Staying Compliant on IC Classification is not Enough | DCR Workforce Blog

Staying Compliant on IC Classification is not Enough

How a business classifies its independent contractors has been discussed on many contingent workforce blogs, practically ad nauseam! But, here is an important angle which I think requires increased attention and focus. As the use of contingent workers is growing across all industries, the most desired skills are being represented by independent contractors. In healthcare, IT and other industries where the talent wars are really fierce, hiring an independent contractor with specialized skills is important to the very survival of some businesses. This arrangement is highly lucrative to the Independent Contractors who can take up more than one assignment and earn much more than they could expect to from regular jobs.

As nervous employers turn more and more to outsourcing their IC classification to ‘external consultants’, who can be trusted to reduce the employers’ classification risk. What is more, independent contractor classification does not hold true for all time.  A classification reassessment should be conducted for every new project or assignment where the services of the independent contractor are engaged as well as periodically, every few months, to verify that the working relationship between IC and client have not altered. The conditions of each project may differ, as well as the supervisory oversight applied and the tools of trade being utilized. Repeated contracts being assigned to the same contractor could also change the context of the relationship and make it more of an employment relationship than that of a contractor.

If the risk-averse consultant applies highly conservative standards, and reclassifies independent contractors as W-2 employees; some of them walk away rather than accept the W-2 status.  Others demand higher pay – taking the overall costs of the engagement higher! Both are thoroughly unpleasant and unacceptable consequences to any employer. Keep in mind that the IRS guidelines, and “compliance tests” offered by State agencies, are often vague and subject to interpretation. Employers could either have the consultant’s advice audited by another compliance expert, or critically analyze the decisions of the external consultant to determine if the parameters being applied or too conservative. In every case, the client should review the results and recommendations of the consultant conducting the audit, but should have final say regarding classification.  You must determine the appropriateness of the requirements to each specific case.  For example, if the independent contractor is going to provide construction services, licenses and insurance are mandatory.  However, is it critical to have an IT consultant carry that same level of insurance? Employers need to question the expert’s judgment once in a while, until they gain the confidence that they are not overly conservative and making their independent contractors unhappy or even driving them away.

A good consultant will offer alternatives to enable you to retain desired talent who fails to qualify as an independent contractor.  The consultant should suggest ways to rewrite the Statement of Work (SOW) to align with IRS requirements.  Feedback should be offered to the independent contractor on steps to be taken to meet baseline qualifications.  Finally, the consultant should provide guidance to the client’s staff on best practices and prohibited activities when supervising the efforts of independent contractors.

When selecting a consultant to provide 1099 classification services, ask for details regarding their approach.  Be sure to understand their decision criteria, and the level of liability they are prepared to incur in the event of a misclassified worker.

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.