Independent Contractor Classification Compliance within your Vendor Management System | DCR Workforce Blog

Independent Contractor Classification Compliance within your Vendor Management System

Skilled workers have so much demand for their services that many of them are opting to work as independent contractors, at hefty bill rates. Professionals are happy to find new ways to market their skills and enjoy the freedom and flexibility offered by the work opportunities, from which they can often pick and choose. Employers are also happy to find these highly rated professionals outside traditional employment relationships. But, like with all good things, this too comes with a catch.

Employment regulations expect the classification of an independent contractor to follow certain criteria which are laid down mainly to ensure that the independent contractor classification is not just aimed at avoiding paying one’s taxes, and strictly applied by every single state. When recruiting independent contractors, an organization may hire them through a staffing agency which takes them on the rolls, thus the company protects itself from any co-employment and misclassification claims.

This often comes at a cost because mark-ups must be paid to the supplier by the organization, over and above the worker’s pay rate. This cost may be avoided by hiring an individual directly, as an independent contractor by contracting to pay a specific fee toward a specific service without paying the worker any other benefits or overtime. However this option also carries an element of risk, in the event of any misclassification claim being found to be valid.

 Various independent contractor tests

The independence of a contract worker depends on various tests using different factors, one or more of which could result in invalidating the independent contractor classification.

For example, any of these may result in a misclassification of an independent contractor by the IRS:

Further, other federal and state agencies use different criteria to determine independent contractor status, weighing factors differently. Frequently these other tests are even more stringent than the IRS test, and may rule differently than the IRS on an identical case.

Independent contractor status can’t be forced by an employer

Companies have a right to engage independent contractors but they cannot misclassify by design, making the government potentially lose income tax revenue, unemployment insurance tax and workers’ compensation nor can they deprive the worker of rightful benefits if they are truly employed. The worker is also burdened with the administrative aspects of tracking and reporting wages and expenses, and loses coverage under workers’ compensation. So the punishment for misclassification is correspondingly high, and the workers are free to question this classification and draw attention to their plight, when the employer errs.

Non-compliance could invite the risk of fines, penalties and expensive class action suits. There could be back wages, tax liabilities, retroactive employee benefits and contributions to unemployment insurance. If the worker lacks proper documentation and immigration status, the IRS is joined by other government agencies in prosecuting offenders of a longer list of violations.

Beyond the U.S., nearly every developed country has enacted regulations to protect workers from misclassification.

Vendor Management System to the rescue

Manually assessing each and every independent contracting engagement by these factors is not easy, and could be considered downright impossible without automating the processes. Instead, use technology which can vet the work relationship as defined by the statement of work, when entering into the agreement. The IRS itself may introduce a fresh initiative aimed at curbing any misclassification, whether by design or by mistake.

Today there are highly sophisticated Vendor Management Systems such as DCR’s Smart Track which ensures that independent contractors are not misclassified. When classifying workers as independent contractors, Smart Track helps you make sure that you have covered all your bases, and ensures you avoid any misclassification by rigorously screening all workers, evaluating their classification and resolving any cases of non-compliance. Here’s how it works:

  • Smart Track’s compliance data gathering module provides online assessments, calculates risk levels, and validates licensing, certification and even Department of Defense security clearance requirements. Smart Track assesses the worker for compliance with standards and uses online surveys for contractors and hiring managers, and evaluates the responses to determine and indicate the degree of compliance.
  • It can suggest corrective actions needed in cases where the independent contractor classification is not effective.
  • Smart Track also serves as a repository for supporting documentation and pre-qualifies the names of independent contractors who can be brought on board without any delay, if the requirement is urgent. Qualification steps can be completed easily once an engagement is imminent.
  • Smart Track stores supporting documentation used to validate the classification and tracks expiration dates to be sure supporting documentation does not become outdated during the worker’s tenure. It helps to maintain the relationship between the employer and contractor as independent as possible, and governed entirely by the deliverables.
  • Smart Track Integration Toolkit allows customers to leverage third party independent contractor compliance organizations in a seamless ecosystem.

All VMSs do not offer the same features, and it’s hard to beat what Smart Track offers in how it helps align workers with projects, provides visibility into all aspects of contingent workforce management and supports compliance and analytics while offering forecasting features.

If you haven’t seen how Smart Track can protect your organization from the risks of misclassification, maybe it’s time to give us a call at 1-888-DCR-4VMS to see this and other innovative features in action.

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.
Scott’s background spans the life cycle of Statement of Work (SOW) in the contingent workforce management ecosystem. When he’s not busy providing CWS solution design, he can be found playing golf and driving fast cars…he’s spent some time attempting to get to an elite level in golf and has driven a NASCAR race car around Daytona International Speedway. Scott is also a sports and music enthusiast.