Are You Steering Clear of Independent Contractors? | DCR Workforce Blog

Are You Steering Clear of Independent Contractors?

independent contractor

The use of creative employment relationships always carries a risk, and this risk abounds in the use of independent contractors. There is a surfeit of risk mitigation advice from almost everyone for human resources professionals, and most of it is focused on how one can avoid being guilty of misclassification and other employment law violations. After all the dust has settled, some organizations appear to be scared away by this well-meaning advice and warnings, from using independent contractors.

By steering clear of independent contractors, organizations are limiting their access to the skills they really require as an increasing number of skilled workers are choosing to work as independent contractors. Let us look at the positive as well as the negative aspects of using independent contractors, and the controls that you can put in place to safely incorporate them into your workforce strategy. .

Established wisdom states that workers can be engaged as independent contractors, if and when they fulfill the following criteria by way of business credentials:

  • They have established their own business, as evidenced by a business license, state UBI number, and tax returns. They pay their own payroll and business taxes. They have clients other than you.
  • They decide whether to do your work by themselves or subcontract the work out to others or get it done by employees.
  • A Statement of Work is established that specifies the work to be done and deliverables to be completed.
  • The independent contractor does not use your equipment and supplies. You do not specify the hours to be worked, location at which the work must be conducted, or manner in which the work is done. In short, you do not supervise the worker(s).

Where can it all go wrong?

The requirements listed above seem quite straightforward. So why have so many organizations been found by the Internal Revenue Service (IRS) to have misclassified a worker, resulting in hefty penalties. This blog cites some of the most common mistakes.

Contract: Just because the work contract specifies that the worker is an independent contractor, or the worker wants to be designated as an independent contractor, it cannot be assumed that the IRS will agree with the classification. Establish a contract that specifies the work to be done, the deliverables to be achieved, the timeframe in which the work is to be completed, and the method of payment for the work (time and materials, fixed price, deliverables-based, etc.)

Behavior: This is all about who controls the worker and determines job responsibilities. The client cannot decide how the work will be done and provide the necessary training for the work.

Money: The financial relationship with the worker is also important. If the worker receives regular wages or the employer pays for the tools and equipment necessary to the execution of the work, the worker’s relationship is not that of an independent contractor.

Nature of Relationship: If the worker’s relationship with the client bears any similarities to how the client deals with permanent employees – whether in providing health insurance, pension plans or paid vacations – it is perceived as an employer-employee relationship.

Nature of Assignment: Intermittent or seasonal assignments do not automatically justify the classification of a worker as a 1099 contractor. Similarly, paying a worker on commission basis does not qualify someone as an independent contractor.

Protection from misclassification can come to employers in different forms. At this point in time, organizations can safeguard their classification attempt in two different ways.

  1. If unsure, file Form SS-8 with the IRS and ask them to determine worker status for purposes of federal employment taxes and tax withholding, even if it takes a while to get the reply.
  2. Call in the experts, and ask them to validate your 1099 classifications – and avoid any accidental misclassification.
  3. Avoid the “red flags” that the IRS is looking for. These mistakes will most likely cost you money!
  • Do you make a practice of converting independent contractors to direct-hires after the contract assignment ends?
  • Are their in-house employees doing the same work as the independent contractors?
  • Is the independent contractor only working for you?
  • Have former employees who were previously laid off been brought back as independent contractors to do the same work as before?

Employers need to exercise due diligence in these matters. Controls should be put in place before allowing any hiring manager to fill a position with an independent contractor, and internal audits of all independent contractors should be conducted any time there is a request to extend the assignment or modify the terms of engagement. All independent contractors should be audited at least twice per year. By taking the necessary precautions, you can confidently continue to engage independent contractors.

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.