Three of the most common risks employers will encounter are misclassification, audits and liability. Here’s the rundown on contractor risk and simple first steps your organization should take to stay compliant.
While we tend to only hear about big-name misclassification lawsuits, that doesn’t mean that worker classification cases are few and far between. In fact, an estimated 10-20% of employers have incorrectly identified at least one worker as an independent contractor.
Unfortunately, there is no standard test to determine if a worker is an independent contractor or an employee — a fact that certainly complicates the classification process. Misclassification consequences are a serious matter, and businesses must be aware of laws and regulations if they choose to engage independent workers. Companies found guilty of misclassification may have to pay hefty fines or back taxes with interest, deal with class-action lawsuits or face reputation damage.
In order to avoid these serious consequences and remain compliant, managers and organizations alike must first determine whether or not an independent worker is self-employable.
Organizations should have a defined classification process and policies in place for how managers should evaluate self-employment status and engage independent workers. Federal government, state government and agency tests regarding worker classification should be reviewed in detail and used to create internal processes and policies. Regular communication regarding policies and procedures is key to maintaining a compliant program.
Stemming from misclassification, companies may be at risk for an audit if a state or federal agency believes they have misclassified a worker. Any number of actions may trigger an audit, including a former independent contractor who files for unemployment (even years after engaging with a company), a whistleblower who reports misclassification or a worker who receives a W-2 and 1099 in the same year.
To reduce audit risk, organizations should review their internal practices to ensure they are compliantly engaging and managing independent contractors. Some best practices include updating contractor engagement procedures to ensure workers are properly classified, always using a written contract when engaging an independent contractor and avoiding excessive control of contract workers. In all activities, the client-contractor relationship should be treated as a business-to-business relationship. One should also always maintain detailed records of the services contractors perform.
Read the full story at Three Ways To Mitigate Risk When Engaging Independent Contractors