We are all aware of the potential financial penalties that Independent Contractor (IC) or contract worker misclassification can bring to a company, some have even experienced it. This misclassification can be particularly debilitating to a company’s bottom line, and thoughtful risk mitigation policies need to be established.
Based on testimonials from our current clients, potential clients, and industry veterans, a number of practices aimed at reducing misclassification risk have been implemented by well-intentioned organizations.
Do they work? Well, not all of them, but some work very well. Others work only in combination, while some are simply myths. For a variety of reasons, these myths are embraced and can be difficult to dispel. Consulting with 1099 compliance professionals can help, but before we get into that let’s meet the myths through the eyes of a hiring manager.
Myth #1: Contractor is Incorporated
Some view articles of incorporation to be the ultimate misclassification cure-all. While bona fide ICs should have their business credentials in order, the credentials themselves do not categorically appease government auditors. Do not place your focus on the Articles of Incorporation, but on the manner and the extent to which your organization exerts behavioral and financial control over ICs. The degree and nature of such control are key.
Myth #2: Length of Assignment Drives Risk
The mere fact that a time-on-assignment rule exists offers little protection against worker misclassification or co-employment concerns. Somewhat connected to this myth is the notion that as soon as an IC and/or temporary worker has gone beyond 12 months on assignment, they magically become an employee of the customer. By itself, time-on-assignment does not define employment status; however, if the temporary resource is treated as a direct employee, a longevity rule won’t help during an audit.
Myth #3: Watch Out for the IRS
The majority of misclassification cases that we have seen were the result of the Department of Labor and/or state agency audits and IRS investigations. Of all the cases of misclassification here are some of the most common reasons why audits commenced:
- An off-boarded IC struggles to land his/her next consulting gig and—as financial resources dwindle—puts in a claim for unemployment insurance that identifies the former customer as the employer of record.
- The IC suffers an injury and submits a workers’ compensation claim that identifies the former customer as the employer of record.
- Wishing to receive overtime pay, an IC submits a complaint to the Department of Labor’s wage and hour division.
Myth #4: Once an IC, Always an IC
This is one of our favorite myths because it gets right to the heart of misclassification.
Most HR managers have a process by which an IC is evaluated prior to engagement. For all the right reasons, his/her evaluation determines that the resource is, indeed, a true IC. The IC even has business insurance that meets your requirements, maintains workers’ compensation, works off-site, and charges your organization not on an hourly basis, but by deliverable or milestone. These are all great steps. But, twelve months into the engagement and due to the demands of the project, the IC has dropped all other customers, has become an integral member of your team, and now follows your companies’ specific day-to-day instructions, as would direct employees.
The once bona fide IC has undergone a transformation and is now a misclassified IC.
Myth #5: Certain Service Providers Must Watch Their Steps
Some HR managers believe they are safe because they didn’t engage ICs for high-risk needs like courier services, construction or security. Although these types of ICs have seemingly been targeted for audits in the past, many states have passed legislation to uncover instances of misclassification regardless of industry. No longer can companies take the position that they are untouchable by virtue of their lines of business. For example, over the last few years, the majority of misclassification cases that we have encountered have been in the information technology industry.
Due diligence must be applied to your organization’s use of ICs and temporary employees. Today, your governance efforts can be bolstered through a contingent workforce management vendor. Nexus Contingent Workforce doesn’t rely on unfounded myths for effective risk mitigation. Instead, it will house all IC documentation for continual monitoring and provide structure to engagement processes. We provide solutions that bring value to your companies contingent labor processes.