors.

Contracts like Mr. Welch’s agreement with GE allow ex-CEO’s to receive the benefits of consulting as “independent contractors”, without the costs of paying for their own insurance and other benefits, not to mention the costs of doing business such as office rent, administrative support and other costs faced every day by independent contractors in the real working world. 

In his letter, Mr. Welch says he does “not believe it is improper” and there is “nothing invalid” about his employment agreement with GE. He only asked GE to change the agreement because of the “perception” of wrongdoing and bad public relations that he believed was harming the company.

The IRS would disagree with Mr. Welch. His consulting agreement violates IRS requirements governing independent contractors. Welch’s comments provide a perfect illustration of the need to understand the distinctions between employee and independent contractor. These revelations come at the same time the IRS has announced its highest priority for audits are  wealthy individuals.

Independent contractors are self-employed, and are required to pay their own self-employment taxes to the IRS. While the media focuses on investigations by the SEC and various Congressional Committees, we hear little of how these CEO's and their companies will account to Uncle Sam when IRS auditors find their contracts violate IRS requirements governing independent contractors and the important distinctions between employees and independent contractors in today's workforce.

(See more details on this issue in the September issue of IC Law Update Newsletter).