Compliance Checklist for Misclassification Risk

By MBO Partners | June 10, 2021

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Engaging an independent contractor is different than hiring an employee because different laws apply to each category of worker. If your organization engages independent contractors, it is important to consider how your company will comply with relevant laws, policies, and regulations.

For example, while companies have the ability to schedule employees and control how they work, independent contractors are their own business entity. They are responsible for paying their own taxes, providing their own benefits, and completing the work outlined in their contract as they see fit.

Properly classifying workers is a big deal because misclassification can result in audits, fines, penalties, lawsuits, and negative publicity. In order to minimize risk and stay compliant, it is important to understand how federal, state, and local laws view independent contractors versus employees and ensure that your company abides by these rules. Use the checklist below as an accompanying guide to determine whether a worker should be classified as an independent contractor or as an employee.

Control

Degree of control is the No. 1 difference between engaging an independent contractor and hiring an employee. Independent contractors are tasked with managing both the process and outcome of their contract. How they choose to conduct the work needed to  produce the results outlined in their contract is entirely up to them. They can decide where, when, and how they conduct their work.

Business Ownership

Independent contractors build businesses around specialized skills or expertise that they provide to clients. They may be sole proprietors or have an incorporated business. They often perform work for multiple clients and have a business name

Proof of Self-Employment

Proof of self-employment can include a business or professional license, insurance certificates, or business cards. Keeping these records on file can help to prove that a worker is an independent contractor in the case of a future audit.

Training

Independent contractors are skilled experts. Organizations are not responsible for providing them with training of any kind. Employees, on the other hand, typically receive some sort of training around the job duties.

Marketing Autonomy

Independent contractors are free to market their services while working for a company. They may be working on multiple projects for different clients at the same time.

Written Contract

A contract is a binding agreement that helps define a business relationship between an independent contractor and a client. A written contract can help avoid conflict down the road by defining what the independent contractor and the business is and is not responsible for, and outlining timelines, deliverables, and the definition of a completed work product

Scheduling

Independent contractors are free to create their own schedule. If possible, work should be performed offsite unless it is critical that they be onsite to complete the job. If an independent contractor works onsite, they should perform duties using their own equipment.

Payment

Unlike employees who are typically salaried or paid by the hour, independent contractors submit invoices for their work. They tend to have a standard billing rate for their services.

Taxes

Organizations are not responsible for withholding taxes for independent contractors. Clients will typically need to complete Form W-9 Form W-9 to request the correct name and Taxpayer Identification Number (TIN) of the independent contractor, and Form 1099-MISC, to report payments made. Independent contractors are responsible for paying both the employer and employee halves of Social Security and Medicare (FICA)

Benefits

Organizations are not required to provide traditional benefits such as health insurance, stock options, or retirement plans to independent contractors. In order to protect against any legal issues, it is a good practice to make sure independent contractors have basic insurance requirements built into their contract.

Delegating Work

Independent contractors are allowed to have their own employees, subcontractors, or partner consultants who they may work with to complete jobs.

While the above factors cover the basics, keep in mind that they are not all-encompassing and they may not apply to every situation. In order to make the best possible classification decision, many organizations partner with a firm like MBO that specializes in independent contractor engagement that can help you properly assess the worker status of talent.

Download your own compliance checklist here

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.

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