8 Worker Misclassification Tips to Set Your Enterprise Up for Success

By MBO Partners | January 18, 2023

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Key Points

Worker misclassification can result in legal battles, fines, penalties, and brand damage.

Properly classify workers by learning how independent contractors are different from employees.

Build a comprehensive classification program to mitigate risk and keep your company compliant.

Worker classification is an important part of managing a blended workforce composed of full-time and independent contractor talent. Misclassifying workers can be a legal headache and an expensive problem, so following proper laws, policies, and regulations is a must. 

And while worker classification may sound scary and complicated, it doesn’t have to be. Today, there are many ways to help ensure compliance and minimize risk. Here are eight tips for keeping your company compliant. 

1. Learn Why Compliance Matters

To put it simply, compliance matters because independent contractors are a different type of worker than your typical full-time employee. If a company misclassifies an employee as an independent contractor—either as a mistake or to avoid employee-related costs—it can result in expensive lawsuits, bad publicity, fines, audits, and more.  

Putting measures in place to ensure that all workers hired are properly classified will help your company remain compliant. Proper classification is also an important factor in attracting top independent talent. When independents know your company is a reliable place where they can freely work as they want, they will be more likely to seek out projects and return for future work. 

Contingent Workforce Compliance: What Companies Should Know 

2. Stay Informed on Department of Labor (DOL), IRS, and State Classification Laws

The Department of Labor (DOL), the IRS, and individual states all have different laws and guidance documents regarding independent contractor classification. Becoming familiar with these resources and where they stand can help give you an idea if your company is on track with compliance standards. 

The DOL has a six-factor rule to determine if aa worker is an independent contractor or employee. Check out their website here for detailed information about classification. The IRS uses a common law test, which is based on evidence of the degree of control between a worker and a business. You can find more information about this test on their website here. Lastly, individual states may have specific laws or a Memorandum of Understanding to protect against 

misclassification. Check out your state-level Department of Labor for more information. 

Worker Classification Tests: DOL, IRS, State Tests for Classifying Workers 

3. Talk to Staff About the Difference Between Independent Contractors and Employees

Educating internal staff about the differences between independent contractors and employees is a helpful way to minimize misclassification. Independent contractors are their own business entity and will have a different role in a company than a full-time employee. When staff  

understand and are aware of how independent contractors fit in, they will be less likely to compromise worker status by treating the contractor like an employee.  

In general, employees should be aware that independent contractors have been engaged to complete a specific task or fill a specific role for a determined amount of time. Independent contractors are free to complete the work outlined in their contract when, where, and how they choose. This may involve working different hours than internal employees, using their own computer or software, or following different reporting procedures than an employee on their team. 

Independent Contractor vs Employee: 10 Key Differences 

4. Review Current Classification Practices

Reviewing current classification practices can provide valuable insight into how compliant your company is. Look at how managers are finding and engaging independent talent. Are they using their own resources, word of mouth, or a reputable platform that already has a level of compliance vetting built in?  

Review federal, state, and local laws to see if your practices are following these standards. Look at past independent contractors you’ve hired. Have you kept resumes, contracts, and proof of insurance on file? Pinpoint the areas you are excelling at as well as areas where you think you can improve.  

3 Ways to Stay Compliant When Hiring Independent Contractors 

5. Help Managers Understand Degree of Control

Degree of control is one of the most important parts of the contractor-client relationship. It can be easy to fall into the habit of treating an independent contractor like an employee once they are onboarded and a part of your team, but this can lead to a lot of risk. Talking to management about the dos and don’ts of managing independent contractors can help avoid problems. 

With an employee, a manager has certain control over the hours, location, and type of work the employee is responsible for. Independent contractors, however, are free to complete the work outlined in their contract however they want. Unless specifically stated in their contract, they are allowed to choose where the work, when they work, and how they get their work done. If these lines start to blur, the worker can quickly fall into a grey zone of maybe-employee, maybe-independent contractor. 

3 Key Factors of Classification Compliance 

6. Keep Good Records 

Keeping track of all records related to independent contractors your company has engaged is an important part of worker classification. Records help to support the case for a worker’s independent contractor status. Keep items that support proof of self-employment on file. These records can include a business or professional license, insurance certificates, or business cards. You’ll also want to keep track of 1099 forms, independent contractor agreements, checks, cash payments, or bank statements, tax reports and income tax returns, payroll records, financial statements, etc. in the case of an audit. 

How to Avoid a Worker Misclassification Audit 

7. Prioritize Independent Contractor Satisfaction 

A happy independent contractor who is satisfied with their work arrangement is much less likely to challenge their classification status than someone who is frustrated by how they are being treated. Making sure your independent contractor population is satisfied will not only lead to better working relationships, but it will also help avoid an unhappy worker triggering an audit or waving a red flag.  

Build good relationships with independent talent by encouraging managers to maintain clear, consistent communication. Create a simple onboarding process, offer fast and reasonable payment terms, and build a positive work environment that welcomes independents.  

6 Ways to Boost Independent Contractor Retention

8. Engage a Knowledgeable Partner 

Proper classification practices are nuanced and complex. Going at it alone can be difficult without proper legal guidance and understanding. Independent contractor compliance requires extensive investigation and indemnification, which is why many companies choose to partner with another company to build a comprehensive classification program. 

With more than 25 years of experience in independent workforce management, MBO can help you build a reliable compliance program. The right program can reduce risk while saving costs, in addition to helping you handle other important business aspects—making sure contracts are fairly written and negotiated, that taxes are filed and paid, and that eligible expenses are properly submitted and deducted. 

Learn more here: Frictionless, Compliant Independent Talent Engagement 

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