Over the next five years, we predict that half of the U.S. workforce will be or will have experienced working as an independent. 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 work with 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.
One of the biggest risks of independent contractor engagement is misclassifying employees as contractors. Unfortunately, there’s not a standard test to determine classification, 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 have a classification process that puts policies in place for engaging and managing your independent workforce. Use federal government, state government, and agency tests as guidelines to create a questionnaire or checklist when determining worker classification.
Once your organization has a classification process in place, independent contractors provide great staffing flexibility. You can outsource work on a project-by-project basis, which is helpful if your business has fluctuating workloads, and you can avoid the expense and potential legal consequences of firings or layoffs. With a bit of work and insight, misclassification is manageable.
Working with a firm like MBO Partners that has an established methodology for evaluating and engaging independent workers can also help to minimize your risk.
Independent contractors are responsible for performing the services outlined in a contract or SOW, and maintain certain autonomy because of this. You cannot interfere with their work too much, or you will risk making them look like an employee, which can lead to lawsuits and fines. Interference can come in the form of trying to control how the contractor performs their work, allowing them to use company equipment or work facilities, or providing them with job training.
To avoid treating a contractor like an employee, your contract should be as clear as possible. Spell out specific tasks or deliverables and use dates, numbers, and defined results when possible. Avoid having independent contractors perform the same work as employees. Contractors 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 workers. You’ll often receive higher-quality, more specialized work, and experience a faster hiring-to-productivity time. Furthermore, independent contractors bring their own benefits and are responsible for their own taxes. You do not need to provide typical employer benefits such as unemployment insurance or workers’ compensation.
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 workers, ensuring contractors are properly classified, having a written contract for all independents you engage, and forming a team to handle issues before they arise.
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.
For example, in the Microsoft vs. Vizcaino lawsuit, the court found that Microsoft had treated a number of independent contractors they engaged as employees. The contractors had worked on teams with W-2 employees, shared the same supervisors, performed the same functions, worked the same hours, and worked on-site using company equipment and supplies. The lawsuit cost Microsoft nearly $100 million.
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.
A monthly summary of independent contractor misclassification and compliance news. This is the July, 2018 edition.
The differences between 1099 and W-2 tax forms, and considerations to take into account when making hiring decisions for your organization.