Navigating Compliance and Risk Management in Direct Sourcing

By MBO Partners | February 27, 2024


Key Points

Direct sourcing gives enterprises access to a pool of vetted talent, saves costs, increases worker satisfaction, and boosts retention rates.

Direct Sourcing can also help decrease the risk of worker misclassification.

Incorporating direct sourcing into a larger program can help lower compliance risk.

Over 72 million Americans worked independently in 2023. As more enterprises turn to the independent workforce for staffing flexibility, in-demand skills, and cost savings, direct sourcing is steadily evolving as the leading way to engage this group of talent. Direct sourcing gives enterprises access to a pool of vetted talent, saves time and costs, increases worker satisfaction and output, and boosts retention and re-engagement rates. It can also help to decrease the risk of worker misclassification.

Risk management should be top of mind for any company that engages independent contractors. Without a program or plan to navigate independent contractor compliance, companies risk expensive lawsuits, audits, reputation damage, and more. For all the challenges that come with worker classification, there are also many best practices companies can use to mitigate compliance risk.

Compliance Challenges when Engaging Independent Contractors

1. Worker status is complex

One of the most difficult compliance challenges companies face when engaging independent contractors is that worker status is complex and changing. Federal and state laws surrounding worker classification are constantly evolving, sometimes contradictory, and are often interpreted in different ways. Without proper legal guidance, this can easily lead to confusion and misclassification of workers.

When to Classify a Worker as an Independent Contractor

2. Independents are all different

Independent contractors come from a variety of backgrounds. Some may have been running their own business for years and be familiar with what it means to be an independent contractor while others may be navigating this road for the first time.

Independents often fall along a spectrum of self-employability. Some may be clearly self-employable, while others may be better engaged through a payroll program or need to complete a few additional steps before they can be classified as an independent contractor. Understanding how independent contractors differ from employees is a helpful place to start. Many organizations find it useful to work with a company like MBO that can provide a variety of engagement options based on the qualifications of each individual worker.

3. On its own, direct sourcing may not be enough

Direct sourcing can often help to mitigate compliance risk because it creates transparent processes around talent engagement. But on its own, direct sourcing may not be enough to ensure compliance long-term. A comprehensive program that includes direct sourcing is the safest route an organization can take.

A program should take into account your company’s specific industry and needs. It should include a process for vetting and defining worker status, reviewing individual worker qualifications, and staying up-to-date on current laws and regulations.

3 Levels of Contractor Compliance

Best Practices for Mitigating Risks when Directly Sourcing Independent Contractors

1. Use a written contract

A written contract is a good first line of legal protection for both your company and independent contractors. In a contract, you can include important details such as payment terms, insurance requirements, as well as project timelines, roles, and expectations. A contract is also a great place to establish worker status. Including a statement that establishes agreement to an independent contractor relationship can help keep worker status clear.

3 Reasons to Use a Written Contract for Consultants

2. Understand degree of control

One of the most helpful things to be aware of when working with independent contractors is degree of control. Unless otherwise specified in a written contract, independents are free to choose when, where, and how they complete their work. This is a very different type of work relationship than the typical manager-employee arrangement and can be hard to abide by if employees are not familiar with how independent contractors’ work. If a manager tries to over-supervise and a contractor is unhappy with the arrangement, misclassification issues can arise.

3. Incorporate direct sourcing into a larger independent contractor program

Along with direct sourcing, a comprehensive program to govern finding, engaging, and managing independent contractors is the optimal way to help reduce the risk of compliance violations. A typical program will include a few key parts.

First, when developing a direct sourcing strategy, a program should account for specific local, state, and federal laws. Next, if using a marketplace platform to find talent, a good program should ensure that the marketplace includes some level of compliance vetting. This will help bring the right talent to your company from the start. Third, a program should offer flexible engagement options so talent can be engaged in the most compliant way possible based on their background. Lastly, a program should require worker classification documentation when onboarding. The type of documentation needed will be specific to your industry and the type of independent contractors you are engaging and will help prove they are qualified to work as a contractor.

Why Direct Sourcing Can Help You Manage Risk When Engaging Independent Talent

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The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.  

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