5 Ways to Lower Worker Misclassification Audit Risk

By MBO Partners | July 15, 2022

Share
direct sourcing

Key Points

It is important to understand that independent contractors, temporary workers, freelancers, etc. cannot be engaged or treated like traditional W-2 employees.

An internal audit can give you an in-depth understanding of your current classification practices and whether they are compliant.  

To remain compliant and lower your risk, consider building a program for independent contractor engagement.

As more companies engage independent contractors as part of their workforce, there is an increasing importance of properly classifying workers. If your company engages independent workers, you are probably aware of high-profile employee misclassification lawsuits that have been in the news.  

What is a Worker Misclassification Audit? 

It is important to understand that independent contractors, temporary workers, freelancers, etc. cannot be engaged or treated like traditional W-2 employees. Doing so risks an audit, which can lead to many negative consequences including large fines, bad press, back tax payment, stalled acquisitions, and class-action lawsuits. 

Companies of any size and reputation are subject to audits. Several activities can trigger an audit including a contractor who files for unemployment, a whistleblower who reports possible misclassification, or a worker who files an SS-8 form to request classification determination. 

Here are five tips to lower your audit risk and improve independent contractor satisfaction at your company.

1. Audit Your Current Processes

A good first step to avoiding an audit is to conduct one of your own. An internal audit can give you an in-depth understanding of your current classification practices and whether they are compliant.  

To conduct an audit, gather records of services performed by contractors, check to see if you have contracts on file for your independent engagements, and confirm if the contractors you’ve engaged in the past have federal tax ID numbers. 

Are you able to prove that all the contractors you’ve engaged qualify as independent workers? Investigating your practices can help identify gaps and areas for improvement before a regulatory agency steps in with an audit of their own. 

Check out: Independent Contractor vs Employee: Which Should I Hire? 

2. Build a Compliance Program 

Your business may have a worker classification policy in place, but do employees follow it? If not, you could be at risk.  

To remain compliant and lower your risk, consider building a program for independent contractor engagement. This program will help you compliantly find, engage, and manage contingent workers. Program policies should be understood and enforced across the board and have the flexibility to evolve as needed. 

Learn more: 3 Business Benefits of a Contractor Compliance Program 

 3. Review Worker Classification Regulations

The federal government, state government, and government agencies all apply different laws and tests to determine worker classification. These tests lack uniformity, so just because a worker complies with one test, doesn’t mean they’ll comply with another. While this complicates the vetting process, it is still important to be aware of these laws when assessing the classification status of workers. 

In general, it is good practice to keep records of documents that support a classification decision such as a business or professional license, business cards, or insurance certificates that can be used as proof of self-employment. 

Dig deeper: Worker Classification Tests: DOL, IRS, State Tests for Classifying Workers 

 4. Always Use a Written Contract

Using a written contract for all independent contractor engagements not only helps to clearly define your working relationship, but it also helps to verify classification in the event of an audit.  

In addition to outlining the scope of work, defining the communication process, and specifying payment terms, you may want to consider including additional safeguards such as explicitly stating the person you’re engaging with is an independent worker, that they are free from control, and that they have insurance. 

Learn more: 3 Reasons to Use a Written Contract for Consultants 

 5. Build a Team for Support

A cross-functional team keeping an eye out for warning signs can save you a big headache down the road. If possible, include representatives from legal, compliance, HR, and procurement to provide insight and support from different perspectives. This team should be on the lookout for audit triggers such as independent workers filing for worker’s compensation, disability, or unemployment claims as well as ensure that contractor hiring and management processes stay compliant and up to date. 

While there are many things you can do to minimize the risk of a misclassification audit, independent contractor engagement can be a confusing and tricky road to navigate. Firms like MBO Partners have an established methodology in place for evaluating and engaging independent workers for clients and have proven best practices for minimizing or eliminating issues with contractor engagement. Partnering with a company that specializes in independent contractor engagement and compliance can help minimize your risk and make sure your business remains compliant. 

Up next: 15 Ways to Avoid a Worker Misclassification Audit 

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.   

Compliance CTA

Related Posts

Creating an Effective Contingent Labor Program: Getting Classification Right 

Following on my introduction to this series, this first installment focuses on the critical importance of correctly classifying the members of your independent workforce.   In the past, the onus was on independent contractors to make sure they were set up correctly, paying the right taxes – the IRS would audit them directly. That has…

Read More...

Independent Contractor Misclassification and Compliance News February 2024

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web. Commissioner of Federal Trade Commission (FTC) Argues Misclassification…

Read More...

Independent Contractor Misclassification and Compliance News January 2024

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web. U.S. Department of Labor Announces New Worker Classification…

Read More...
Trending
Tags

Concerned about compliance?

Get our misclassification guide and learn
how to lower your risk

ACCESS THE GUIDE

Learn more about the MBO Platform

FOR INDEPENDENT
PROFESSIONALS

Start, run, and grow

your independent business with MBO

FOR
ENTERPRISES

Engage, scale, and optimize

your independent workforce