MSP/VMS to the Rescue in Independent Contractor Misclassifications | DCR Workforce Blog

MSP/VMS to the Rescue in Independent Contractor Misclassifications

MSP/VMS to the Rescue in Independent Contractor MisclassificationsMisclassifying employees as independent contractors carries huge costs. When caught, employers must pay back wages, tax liabilities, retroactive employee benefits, contributions to unemployment insurance; fines and penalties. Blackwater USA and Handy are among those who learned the hard way that classifying workers as independent contractors means big trouble to businesses. Companies are liable whether they avoid an employment relationship with deliberate intent to defraud the government of taxes or the workers of compensation and benefits – or not! The Department of Labor is escalating its efforts to catch more cases of misclassification by inking collaboration agreements with individual states. Laws are being modified to ensure that staffing companies acting as employers of record also face legal liability for claims of discrimination, retaliation or wrongful termination, along with their clients who use these workers.

The US Government Accountability Office (GAO) estimates that 21% of contract personnel working for an energy or utility company could be misclassified. As the government cracks down on erring employers using audits and enforcement actions, employees themselves are asked to refer any doubtful classification issues to the powers that be. When employers deliberately employ workers who lack proper documentation and immigration status, the IRS is joined by other government agencies in prosecuting offenders of a longer list of violations.

A growing number of businesses are adopting contingent workforce programs, using workers who can be legitimately classified as independent contractors, to access skilled and experienced workers who are essential for the success of their business plans. Risk-averse employers do not need to avoid using anyone as an independent contractor. They merely need to understand how to comply with government classification regulations.

Some companies have implemented a Managed Services Program (MSP) supported by a Vendor Management System (VMS) to manage the independent contractors within their contingent workforce program. . An effective MSP/VMS program should include rigorous screening of all workers, evaluation of their classification, and resolution of cases of non-compliance.

  1. The VMS should include the ability to assess the worker for compliance with 1099standards. The best systems include online surveys for contractors and hiring managers, and an ability to evaluate responses and indicate degree of compliance.
  2. The VMS should also serve as a repository for supporting documentation and offer a database of profiles of pre-qualified independent contractors who can be brought on board without delay in case of an urgent requirement, but also suggests corrective actions to achieve an effective independent contractor classification.
  3. The MSP should ensure that all required documentation has been submitted and is current.
  4. When holding the contractual agreement with the independent contractor, the MSP can also shield the client from direct control over the independent contractors. The MSP should ensure the creation of a clear Statement of Work specifying the role to be played, work to be completed, and duration of the engagement.
  5. The IRS requires a clearly demonstrated “hands off” relationship between an independent contractor and the company that engages the individual. The buyer cannot exercise any control, real or implied, over the work of the independent contractor through deciding work hours, judging performance or requiring the use of the company’s tools, uniforms, facilities and other equipment. MSP personnel are trained in approaches for maintaining this delicate balance.
  6. The MSP oversees the completion of all deliverables and contractual obligations, addressing and resolving any issues that surface.

A genuine relationship with an independent contractor should be just that. The contract is entered into and the contractor is left fully independent to deliver the results, as specified in the agreement. If you think that the assignment requires you to manage these resources like regular employees, it is best to employ them in the normal way.

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.