Compliance Checklist for Classifying FTEs vs Contractors

Engaging an independent contractor is different than hiring an employee because different laws apply to each category of worker. If your organization engages independent contractors, it is important to consider how your company will comply with relevant laws, policies, and regulations.

Organizations can minimize independent contractor engagement risk by evaluating factors such as control, business ownership, contracts, payment structure, and compliance with tax and labor laws.

For example, while companies have the ability to schedule employees and control how they work, independent contractors are their own business entities. They are responsible for paying their own taxes, providing their own benefits, and completing the work outlined in their contract as they see fit.

Properly classifying workers is a big deal because misclassification can result in audits, fines, penalties, lawsuits, and negative publicity. In order to minimize risk and stay compliant, it is important to understand how federal, state, and local laws view independent contractors versus employees and ensure that your company abides by these rules.

Using a structured compliance checklist helps organizations properly classify workers and reduce the risk of misclassification, audits, and penalties. Organizations can use the following independent contractor compliance checklist to reduce risk and ensure proper worker classification:

1. Control

Control refers to how much direction a company has over how, when, and where work is performed. Degree of control is the No. 1 difference between engaging an independent contractor and hiring an employee. Independent contractors are tasked with managing both the process and outcome of their contract. How they choose to conduct the work needed to  produce the results outlined in their contract is entirely up to them. They can decide where, when, and how they conduct their work.

2. Business Ownership

Independent contractors operate as their own businesses and often work with multiple clients. Independent contractors build businesses around specialized skills or expertise that they provide to clients. They may be sole proprietors or have an incorporated business. They often perform work for multiple clients and have a business name

3. Proof of Self-Employment

Proof of self-employment helps verify that a worker is operating independently. Proof of self-employment can include a business or professional license, insurance certificates, or business cards. Keeping these records on file can help to prove that a worker is an independent contractor in the case of a future audit.

4. Training

Independent contractors should not receive training from the hiring organization. Independent contractors are skilled experts. Organizations are not responsible for providing them with training of any kind. Employees, on the other hand, typically receive some sort of training around the job duties.

5. Marketing Autonomy

Independent contractors are free to market their services to other clients. They may be working on multiple projects for different clients at the same time.

6. Written Contract

A written contract defines the relationship, responsibilities, deliverables, and expectations between the contractor and the organization. A contract is a binding agreement that helps define a business relationship between an independent contractor and a client. A written contract can help avoid conflict down the road by defining what the independent contractor and the business are and are not responsible for, and outlining timelines, deliverables, and the definition of a completed work product

7. Scheduling

Independent contractors control their own schedules and determine when and where work is completed. If possible, work should be performed offsite unless it is critical that they be onsite to complete the job. If an independent contractor works onsite, they should perform duties using their own equipment.

8. Payment

Unlike employees who are typically salaried or paid by the hour, independent contractors submit invoices for their work. They tend to have a standard billing rate for their services.

9. Taxes

Independent contractors are responsible for paying their own taxes, including self-employment taxes. Independent contractors are typically paid by invoice rather than through payroll. Organizations are not responsible for withholding taxes for independent contractors. Clients will typically need to complete Form W-9 Form W-9 to request the correct name and Taxpayer Identification Number (TIN) of the independent contractor, and Form 1099-MISC, to report payments made. Independent contractors are responsible for paying both the employer and employee halves of Social Security and Medicare (FICA)

10. Benefits

Organizations are not required to provide traditional benefits such as health insurance, stock options, or retirement plans to independent contractors. In order to protect against any legal issues, it is a good practice to make sure independent contractors have basic insurance requirements built into their contract.

11. Delegating Work

Independent contractors are allowed to have their own employees, subcontractors, or partner consultants who they may work with to complete jobs.

These factors help determine whether a worker should be classified as an independent contractor or an employee.

Following a structured compliance checklist helps organizations reduce misclassification risk, maintain regulatory compliance, and confidently engage independent contractors.

Compliance FAQs

What is an independent contractor compliance checklist?
It is a set of criteria used to determine whether a worker is properly classified as an independent contractor.

What is the biggest risk when hiring independent contractors?
Misclassification, which can result in fines, audits, and legal penalties.

What is the most important factor in contractor classification?
Control—how much direction the company has over the worker.

Do independent contractors receive benefits?
No, independent contractors are responsible for their own benefits and insurance.

While the above factors cover the basics, keep in mind that they are not all-encompassing and they may not apply to every situation. In order to make the best possible classification decision, many organizations partner with a firm like MBO that specializes in independent contractor engagement that can help you properly assess the worker status of talent.

Download your own compliance checklist here

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.