4 Ways to Reduce Worker Misclassification Risk

Worker misclassification is a complex topic with no straightforward solution. It can often be unintentional because businesses simply do not fully understand the laws regarding how to classify their workers. However, it can also be done intentionally to reduce labor costs or avoid payroll taxes.

Regardless of why misclassification occurs, it can result in many negative consequences, such as legal battles and costly fines, that can be detrimental to businesses.

Follow these four tips to reduce the risk of worker misclassification and ensure your workforce is properly classified.

1. Understand Classification Laws

When it comes to classifying workers as independent contractors, businesses are obligated to abide by many laws, tests, and guidelines. And as the independent workforce grows, these laws change and evolve. That makes it challenging to understand what is required and applicable from both a local and national standpoint. As you decide how to approach worker classification, it is important to remember this.

Understand the difference between independent contractors and employees

Independent contractors are viewed as a separate worker classification in the eyes of the IRS—they cannot be treated or engaged like traditional W-2 employees. In general, independent contractors are engaged to complete a specific project with a start and end date and can choose when, where, and how they complete that work.

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

2. Understand the Rights of Independent Contractors

An awareness of independent contractor rights can help you build a better classification process and avoid improper treatment of independents once they are engaged. Among other rights, independent contractors may work for multiple clients and openly market their services. They pay their own taxes, set up their own benefits, and submit invoices for work completed.

Maintain the contractor-client relationship

Companies that engage independent contractors must be especially careful not to exert too much control over the work arrangement. Independents are responsible for performing the services outlined in their contract—exactly how they do that is up to them. Managers should avoid telling independent contractors how to do their jobs or getting overly involved in how the work is completed.

3. Review Current Classification Processes

When you need skilled talent quickly, it can be easy to turn to your own network or an online marketplace. However, this can be risky because rogue engagement and technology platforms that have not been vetted often lack the level of compliance needed to engage highly skilled independent talent. By taking the time to perform an audit of internal processes for how independent contractors are engaged and classified, you can pinpoint flaws in your process, ensure proper contracts are being used, and ensure that independents are carrying the required insurance.

Read Next: Independent Contractor Classification: How to Stay Compliant

Make sure internal employees are educated

Education is a key part of ensuring independent contractor classification processes and procedures are being followed. Educate HR and enterprise managers on the importance of proper classification and how existing laws apply to their use of independent talent. Consider forming a cross-functional team to handle any misclassification issues that arise.

4. Use an Outside Expert

At the end of the day, worker classification is a big—and important—issue to tackle. Proper compliance goes beyond indemnification and adhering to classification laws and guidelines. Most enterprises don’t have the time or resources to commit to establishing a comprehensive worker classification program, and this is why many choose to partner with an expert who can assist with these tasks.

Protect your business from misclassification

Staffing and consulting firms are often not equipped to handle the extensive investigation and provide the support independent contractor compliance requires. Companies like MBO Partners have an established methodology to evaluate and engage independent contractors. Partnering with an expert has the added benefit of additional help compliance tasks: ensuring contracts are fairly written and negotiated, that taxes are filed and paid, and that eligible expenses are properly submitted and deducted.

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.