Worker misclassification is an inherent risk when engaging independent contractors. Businesses today must decide how to handle differing worker classification laws from federal, state, and local government agencies. Because laws and regulations that dictate worker classification and use of independent contractors are ambiguous and frequently change, legal compliance is challenging.
At the same time, companies must also understand that the consequences of misclassification are serious: paying back-taxes with interest, getting pulled into class-action lawsuits, or suffering repercussions from negative press. Fortunately, in there are many steps businesses can take to compliantly handle the risk of worker classification.
1. Be Aware of Degree of Control
One of the top causes of misclassification is degree of control in a client-independent contractor relationship. By law, independent contractors operate as their own business entity. They have the right to complete work when, where, and how they choose, and can openly market their services to other businesses. Companies must therefore be careful not to exert too much control over the independent contractors they engage. For example, in most cases, independent contractors should not be performing the same work as employees.
As a best practice, it is always good to refer back to defined contractual deliverables when interacting with independents. Managers should avoid asking for specific reporting that may lead to some sort of influence over how work is completed, or make independent contractors attend corporate meetings or events that are not outlined in a contract.
2. Minimize Rogue Enterprise Managers
When managers are in a pinch to find talent, they may turn to their own network or an online marketplace for a fast solution. Unfortunately, this type of rogue engagement can lead to big misclassification problems. Simply put, worker misclassification is more likely to occur because much self-sourcing technology today lacks a level of compliance vetting that enterprises need to compliantly engage highly-skilled independent talent. It is therefore very important to educate managers on the risk of engaging independent talent in this way and to encourage them to instead work through an established engagement program or other appropriate channels.
3. Prioritize Independent Contactor Satisfaction
When independent contractors are dissatisfied or believe they have been improperly classified—perhaps they have been forced to work on a 1099 or think they should be classified as an employee because they do similar work as employees—they are more likely to take action that raises classification questions or triggers an audit.
By understanding the unique needs of independent talent and prioritizing these key factors, independent talent will be happier with their choice in client partnership. Top factors that influence satisfaction include: a clear onboarding process and project scope, fair and quick compensation, and reasonable processes and procedures.
4. Put Risk Management Measure in Place
While certain departments or managers within your organization may have a system in place for engaging independent talent, true risk management can be difficult to achieve without a centralized engagement program. A program can help a company more confidently engage and manage independent talent with minimized risk of misclassification.
That said, creating a centrally managed program is a big investment of time and cross-functional resources, and is not an area of expertise for most companies. Instead, many organizations decide to partner with a firm that does have this expertise rather than trying to build their own center of excellence for engagement compliance. Companies like MBO that specialize in independent workforce engagement and compliance can help to build the right program, and may indemnify enterprises from misclassification and legal risk.
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.