The buy-side Quality of Earnings team is claiming our use of independent contractors for development must be reclassified as full-time employees, which would trigger additional payroll taxes and lower our EBITDA. How do we defend our classification to protect our valuation?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings auditors frequently target independent contractor arrangements, claiming they must be reclassified as employees. This adjustment would add payroll taxes and benefit costs to your historical financials, artificially lowering your EBITDA and your valuation. To defend your contractor classification, you must present a robust, compliant operating model.

Provide the auditors with clear documentation showing that your contractors meet all legal criteria for independence. This includes having signed contracts with clear scopes of work, contractors using their own equipment, and having control over their own schedules. Show that your internal team, as defined on your Accountability Chart, is responsible for managing these projects rather than performing the manual coding work themselves.

Demonstrate that this flexible staffing model is a deliberate operational strategy that allows you to scale up or down based on demand, which actually reduces your long-term fixed overhead. By proving your classification is legally defensible and operationally efficient, you can reject the auditor's downward adjustment. This protects your historical EBITDA and ensures your valuation multiple is applied to your true, normalized earnings.