3 Benefits to Creating a Contractor Compliance Program

By MBO Partners | September 21, 2022

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Key Points

A compliance program serves to minimize a company’s exposure to misclassification liability.

Businesses that engage independent contractors for projects that require a high degree of specialization in an area of expertise need an extensive level of compliance.

In order to create an effective program tailored to organizational needs, many businesses choose to partner with a firm that specializes in independent contractor engagement and compliance that can indemnify the enterprise from misclassification and legal risk.

Any enterprise that uses independent contractor talent needs a comprehensive compliance program. A compliance program serves to minimize a company’s exposure to misclassification liability. By law, independent contractors represent a different category of worker than W-2 employees. That means that just because someone wants to work as an independent contractor, doesn’t mean they meet the specific criteria to legally do so.

If a company misclassifies a worker as an independent contractor when they should really be an employee, the company may be liable for fines and penalties, and can even be hit with a class-action lawsuit. Businesses that engage independent contractors for projects that require a high degree of specialization in an area of expertise need an extensive level of compliance. In order to operate legally, it is important to understand existing contractor compliance guidelines and laws.

Below are three key benefits to building a contractor compliance program at your organization.

1. Minimize compliance risk

There are many inherent risks in engaging independent contractors: insufficient insurance requirements, unpaid taxes, misclassification, and rogue enterprise managers, just to name a few. Independent contractor classification and engagement are complex processes, but must be followed in order for businesses to remain compliant and avoid IRS audits.

A compliance program helps to minimize the risks associated with misclassification. In order to create an effective program tailored to organizational needs, many businesses choose to partner with a firm that specializes in independent contractor engagement and compliance that can indemnify the enterprise from misclassification and legal risk. Companies like MBO can provide valuable strategies, tools, and advice to help enterprises create sustainable contractor compliance programs.

2. Strategically Manage Spend

Without a defined program in place for independent contractor engagement, management, and payment, a company can incur a variety of costs. First, the risk of misclassification in and of itself can be quite costly. Businesses can be liable for paying back-taxes, penalties, and benefits to misclassified workers, and dealing with lawsuits and reputation damage can add an additional financial burden.

A common fix for misclassification risk is to engage workers as W-2 employees on a payroll program. However, these programs tend to be quite costly and independent professionals often don’t want to be engaged this way, leading them to take their services elsewhere or look for ways to circumvent this type of classification—a practice that can circle back to rogue engagement and misclassification.

Without a defined program, it is also difficult for businesses to strategically manage independent contractor spend as a category. When a business does not have visibility into how its independent workforce is managed or paid, it becomes really difficult to drive cost-savings opportunities.

A well-rounded program serves to eliminate these burdens. Providing flexible engagement options that appeal to a broad range of independent work engagements and worker types helps to mitigate misclassification risk, allows talent to work the way they want, and gives businesses the insight and data they need to efficiently manage independent contractor spend.

3.  Boost Work Efficiency

Lastly, a contractor compliance program increases visibility into the expenses and profitability of using independent professional talent, as well as boosts the efficiency of filling a project need with qualified talent.

With a defined program in place, it is much easier to manage factors like independent contractor-related expenditures and talent rates. Over time, this increased visibility can help organizations realize significant cost savings. Technology can also be used to support a program, helping to eliminate administrative burdens by giving managers the tools to efficiently find, engage, and manage independent talent.

Although the details of instituting a contractor compliance program can seem overwhelming, risk control, cost savings, and increased efficiency and visibility are all very tangible benefits that will help your business remain both legally compliant and competitive among peers.

Do you have more questions about how to create a compliance program for your business?  Contact us today.

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