Compliance and Enterprise Readiness: Why the details of independent contractor engagement matter

By MBO Partners | October 7, 2022

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Enterprise readiness for independent contractor compliance is important to build a reliable, agile contingent workforce.

If a worker is misclassified, enterprises put themselves at risk for fines, penalties, litigation expenses, worker settlements, brand damage, and more.

A compliance program can help businesses with tasks such as contract negotiation, worker indemnification, and onboarding support.

Independent contractors fall into a different legal category than traditional employees. When your company engages independent contractors for projects that require high specialization in an area of expertise, compliance becomes an important part of the equation. Enterprise readiness for independent contractor compliance is important to build a reliable, agile contingent workforce.  

What is Independent Contractor Compliance? 

When a company hires someone to fulfill work as an independent contractor, they are responsible for making sure that person is truly qualified to work as an independent contractor. There are many federal, state, and local laws that apply to independent contractors and are important for businesses to follow.  

People who chose to work as independent contractors come from all different backgrounds and have individual levels of self-employability. For example, one person may be very clearly qualified to work as an independent contractor, whereas another might need to take some additional steps before a hiring manager can confidently engage them as an independent contractor. 

Why Does Independent Contractor Compliance Matter? 

If a worker is misclassified—if they really should be classified as an employee but are called ana independent contractor, or vice versa—enterprises put themselves at risk for fines, penalties, litigation expenses, worker settlements, brand damage, and more. 

These legal aspects extend to working with independent contractors themselves. In general, independent contractors typically complete projects with a set start and end date, and are free to choose when, where, and how they complete the work outlined in the contract. They are responsible for operating their own business, paying their own taxes, providing their own benefits, and submitting invoices for work completed.  

10 Ways Your Enterprise can be Ready for Independent Contractor Compliance

1. Review current classification processes

Conducting an internal audit of current classification processes can help you pinpoint where work is needed. Look at how hiring managers are finding and engaging talent. Make sure there are specific guidelines in place and that independents are being engaged through the proper channels. Review federal, state, and local laws that apply to your organization and look at whether your practices are in line with these standards. 

2. Learn the difference between independent contractors and employees

Understanding the differences between independent contractors and employees is helpful when it comes to compliance because it will shape the way you engage and manage this pool of workers. For example, because independent contractors bring specialized expertise to a project you are not responsible for providing them with training. 

3. Practice an appropriate degree of control 

Degree of control is one of the biggest factors that differentiates independent contractors from employees. It can be easy to treat an independent contractor just like another member of your team, but that can be a slippery slope. Remember, independents have the right to control how, when, and where their work is done—unless otherwise specified in their contract. 

4. Don’t discount independent contractor happiness

Independent contractors are experts in their fields and that means they are in-demand. They get to choose the clients they work with, which means that their happiness at your company is important. If they are dissatisfied, or have a negative experience being treated like an employee, they could take action that triggers an audit or raises aa red flag for worker misclassification. Keys to independent contractor satisfaction include fast and reasonable payment terms, a simple onboarding process, and a positive work environment. 

5. Eliminate rogue engagements

Sometimes, hiring managers will engage independent contractors in a gray zone where they aren’t fully qualified. This is a type of rogue engagement that can be risky because there is little to no oversight as to how workers are engaged. Identifying when independents are being engaged this way and directing managers to a more controlled method of engagement can help minimize risk. 

6. Use written contracts

A written contract protects both your business and the independent contractor from aa legal standpoint. It has the added benefit of defining project details and giving you the chance to build a positive working relationship. 

7. Consider engaging contingent workers through a centralized program

A centralized program that considers applicable laws, outlines company-wide policies, and puts legal safeguards in place is a great way to lower your risk. Having these types of processes in place now is much easier than responding to a problem retroactively. 

8. Make sure independent contractors are insured

Requiring independent contractors to provide a base level of insurance is a common practice. General Liability and Erros & Omissions insurances are the most common and will help to minimize the cost of resolving issues like a contract dispute.  

9. Talk to employees about worker misclassification

Educate employees and hiring managers on classification practices and laws so they are familiar with what they can and cannot do. Make sure they understand the basic differences between independent contractors and employees so they can confidently engage and manage contingent workers. 

10. Bring in an expert to manage the legal side of things

Partnering with an organization that specializes in independent contractor engagement and compliance is a helpful step for most enterprises. Compliance is a very complex topic to tackle. It goes beyond indemnification and learning worker classification laws. Proper compliance requires extensive investigation and ongoing support. A company like MBO can help you build a compliance program and handle additional compliance tasks such as contract negotiation, worker indemnification, and onboarding support. 

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