Independent workforce compliance is important for any business that currently uses or is considering using independent talent. In order to operate legally, companies must take steps to comply with relevant laws, policies, and regulations regarding independent contractors. Proper engagement and management of this talent pool is very different than maintaining compliance for a workforce of traditional employees. Below, we outline four important things to know about compliance for the independent workforce.
Today’s regulatory environment for independent contractor engagement is complex. By law, independent contractors represent a different category of worker and there are different laws that govern how they can be engaged and treated in a work environment.
One of the most important things to be aware of is when to classify a worker as an independent contractor and when to classify them as an employee. This is not a choice that can be left to the discretion of a client or employer—there are specific federal, state, and local laws that govern whether a worker can be considered an independent contractor or employee. Confusingly, however, because there is no universal definition of "independent contractor," there is a lot of ambiguity with these laws. Depending on how they are interpreted, a worker could be seen as an independent contractor from one perspective and as an employee from another.
Remember that independent contractors are their own business entity—they have built a business around the specialized services they provide. They are responsible for paying their own taxes, providing their own benefits, and can determine when, where, and how they work.
Laws and regulations surrounding worker classification are ambiguous and in flux, making legal compliance an ongoing challenge. This means that the simple nature of using independent talent poses a risk to all organizations. As established above, independent contractors cannot be engaged or treated like traditional, W-2 employees. Misclassification, whether willful or not, can lead to weighty consequences including fines, negative publicity, penalties, and class-action lawsuits.
The best way to combat these risks is to fully understand and stay on top of changing regulations and laws by creating a stable, centralized classification program to manage and engage independent talent. Remember, even if certain departments or managers within your company have a system in place to engage independent contractors, without an overarching centralized program, true risk management can be difficult to achieve.
Misclassification can lead to costly legal consequences including audits, and criminal or civil penalties and sanctions. Even if you don’t think you’ve misclassified workers, the IRS can be alerted to potential misclassification in several ways: a whistleblower may file an SS-8 form to request classification determination, a worker may receive a 1099 and W-2 from your company in the same year, or an independent contractor may try to claim unemployment or disability insurance.
If you do misclassify employees, you may be violating wage, tax, and employment eligibility laws. Resulting fines from the U.S. Department of Labor (DOL), IRS, and state agencies can total millions of dollars. Companies can also be held responsible for paying back-taxes on employee wage interest as well as FICA taxes that weren’t withheld originally.
As stated earlier, a comprehensive compliance program is the best way to minimize exposure to misclassification liability. And, generally speaking, compliance should grow as dollar value and length of independent contractor engagement increases. When developing a program, it is important to factor compliance into all aspects of the independent contractor lifecycle, from sourcing and engagement, to management and future re-engagement.
Creating a program that addresses all of these needs can be a big task to take on. That’s why many organizations decide to partner with a firm like MBO that offers flexible engagement models to account for the different levels of self-employability that independent contractors bring to the table and has a tried and proven methodology for independent contractor engagement. Failing to have a program in place for independent contractor compliance can be a big risk—remain both legally compliant and competitive among peers by putting the right measures in place to properly work with independent talent.
MBO Partners helps enterprises compliantly manage and engage independent contractors. Reach out to us to discuss how we can work together to meet your needs.
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.
Independent contractor misclassification can be an expensive mistake—here’s what you need to know to avoid it.
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