Can We Ever Kill All Misclassification Concerns? | DCR Workforce Blog

Can We Ever Kill All Misclassification Concerns?

worker classificationYou think you have heard all that was ever said about misclassification threats and how to stay compliant. Then, there is one more blog post, discussion or debate which brings the topic up again, creating more doubt and uncertainty in your mind. Or, worse still, the IRS launches a fresh new initiative which promises (read, threatens) to make sure that no organization can get away with the improper use of independent contractors.  Either of the above will surely have one effect. Rob everyone who uses independent contractors of a peaceful night’s sleep.

Eight Facts about Avoiding Classification Risk:

  1. Companies do use independent contractors and non-employee labor in the course of their business activities, and do have a right to the cost savings which this classification affords them.
  2. Having said that, some companies do intentionally misclassify, hoping they will not get caught. This results in government losses in income tax revenue, unemployment insurance tax and workers’ compensation – to the tune of millions each year.
  3. A misclassified worker also suffers; while the business owner profits..   An independent contractor must cover all work-related expenses, is not eligible for employment benefits, is not covered by workers’ compensation, pays a higher tax rate, and is burdened with all administrative aspects of tracking and reporting wages and expenses.
  4. There are employers who genuinely make a mistake when they misclassify, as there are numerous bodies (IRS, state statutes, etc.) offering evaluation criteria which is, at times, confusing or contradictory.
  5. IRS regulations are generally considered to be the true standards for assessment. There are 20 questions which need to be asked and answered under the common law rule. Behavioral control, financial control and relationship between the parties are all examined. The interpretation of results and weight placed by the IRS on a specific factor to determine whether a classification is acceptable or not does not always appear to be consistent.
  6. Independent contractors provide services for which they get paid for the deliverables. –The client has no control over what will be done and how it will be done. The contractor invests in tools and carries his/her own insurance and licenses (as required).  A Statement Of Work specifies project milestones and deliverables.  The independent often serves more than one client at a time. If the role requires work which is identical to what some permanent hires of the organization are performing, the employer could be charged with misclassification.
  7. The Federal and State governments have launched aggressive programs to recoup losses resulting from inappropriate independent contractor classification.  Over the past two years, an increasing number of states have joined the U.S. government in offering “amnesty” programs in which companies pay specified amounts, avoiding exhaustive audits and the possibility of significant fees and fines. While large corporations were initially targeted for random audits, efforts have expanded to companies of all sizes across all industries.
  8. Consultants can sometimes try and take the least risky option, and encourage companies to participate in the amnesty programs. In some cases, companies who do not have a centralized focus on the use of temporary workers have agreed to do so even when there was no indication that anything was really wrong with their independent contractor classification in the first place.

Unless and until the IRS and other regulators consciously choose to develop a single, clear and consistent set of criteria for determining a worker’s classification, misclassification will continue.  We encourage companies to take protective steps.  Educate your hiring managers and HR personnel on the obvious pitfalls.  Establish centralized visibility into the use of independent contractors.  Require standard Statements of Work that clearly define the working relationships between the two firms.  Finally, seek assistance from reputable advisors and consultants whose focus is on proper classification rather than resorting to ‘after the fact’ damage control.

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.