The Legal Landscape: Navigating Compliance with Independent Contractors

By MBO Partners | October 18, 2023


Key Points

Companies must understand how to navigate compliance in order to operate legally when engaging independent contractors.

It is best to hire independent contractors for defined projects and full-time employees for ongoing business needs.

Avoid misclassification risk with a compliance program, written contracts, and hiring the right type of worker for the role you need filled.

Engaging independent contractors comes with many benefits: increased staffing flexibility, access to in-demand skills, cost savings, and a workforce for project-based work. But in exchange for these advantages, companies must be aware of how to navigate compliance in order to operate legally when engaging contingent workers. From a legal perspective, independent contractors fall under a different category of workers than a W-2 employee.

How do Independent Contractors Differ from Employees?

Independent contractors are people who’ve started their own business and offer services based around a specific set of skills or expertise. Independents openly market these services and often work with a variety of clients, some on short-term projects and some on longer-term engagements. Independents must pay their own taxes and provide their own benefits. They often have a set bill rate or cost range for their services that is negotiated when they enter into a new contract with a client. Independents are free to conduct the work outlined in their contract when, where, and how they want.

Employees, on the other hand, experience more guidance and oversight in their work. While most employees will come with some sort of experience in the industry or role they are filling, they tend to require more job training and onboarding than an independent contractor. They tend to work set hours and receive supervision from a manager. Depending on the state they work in and the size of the company they work for, employees receive some level of benefits from their company (such as health insurance, stock options, or 401k matching), and their employer is responsible for playing the employer side of Social Security and Medicare (FICA) taxes.

16 Benefits of Hiring Contractors vs Employees

What Legal Considerations Should Companies Take into Account when Engaging Independent Contractors?

When engaging independent contractors, it is important to remember that worker status is complex and changing. There are many different federal, state, and government laws and regulations regarding worker classification. These laws are sometimes interpreted in different ways, which can lead to ongoing confusion and worker misclassification lawsuits.

Paying attention to these laws is important because if a worker is classified as an independent contractor when they should really be an employee, the consequences can be costly. Companies may be liable for paying fines, get caught in a pricy lawsuit, and suffer reputation damage. Working with a third party that has experience in reducing engagement risk and ensuring proper classification can be a big help in navigating this complex legal environment.

When to Classify a Worker as an Independent Contractor

4 Ways Enterprises Can Ensure Compliance and Avoid Misclassification Risk

1. Create a comprehensive compliance program

Having a program designed specifically for independent contractor engagement and management is a great way to help minimize exposure to misclassification. A compliance program should include a process for vetting and defining worker status, review individual worker qualifications, and stay up-to-date on current laws and regulations.

2. Always use a written contract

A written contract helps protect both your company as well as the independent contractor from a legal standpoint. A contract outlines a scope of work for the project, defines communication, specifies payment terms, confirms insurance requirements are met, and states that the worker you are engaging is an independent worker free from control.

3. Be aware of degree of control

When engaging an independent contractor, always keep in mind that this is a business-to-business relationship. Unless otherwise specified in a signed contract, the independent contractor is free to set their own hours, work where they want, and work how they want so long as they get their work done. This can be a hard concept for managers to understand, especially if they haven’t worked with independents before. If a manager tries to step in and supervise work in a way the contractor isn’t comfortable with, or if they continually treat the independent contractor like another employee, the risk of misclassification increases.

4. Hire the right type of worker for the right role

Along the same lines as degree of control, always be sure you are hiring the right type of worker for the job you need done. Independent contractors should be hired for defined projects that have a specific start and end date, defined success metrics, and deliverables. If you have an ongoing business need and simply need more help, hiring a full-time employee is the best solution. Likewise, if the job will require a high level of oversight or control, an employee is the way to go.

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