Avoiding Independent Contractor Misclassification in the IT Sector | DCR Workforce Blog

Avoiding Independent Contractor Misclassification in the IT Sector

MisclassificationIn a recent class action suit, an ex-Google worker sued the company and the online staffing firm Elance-oDesk for misclassifying him and many others as independent contractors. He sought unpaid wages, overtime (saying they worked for 45 hours but were paid for only 30) and other damages along with attorney fees. The merits of this case will be decided by the courts.

Skilled Information Technology (IT) professionals are in high demand, and an increasing number of these professionals are electing to work as independent contractors (IC), commanding hefty hourly rates. Social recruiting has expanded the recruiting reach of every company, offering access to potential employees and temporary consultants that were not previously found through traditional recruiting techniques. IT professionals are offered new ways to market their skills, creating a steady flow of work opportunities. However, all parties should have a solid understanding of employment regulations before starting down this path. Let’s look at issues specifically associated with IT misclassification.

When companies need to augment the IT capabilities of their permanent employees, but don’t want to bring the worker on as a permanent member of the staff, they have a few choices to make. Each has its pros and cons. For the sake of this discussion, let’s stick to the two simplest options:

  • The company can retain the services of a staffing agency. In this case, the temporary IT worker is an employee of the staffing agency. This approach provides the greatest level of protection against co-employment and misclassification claims, but requires the company to pay significant mark-ups to the supplier of the resource.
  • The company can engage the individual as an independent contractor. In this case, the worker is self-employed. He or she has agreed to deliver a product or service to the company at an agreed-upon fee, and is compensated for that service. The worker is not an employee, and is not entitled to overtime, benefits, or anything else. While the company can usually retain the services of the individual at a cheaper rate than through an agency, this option carries a higher risk.

We all know that the independence of a contract worker is decided by the Government based on multiple factors like:

  • The level of control exercised by the supervisor on the manner in which the work is conducted.
  • Whether the IT professional has clients other than the company that has retained his/her services.
  • Whether the work is tenured or permanent.
  • The degree to which the assignment is core to the business of the client.

This is true for all workers. So what makes the classification of IT professionals more complex?

The nature of the work. IT roles can range from data entry, to data center support, to the design and development of leading-edge software and hardware. When engaged to provide data center support, hotline tech support, or data entry, the client will most likely need to set firm hours and exert other controls over how the work is conducted. In this scenario, the individual would most likely be classified as an employee. On the other hand, if retained to design a new software product, the focus is on the deliverable – not how and when the work is conducted. In this case, the individual is acting as an independent contractor.

Where the work is conducted. A great deal of IT work is conducted through online platforms by individuals who are working remotely. The IT professional may be down the block, or on the other side of the world. Working from an offsite location does not automatically make the worker an individual contractor. A company can exert controls over the method of work even when the worker is not in the office. When creating such a relationship, it is also not safe to assume that the relationship will pass the vigilance of local tax authorities. Should misclassification occur with an overseas worker, the repercussions from having the local authorities applying local laws could up the ante on the penalties payable! Almost every country in the world has its own policy on who can be designated as an independent contractor. As most of these countries do not have the at-will employment policy that America employs, the costs of misclassification could be higher.

The impact of team work. Many IT professionals are engaged to provide skills missing from an internal team. The individual will work as a member of a team, implementing new applications, developing new software, or building a new hardware product. It is common practice in most companies to offer special rewards and recognition to teams that complete such assignments on time and budget. In addition, the independent contractors may be required to work specific hours in order to meet a deadline. When companies manage project teams, or offer team incentives that also reward the independent contractors working with the team, they run the risk of misclassification.

Wading through the complexities of employment regulations is always challenging. Advancements in sourcing techniques and global collaboration have reshaped how work is conducted and opened up new opportunities for IT professionals, but have also increased the challenges and risk levels associated with independent contracting. At DCR, we advise our clients and the independent contractors we work with to do three things:

  • Know the law. Read as much as possible on the subject of independent contractor classification.
  • See legal advice. When facing work situations that can be subject to interpretation, ask a professional.
  • Establish a written statement of work for every independent contracting engagement. Specifically address each of the 20 points used by the IRS when assessing classification. Then, ensure that the actual work is conducted in accordance with the written agreement.

Do write in to us to share your experiences and observations.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.