5 Risks of Hiring Independent Contractors
Over the next five years, we predict that 58% of the U.S. workforce will be independent, or will have worked independently. This growing trend of independent work is not only a valuable source of talent for businesses, but its proliferation has also made it easier for businesses to compliantly engage independent workers with minimal risk.
Despite these positive changes, navigating how to properly engage this pool of talent can be confusing given evolving laws and lack of precedent. Here are five risks you may encounter when engaging independent contractors, and the steps you can take to minimize them.
1. Worker Misclassification
One of the biggest risks of independent contractor engagement is worker misclassification. Unfortunately, there’s not a standard test to determine whether a worker should be classified as an independent contractor or as an employee, which complicates the engagement process.
Because misclassification consequences are big—paying back-taxes with interest, large fines, and even class-action lawsuits—it is important to be aware of federal, state, and local government laws and guidance surrounding worker classification. To truly protect your business and remain compliant with the law, it is important to create a centralized engagement and management program for independent talent.
A centralized program can be a big task to take on. That’s why many businesses choose to work with a firm like MBO Partners that has an established methodology for independent contractor engagement and management, and can help stand up a program to maintain total compliance for enterprises.
2. Treating Independent Contractors Like Employees
Independent contractors are responsible for performing the services outlined in a contract or SOW, and maintain a certain amount of autonomy because of this. As a client, you cannot interfere with their work too much, or you will risk making them look like an employee, which can lead to misclassification. Interference can come in the form of trying to control how the independent professional performs their work, allowing them to use company equipment or work facilities, or providing them with on-the-job training.
To avoid treating an independent like an employee, your contract should be as clear as possible. Spell out deliverables and use dates, numbers, and defined results when possible. Avoid having independent talent perform the same work as employees. Independents should provide their own equipment, set their own hours, and direct how and when they do their work unless otherwise specified by their contract. Make sure relevant managers and employees are aware of these rules and restrictions.
With these divisions in place, you should feel confident using independent talent. You’ll often receive higher-quality, more specialized work, and experience a faster hiring-to-productivity time.
3. Misclassification Audit
If state or federal agencies think you have misclassified a worker, you are at risk for an audit. Aside from misclassification, a contractor who files for unemployment, a whistleblower who reports misclassification, or a worker who files for an SS-8 form requesting classification determination may all trigger an audit.
Fortunately, there are a number of steps you can take to reduce your audit risk, including: conducting an internal audit to determine whether or not your current classification practices are compliant, creating guidelines for engaging independent talent, ensuring independent contractors are properly classified, having a written contract for all independents you engage, and forming a team to handle issues before they arise.
4. Liability and Insurance
Any independent contractor you engage will not be covered by your company’s workers’ compensation policy, which can make you liable for injuries they suffer on the job. In order to avoid this, work with contractors to build necessary insurance requirements into their contract before starting work. Unless specified by contract, independent contractors are also not protected by workplace safety, anti-discrimination laws, or unemployment compensation benefits.
Co-employment occurs when two companies both have rights and obligations as an employer. This commonly happens when staffing agencies engage independent contractors for their clients. In this situation, because both the staffing agency and client have obligations to the contractor—the staffing agency may provide payment, and the client may determine the assignment—they can both be viewed as an employer. Co-employment can increase the risk of litigation if a contractor thinks they should be treated as an employee, if your company is audited and found to have treated contractors as employees, or vice versa.
To avoid co-employment, make sure any staffing agencies you work with have a process in place to properly classify and engage independent workers. Also, be sure to implement policies and procedures for how managers and W-2 employees should interact with contractors to avoid the trap of treating them like employees. Partnering with a firm like MBO can help you navigate these processes and procedures, lower your risk, and assist in compliantly engaging independent talent.
To understand if you are at risk when engaging independent contractors, access our Risk Self-Assessment Calculator.