4 Strategies to Reduce Misclassification Risk

By MBO Partners |

Updated Thursday, August 15, 2019

woman making presentation in office

As traditional employment changes and independent work becomes part of the normal career portfolio, organizations will look for ways to incorporate independent professional talent into their overall workforce strategy. Independents have a lot to offer, and with the right engagement program, they can help an organization thrive.

The U.S. skills gap continues to grow—45% of small businesses reported that they were unable to find qualified applicants to fill job openings in the first quarter of 2017—making the specialized knowledge of independent professionals increasingly valuable.

4 Engagement Strategies that Reduce Misclassification Risk

Here are four important strategies to keep in mind when considering making independent professionals part of your organization’s workforce.

1. Create a company-wide independent workforce engagement program

One of the biggest risks in engaging independent contractors is misclassification. If your company is audited, and state or federal agencies think you may have misclassified employees as independent contractors, you can be at risk for paying back taxes with interest, large fines, or even class action lawsuits. It’s therefore essential to put processes in place for properly engaging and managing your independent workforce.

Conducting an internal audit to determine whether or not your current practices are compliant, creating guidelines for hiring independents, and educating HR personnel and managers on these practices are all useful ways to create a foundational classification strategy.

2. Don’t treat independent contractors like employees

Independent contractors are responsible for performing the work outlined in their contract. As a client, it can sometimes be difficult to know where to draw the line when it comes to managing your independent workforce. A good rule of thumb is to remember that independent contractors are not your employees; they are part of a business-to-business relationship.

Independents are free to work with multiple clients and are responsible for their own taxes and any work-related benefits. When you try and control how independents perform their work with too much oversight, letting them use company equipment or work facilities, or providing extensive on-the-job training, you risk treating them like an employee—which can lead to misclassification. Instead, don’t over-supervise; let independents decide when, where, and how they work. Use your contract as a way to establish communication and management methods.

3. Keep proof of self employment on file

There is no standard independent professional. Just because you call someone an independent contractor doesn’t mean that they really are one. Independents come from all backgrounds and experience levels, and they have different levels of self-employability. It’s therefore important to establish and maintain a consistent classification and engagement process.

Federal, state, and local government agencies use a variety of tests to determine whether a worker is an independent contractor or an employee. Because these tests can vary from agency to agency, use them as a guideline to create a questionnaire or checklist to assess independent contractors you want to engage. If the contractor passes your internal review, be sure to keep a record of anything that can be used as proof of self-employment such as a business or professional license, insurance certificates, or business cards. This will help prove your case in the event of a future audit.

If you’re not comfortable making classification decisions, consider working with a firm that specializes in independent contractor engagement to help you properly assess the talent you want to bring in. MBO Partners has extensive experience in independent contractor classification and can help your organization create a streamlined solution.

4. Define expectations in a written contract

A contract is a binding agreement that helps define your business relationship with an independent contractor. Contracts not only help to set a solid foundation of trust and communication, but they also outline start and end dates for an assignment and any procedural or operational requirements.

A Scope of Work (SOW) is an essential part of a contract that defines what the independent contractor as well as the business is and is not responsible for, detailed timelines, milestone deliverables, what defines a completed work product, and policies and processes for managing changes. A clear contract can help you avoid conflict down the road, and protects both the independent contractor as well as your business.

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.