Have No Fear as You Engage Independent Contractors | DCR Workforce Blog

Have No Fear as You Engage Independent Contractors

Some managers are discouraged from the use of independent workers and freelancers and in many cases, those who do feel like Damocles with the sword precariously hanging over his or her head! The stringent government guidelines and the well-publicized cases of litigation against employers tend to put employers on guard against hiring independent contractors confidently, without fearing the threat of a misclassification charge. When using independent contractors, employers face the risk of having the Internal Revenue Service (IRS) exercising oversight over their business activity and the right of enforcement over unpaid taxes due. All sensible employers fear the possibility of being hit with steep misclassification penalties, which are usually followed by negative publicity as well as a loss of their brand value with customers and prospective employees alike.

But it is possible to mitigate the concerns with classification and enjoy the option to build an agile workforce comprised of skilled professionals who prefer to be self-employed as they control their own work and chart their own career paths. The fear cannot deprive you of your right to access the best skills available out there along with the cost savings they bring to your business.

Here’s how you classify workers as independent contractors and still sleep peacefully at night. It is, however, not intended to help those employers who intentionally misclassify workers and hope that they will not get caught. Such employers need to remember that they are ultimately responsible for a misclassified independent worker, who is made to pay all work-related expenses, forego employment benefits and workers’ compensation, track all personal expenses and pay higher taxes. As such, workers are also constantly encouraged by the IRS to call attention to their classification and question its acceptability – the possibility of walking away from misclassification are low to non-existent. Here are some guidelines to follow:

  • Seek expert advice and direction from a role or technology independent of a staffing vendor to ensure that the independent contractor classification is valid in all respects. It’s always better to do this before the fact rather than after the fact.
  • Depending on a manual system to assess whether the contractor classification meets IRS regulations is nearly impossible. However, a software tool such as a Vendor Management System (VMS) with a dedicated module to ensure all aspects of independent contractor classification is a certain way to ensure compliance. Even when the contractors themselves wish to be classified 1099 and not W-2, an impartial system is a better judge of the appropriateness of offering such classification.
  • A VMS is far superior to any human resources software when businesses need a software tool to track and manage their contingent workforce as per the wage and hour regulations of the Department of Labor through a single window. But then, all VMSs are not the same and few offer features which rival DCR’s Smart Track in how they align workers with projects, provide visibility into all aspects of contingent workforce management, support compliance and analytics as well as offer forecasting features.
  • A VMS handles much more than contractor payments and better pay rate negotiations and inadvertent compliance violations. It identifies high performers and can also define and impose delivery criteria by linking payments to performance.
  • DCR’s reliable and scalable technology solution helps you develop and manage your non-employee workforce as well as mitigate any risks in regulatory non-compliance through automated processes. In this specific instance, it governs the ability to assess a worker for compliance with 1099 standards.
  • Bring a Managed Services Provider (MSP) on board, because between a MSP and a VMS you can rest assured that enough supporting documentation is available to validate the 1099 classification and keep it current and not get outdated during the tenure of the 1099 worker. They also help to keep the relationship between the employer and contractor as independent as possible, and solely governed by the deliverables.
  • Last but not least, make sure that your hiring managers and HR personnel are trained on the regulations governing such classification and the pitfalls that can be faced.

As businesses wait to get some respite by having more clarity on the issue of independent contractor classification in this sharing, gig economy from the Department of Labor, none of these steps can eliminate the need for complete visibility into the use of independent contractors by the business. Regulatory changes may also be brought in, in the near future, setting clear and consistent set of criterial for the classification and making it easier for businesses to engage these workers while being compliant. Until then, these additional precautions will help you hire independent contractors without fear. Do you agree?

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.