Misclassification Risks & 3 Mitigation Tips You Should Know

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Upwork offers three great recommendations on how to mitigate your risk when engaging with independent contractors:

Without spending hours studying the nuances of each individual test, how can you be confident you’re engaging your independent contractors compliantly? Here are three steps to help you manage the uncertainty of worker classification and mitigate your risk:

1. PICK SOMEONE WHO CHOSE TO BE AN INDEPENDENT CONTRACTOR

“It used to be that the American Dream was owning your own home. The American Dream today is owning your own business.” – Keith Hall, President and CEO, National Association for the Self-Employed

Increasingly more and more people are building flexible careers on their own terms, based on their passions, desired lifestyles, and access to broader pools of opportunities. In fact, 60 percent of U.S. freelancers started freelancing by choice, and that number is only expected to grow.

To help avoid classification gray areas when hiring, make sure to select someone who is choosing to be a self-employed independent contractor and actively marketing their services accordingly.

How do you know if someone is an independent contractor? The U.S. Department of Labor has provided some guidance on what constitutes an independent contractor. By its definition, an independent contractor is “truly in business for him or herself” and “the fact that a worker is in open competition with others would suggest independent contractor status.”

Before awarding a contract, talk to the professional to confirm that they regularly work independently as a self-employed professional or small company, contracting their services out to other businesses and working with multiple clients. This will help eliminate any ambiguity regarding the worker’s classification.

2. MAKE SURE YOU HAVE A PROPER CONTRACT IN PLACE

“The most critical factor is communication—making sure both the client and the worker understand the intent of the relationship.” – Keith Hall

When engaging an independent contractor, the best place to start is with a written contract. The contract should outline the full scope of the project, including project fees, deadlines, and deliverables. The contract should also explicitly state that the worker is an independent contractor and will have the sole right to determine and control the manner and means by which the work is performed.

As you begin drafting the contract, think through the tasks you’ll be asking the contractor to complete. If you’re asking the contractor to do work an employee would typically perform, you may have a problem. The IRS 20 Factor Test is a helpful aid in determining whether the tasks assigned are appropriate for an independent contractor.

Your contract doesn’t need to be an extensive form, but it’s important that the key project parameters are clearly laid out up front to avoid miscommunication. Not sure where to start? SHRM offers a helpful contract template.

3. CHOOSE THE RIGHT COMPLIANCE PARTNER

“One of the best things you can do if you’re unsure about proper classification is to get advice.” – Jacqueline Kalk, Esq., Shareholder, Littler Mendelson P.C.

In many situations, the correct classification is clear, but for the 10-20 percent that may be more ambiguous, it helps to have a compliance partner who can determine proper classification.

Before you engage a compliance partner, start by assessing what you wish to accomplish with your contingent worker initiatives. Are you looking to reduce costs? Or struggling to find highly specialized, in-demand talent?

Whether you choose a law firm, accounting advisor, or third-party compliance provider, it’s important that you partner with someone who understands your company’s specific business requirements and the types of workers you’re looking to hire. The compliance partner should also be prepared to address any classification issues and provide details on how they help mitigate risk.

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