3 Ways to Stay Compliant When Hiring Independent Contractors

By MBO Partners | May 15, 2024

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Key Points

Learn three ways to stay compliant when engaging with independent workers.

Avoid the risk of worker misclassification, which can lead to audits, fines, penalties, and lawsuits.

It is important to keep track of every independent worker in your organization and know what their role is.

Staying complaint when hiring independent contractors is a task many enterprises today face. More than 71 million Americans are currently working independently on a full- or part-time basis. This means that if you aren’t doing so already, you’ll likely be engaging some of this independent talent soon.

But read carefully. That last sentence wasn’t an issue of semantics. If you are using independent talent—contractors, consultants, freelancers, solopreneurs, etc.—you are engaging the services of these workers, not employing them.

Without proper management of these workers, you run the risk of misclassification which can lead to audits, fines, penalties, and lawsuits. Workers in nearly every specialty are moving away from traditional employment and towards a self-employed career model. As an organization engaging independent talent, it’s important to stay on top of compliance. Here are three ways to stay complaint when hiring independent contractors.

1. Define Employment Status for All Workers

Clearly defining worker status is an important first step in ensuring compliance. Without a clearly defined employment status, your company may be vulnerable to an IRS audit. With W-2 employees, for example, employers are responsible for payroll taxes—half of FICA (Social Security and Medicare) as well as half of unemployment tax. They are not responsible for paying these taxes on earned income for independent contractors. Therefore, if an independent contractor tries to claim unemployment insurance, it can trigger a cascade of audits on the local, state, and federal levels. Your company may be able to fight the claim, but damage may already be done.

Having a clear program in place for engaging and managing independent contractors is a very important part of remaining compliant with laws. Ensure practices are up-to-date and that enterprise managers follow these practices when finding and engaging independent talent.

Why Misclassification Risk Can’t Be Ignored

2. Understand Worker Classification Laws

There are many different standards and rules for determining whether an individual is an employee or an independent contractor. Federal agencies including the Department of Labor (DOL) and Internal Revenue Service (IRS) as well as individual states each have laws and guidance documents regarding this topic.

As you begin to engage independent talent, become familiar with these agencies and their rules to make the best compliance judgments. If you are unsure of how to navigate these legal nuances, consider working with a firm that specializes in independent contractor engagement to help you properly assess your existing methods for engaging independent talent.

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

3. Maintain Detailed Records

From maintenance to management, you should keep track of every independent worker in your organization and what their role is. If you don’t know what non-employee workers do, how much they are paid, and why they are not considered to be employees, you are putting your company at risk.

Without proper management, it can be easy to misclassify independent contractors. Always remember that independent contractor compliance is a real issue. To protect your company, it’s important to employ risk mitigation techniques and to put a comprehensive compliance program in place that takes important factors into account such as your industry and state criteria for proper classification. Not only will an effective program help you protect your organization—you’ll also maintain peace of mind and become a more attractive place to work.

4 Tips for Managing Independent Contractors

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