Independent Contractor Classification: How to Stay Compliant

By MBO Partners | May 31, 2022

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Independent Contractor Classification: How to Stay Compliant

Updating policies and practices to compliantly engage independent contractors is a major shift many large organizations are going through. Worker misclassification is a serious issue—if a company classifies a worker as an independent contractor when they should really be classified as an employee in the eyes of the law, they are liable for fines, penalties, lawsuits and more.

Why is Worker Misclassification a Big Deal?

While worker misclassification is not always intentional, it can be challenging to correctly abide by the many tests, laws, and guidelines that govern how workers are classified. In order to remain compliant and minimize the risk of misclassification, enterprise managers should have a general awareness of independent contractor rights.

What Makes Independent Contractors Different?

Generally speaking, a client will engage an independent contractor to complete a project with a specific start and end date. Independent contractors are free to choose when, where, and how they complete the work outlined in their contract. They operate as their own business, paying their own taxes, providing their own benefits, and submitting invoices for work completed.

How Can I Get a Handle on Worker Classification?

By educating managers and employees about the basic differences between independent contractors and employees, companies can develop better classification processes and ensure proper treatment of independent contractors as a whole. Here are four ways managers can get a handle on the level of compliance needed to successfully and confidently engage top independent talent.

1. Review Current Classification Processes

If your company already engages independent contractors, take some time to review your current classification processes. How do managers typically find and engage independent talent? Are there set guidelines in place, or are managers relying on their own contacts to find the people they need? Review federal, state, and local laws that apply to your company and assess whether or not existing practices are in line with these standards. By finding the flaws in your process, you can get a better idea of what needs to change and why.

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

2. Be Aware of Degree of Control

Control is a huge part of the independent contractor-client relationship. Treating an independent contractor like an employee is easy to do, but is a slippery slope that can quickly get you into trouble. Independent contractors have a right to behavioral control, how, when, and where their work is done, as well as financial control.

Independent contractors are typically paid a flat fee for their work and are reimbursed for certain expenses they may incur. In general, independent contractors provide any needed tools or equipment for their work and should not require training. Any exceptions to these rules should be discussed ahead of time, outlined in a contract, and reviewed by a company legal advisor.

Learn More: Compliance Checklist for Misclassification Risk

3. Make Sure Independent Contractors are Satisfied

Independent contractors have a choice when it comes to picking the clients they work with. If they are unhappy with their experience at your company, they will be unlikely to engage with you again and may take their services to a competitor. If they are dissatisfied, or if they believe they are being treated like an employee they might take action that triggers an audit or raises a red flag for worker misclassification.

Remember, a satisfied worker who agrees with their classification is less likely to challenge that classification. Be mindful of how independent talent view your company and how they are treated. Common sources of satisfaction include long net payment terms, requiring excessive liability insurance, and administrative burdens.

Learn More: MBO Partner’s latest Client of Choice research

4. Don’t Shoulder All of the Responsibility

There’s no easy way around it—worker classification is complex. Adhering to classification laws and guidelines is just part of the compliance picture. In order to tackle the extensive investigation and indemnification that independent contractor compliance requires, savvy companies will establish a comprehensive worker classification program.

This is a big commitment of time and resources, and is why many companies partner with a company like MBO who can help build a reliable program and handle additional compliance tasks like making sure contracts are fairly written and negotiated, that taxes are filed and paid, and that eligible expenses are properly submitted and deducted.

Learn More: Compliant talent engagement for enterprises

For more information about what MBO can provide your business, or if you have a general question about keeping your company compliant, contact our team of experts today.

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.

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