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HCMWorks Insights

Business Risks of Neglecting Contractor Compliance

Posted by HCM Works on 1 Jul 2021

While contractor compliance may not be the top priority for some businesses, neglecting compliance checks can incur consequences. Not every statement of Works (SOW) is ironclad, and individuals may capitalize on some of the gray areas of classification. 

Contingent workforce arrangements can be beneficial to both contractor and employer. Individuals can receive the tax planning advantages of being identified as a contractor while companies can be more flexible. However, this gray area also introduces risk factors. If a contractor is terminated, they may be inclined to sue for wrongful termination damages if they feel that they have been misclassified as a permanent employee.  As a result, the business will be required to (a) compensate for employee overtime, unpaid vacation compensation, holiday pay, and more, (b) pay the state or providence in fines and skipped taxes, and (b) in severe cases, serve a sentence.

What is Contractor Compliance? 

Contractor compliance is the act of operating within the defined terms of a contract or SOW. Failure to comply can result in businesses facing fines, back taxes, and class action lawsuits. Examples of non-compliance include:

  • Assuming the characteristics of an employee
  • Working with an expired contractor license
  • Failing to complete safety training
  • Not conforming to safety regulations
  • Not performing according to standards agreed upon in the SOW
  • Violating rest period policies

By neglecting thorough workforce management and contractor compliance, businesses introduce unnecessary risks. This article will cover some of the different risks associated with various forms of noncompliance.

Business Risks


Misclassification occurs when an individual works under one classification while conducting business as though identified as another. An example of this would be a contractor who works full-time on site, provides services to only one entity, and acts as a permanent employee would.

Alleged Willful Misclassification

If an individual is participating in willful misclassification they are intentionally identifying as one classification while knowingly performing the duties of another. An example of this is an individual who identifies as a contractor for personal tax advantages while acting as a permanent employee for employer-provided benefits. According to California Labor Code Section 226.8, the liable parties include the employee, the employer, and any individual knowingly withholding information.


Mismanagement is a vague term that refers to unfulfilled obligations due to the contracting of an individual who does not adequately comply with their SOW. Possible outcomes of not ensuring compliance to regulations and standards include project delays, diminished product quality, shirking responsibilities, and more. 


Co-employment occurs when a contractor is either retained by two or more employers or when the individual is employed by one employer, but financially and economically dependent on another. When incidents occur, outlining which employer assumes responsibility can be difficult. Make sure the hired contractor understands employment law to reduce the likelihood of engaging in risk-related behavior.

Accidents and Injuries

Without abiding by safety guidelines and ensuring that contractors complete their training, workers are vulnerable to accidents and work-related injury. According to the Canadian Center for Occupational Health Safety, employers are required to fill out an employer injury report within 72 hours and may be held liable in cases of negligence.

Managing Independent Contractor Compliance

Failure to enforce contractor compliance not only harms the employer but also the contractor. Being mindful of risk and taking preventative measures can help protect against liability and provide a safe work environment. IC payment and compliance solution providers can manage business risk throughout every step of the contract lifecycle. To learn how HCMWorks manages contractor compliance,get in touch with an expert.

Tags: Independent Contractors

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