What Is Worker Misclassification?

As more companies incorporate independent professional talent into their workforces, the issue of worker misclassification has also been thrown into the spotlight. But what is worker misclassification?

First, it’s important to understand that independent contractors—for example, freelancers, consultants, self-employed professionals, gig workers—represent a fundamentally different type of worker than your typical W-2 employee. “Independent contractor” is a legal term for workers who are not considered full-time employees under the law.

The general rule of thumb is that a client or company only has control over the results of the work that an independent contractor is engaged for. If a company classifies a worker as an independent contractor when they are actually considered to be an employee in the eyes of the law, that company may be audited or become involved in a misclassification lawsuit.

It’s important for any organization that is engaging independent contractors to be aware of the legal differences between employees and independent contractors in order to remain compliant and avoid the risk of worker misclassification.

How Is an Independent Contractor Different From an Employee?

Think of independent contractors as their own business entity. These self-employed professionals often work as sole proprietors or through an incorporated business. Independent contractors are often specialists in their area of expertise and they provide their skills and knowledge to a project or task a client engages them to complete.

Employees, on the other hand, tend to have some level of oversight from a manager who gives them guidance on what to do on a daily basis, and where and where to complete their work. While employees generally receive some level of training for their job, independent contractors are expected to already have the expertise needed to complete their assignment and are simply responsible for completing the tasks outlined in their contract.

What Is Worker Misclassification?

When companies decide to work with an independent contractor, they are responsible for ensuring that the person they engage is truly qualified to work as an independent contractor according to applicable federal, state, and local laws. What complicates the issue of worker misclassification is that there is no single definition of “independent contractor.” Workers can be considered to be employees for the purposes of one law, but independent contractors for other purposes.

The rules for employee classification are complex, with strict guidelines that vary across jurisdictions. Misclassifying independent talent, even unintentionally, can lead to fines and penalties, litigation expenses, or worker settlements.

How to Reduce the Risk of Misclassification

In order to reduce the risk of worker misclassification, companies must have a defined program in place for engaging and managing independent contractors. A centralized program will take into account laws that apply to your particular industry and state, outline company-wide policies, and put legal safeguards in place to lower risk of misclassification.

Companies like MBO Partners can help you develop key policies and procedures to build a program for proper management of your independent workforce. At MBO, we have an established methodology for evaluating and engaging independent professionals that is designed to streamline administration, compliance, and management across your entire program.

To learn more about how to reduce your risk of misclassification, download our guide, or contact us today.

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.