Working With Independent Contractors: 5 Risks to Avoid

Companies that engage independent contractors understand the value these highly skilled professionals bring to their business. While working with independent contractors offers many advantages, it also presents challenges—particularly if there isn’t a clear plan in place to manage compliance and meet business requirements.

The engagement process can be difficult to navigate, especially with frequently shifting regulations and limited guidance. Below are five common risks associated with working with independent contractors, along with steps to help reduce exposure.

5 Risks of Working With Independent Contractors

1. Worker Misclassification

Everything seems to be going just fine—until you receive notice of a labor department investigation questioning someone’s classification. This scenario plays out more often than you might think, and it’s a stark reminder of why getting classification right matters.

The challenge is that there’s no simple system to determine whether someone should be an independent contractor or an employee. The U.S. Department of Labor provides general guidance, but the rules are nuanced and can shift over time. Get it wrong, and your company could face substantial penalties, including back taxes, fines, and potential legal battles.

One of the most effective ways to manage your contingent workforce is by partnering with specialized firms like MBO Partners, which offer proven compliance systems and deep expertise. They can help you navigate these worker misclassification challenges with confidence.

2. Compliance Audits

Think of compliance audits as assessments of your business practices—only with much higher stakes. These audits can be triggered by seemingly innocent events: a contractor filing for unemployment, a concerned employee raising red flags, or even a worker simply requesting classification clarity through an SS-8 form.

Fortunately, there are several steps you can take to reduce your risk of an audit and avoid serious consequences. These include:

• Conducting an internal audit to check if your classification practices are compliant
• Creating guidelines for working with independent contractors
• Ensuring contractors are properly classified
• Having a written agreement in place for all independent contractors
• Forming a team to address issues before they arise

3. Uncertainty About Workforce Duties and Responsibilities

It’s a common misstep: You bring on an independent contractor but begin treating them like an employee. Maybe you’re supplying company equipment, overseeing their daily tasks, or offering in-depth training. While these actions may be well-intentioned, they can quickly blur the lines between contractor and employee status.

The solution is to establish a detailed contract that outlines specific deliverables and deadlines while maintaining the contractor’s independence. It’s equally important to ensure your internal teams understand and respect this distinction.

4. Lack of Insurance Coverage

Consider this: An independent contractor gets injured while working on your premises. Without proper insurance coverage, your company could be exposed to significant liability. Unlike employees, contractors typically aren’t covered by your workers’ compensation policy.

Many businesses address this risk by requiring contractors to carry their own insurance policies and by clearly defining liability terms in the contract. Remember, unless specifically contracted, independent contractors are generally not covered by workplace safety regulations or eligible for unemployment benefits.

5. Co-Employment Risks

When two entities share control over the terms and conditions of a worker’s engagement, co-employment concerns can arise. This scenario is common when companies work with staffing agencies or third parties—one may handle payroll while the other oversees day-to-day direction. While practical, these arrangements can bring shared legal responsibilities.

To reduce risk, work with trusted experts that have well-established compliance practices, particularly around worker classification. Set clear internal guidelines for engaging with contractors and partner with organizations experienced in managing independent talent, including those that offer Agent of Record (AOR) services.

How Can I Find Independent Contractors for Our Next Project?

For more expert advice on working with independent contractors, follow MBO’s blog for valuable updates and insights. We cover essential topics, including workforce compliance, workforce optimization, AI/technology, and more—all designed to help you manage the complexities of the modern workforce.

Need more help building a better workforce strategy? Connect with the team at MBO Partners—we’re here to support your success.