5 Risks of Hiring Independent Contractors

Our workforce environment has evolved a lot over the past few years, and organizations are realizing the increasing importance the independent workforce can play in their workforce strategies. Independent talent can help enterprises increase their organizational agility, add in-demand skills to important projects, and maintain staffing flexibility when they need it most.

However, despite the many benefits independent professionals offer, companies must find a way to handle the risks of worker misclassification when engaging this talent pool. If an organization is found to have misclassified a worker—classifying them as an independent contractor when they really should be a W-2 employee—consequences can include an audit, fines, penalties, negative press, and even class-action lawsuits.

While independent contractor compliance can be an intimidating topic to wrap your head around, pulling back from using this talent pool altogether only puts your business at risk of falling behind the competition. Instead, leading organizations must commit to learning about independent contractor compliance and putting a program in place to manage legal risk.

Below, we explore five risks, along with solutions, that companies should be aware of when engaging independent contractors.

1. Properly Classify Workers

There are many different laws and regulations—which often contradict one another—that detail whether a worker should be classified as an independent contractor or an employee. Because there are no standard laws regarding worker classification, independent contractor engagement in and of itself is a risk.

However, as more organizations begin to use this talent pool, legal precedent surrounding worker classification is changing. It is important for businesses to stay on top of these new regulations and legal rulings in addition to creating a centralized classification program. Due to the effort and resources that go into creating a compliance program, many businesses choose to partner with a company like MBO that specializes in independent workforce engagement that can indemnify enterprises from misclassification and legal risk.

2. Beware of Rogue Managers

Today, online marketplaces can be an enticing way for enterprise managers to try and engage independent talent themselves. Marketplaces allow managers to self-source and can provide quick access to talent, but they can also be risky because most of this technology lacks the level of compliance vetting that enterprises need to compliantly engage highly skilled independent talent.

Without the right organizational backing and infrastructure in place to support a compliance program, your company can be exposed to risk. If your managers are already engaging independent talent, conduct an audit to review existing practices and identify areas for improvement.

3. Understand the Client-Contractor Relationship

When you engage an independent contractor, you are establishing a client-contractor relationship. Independents are their own business entity and treating them like an employee can be a big red flag. Companies must be careful not to take too much control over the work arrangement. Best practices include allowing independents to work when, how, and where they want, always using a written contract, and referring back to contract deliverables when interacting with independent talent.

4. Obtain Proper Insurance Requirements

When engaging an independent professional, companies must make sure the talent has the right insurances in place so the company will not be held liable for any damages the talent might cause. Insurance requirements will vary based on the work being done, but may include: general liability, auto, errors and omissions, workers’ compensation, and network security.

5. Support Talent Satisfaction

Independent talent dissatisfaction can quickly lead to unnecessary risk. If your independent talent isn’t happy, or for any reason feels that they should’ve been classified as an employee, they may take action that can raise classification questions or trigger an audit. This can lead down the road to a lawsuit or having to pay costly fines or penalties.

Keep in mind that over 90% of independent professionals today say they have some or a lot of choice in choosing the clients they work with. In order to keep your talent happy, and to attract top talent from the start, businesses must put policies and procedures in place that meet the needs of independent talent. Some of these practices include providing a broad range of engagement options that allow independents to work the way they want, offering payment terms that are in line with market standards, and creating a superior onboarding experience.

To learn more about what independent contractor compliance means at your organization, reach out to our knowledgeable team today and download our guide:

Independent Contractor Engagement Risk: What You Need to Know