Worker misclassification can come with a hefty price tag. In 2015, for example, the Department of Labor won judgements totaling over $700,000 against construction companies who made their workers form LLCs to avoid the federal and state wage and safety laws.
Like an episode of Game of Thrones, there are many players at the federal and state level with an interest in classification, only minus the special effects and fabulous theme music. The IRS, Department of Labor, and state unemployment and workers’ compensation agencies (to name a few) all use different criteria to determine if someone is an independent contractor or employee. Labor and unemployment statutes often define who is an employee, but do not define who is an independent contractor.
There is no bright line test to determine who is an independent contractor. However, most businesses today find themselves engaging with them at some point in their work. With all of its inherent complexity, how can they be sure they’re getting these engagements right? Especially with the risk of potential litigation and the negative publicity of a misclassification case if they get it wrong?
The secret to avoiding misclassification
One of the things I like most about my job as a Senior Compliance Specialist for Populus Group is that I get to work with HR, Legal, and Procurement professionals who are committed to the correct classification of workers. Over the years, we’ve learned avoiding misclassification comes down to three steps:
1. Ask questions.
2. Train managers.
3. Call an expert.
Let's break it down:
Worker classification can be complex, but asking a few pertinent questions before the worker is engaged can help employers reach the right decision:
- Do you have the right to determine when, where or how the work is performed?
- Is the worker performing services that are the same, or similar, to your regular full or part-time employees (integral to your business)?
- Will you provide the worker with the tools and equipment to perform the work?
- Will you need to retain the right to terminate or fire the worker “at will”?
- Will the worker be restricted from marketing his or her services, or working for other clients, while engaged at your business?
It’s important to remember that independent contractors need to remain just that – independent. They should work for other clients, market their services and control when, where and how they do the work. If the answer to any of the above questions is yes, then stop and reconsider if the worker can properly be treated as independent of your business.
Regardless of the worker’s business structure, it is up to the employer to get it right. Conduct training for all managers that hire contingent labor. A well informed managerial staff can be your first line of defense in avoiding costly mistakes.
Call an expert
Consult with your tax and legal advisors to ensure your firm is issuing 1099s to all workers whose income must be reported. Repeatedly we see instances of companies that could have avoided millions of dollars of fines, penalties, court costs and attorney’s fees by being aware of the misclassification issue and initiating best practices in engaging contingent workers. Professionals can help their clients avoid these risks and leave the drama to the actors.
If you need assistance with your independent contractor population, Populus Group can implement a program that can ensure your workers are properly documented and screened, as well as administer the contract, invoicing process, and 1099 reporting.