In an on-demand economy, more and more companies, big and small, are relying on independent contractors. Though utilizing a contingent workforce can be great for an organization’s bottom line, such a shift in workforce strategy comes with its own risks.

There are specific labor laws surrounding independent contractors. While these labor laws haven’t changed in decades, the growing trend in the contingent workforce in the business world has made the government become more aggressive and start cracking down on non-compliance.

In order to avoid audits, fines, penalties, lawsuits, and a bad reputation, you must ensure that your company is following the appropriate labor laws.

You can stay out of trouble by using these tips.

Understand Why It Matters

Classifying true employees as independent contractors can get your company in trouble—whether you do so on purpose or by accident. Employees are afforded certain benefits and rights under the labor laws, and if you are misclassifying these workers as independent contractors, you are refusing to provide them reimbursement of expenses, workers’ compensation, unemployment insurance, health coverage, overtime pay, vacation and holiday pay, and other benefits. In addition, as independent contractors aren’t protected under the same labor laws as employees, you could be affecting their right to fight against sexual harassment and discrimination matters, tax disputes, worker compensation matters and unemployment issues.

Misclassification can significantly disrupt an employee’s wellbeing and future. Simply labeling your workers independent contractors isn’t enough—even if you both agree on the term. You must ensure that under the law, they are in fact contingent workers.

Know What Differentiates an Employer from a Contractor in the Eyes of the Law

The Canadian and US governments use a common formula to determine whether a worker is an employee or an independent contractor. This formula looks at the following aspects of the employer-employee relationship:

• Worker’s opportunity for profit or loss within the company
• How the worker is paid and whether or not expenses are paid
• Who sets the working hours
• Whether or not the worker has other clients
• Whether or not the worker owns an independent business
• Employer’s control over the worker
• Worker’s skill set
• Worker’s investment in equipment and facilities
• Duration and permanence of the relationship
• Ownership of tools and equipment

On the other hand, where the work is performed, the absence of a formal employment contract, and whether or not the worker is licensed by state or local government are not considerations that authorities consider.

Authorities are more likely to classify someone as an employee if he can be fired, is paid by the hour, receives instructions from the employer, receives company training, works full time for the company, receives employee benefits,  has the right to resign without incurring liability, and provides services that are critical to the company’s day-to-day operations.

Properly classifying your workers can be a difficult undertaking as there is no single rule or test to make the determination. You may think that you’ve covered all your bases, but the IRS, CRA, Department of Labor, or other government body might think differently. Knowing the difference between the two terms under the labor laws is critical.

Outsource the Responsibility

If you do not have a sound strategy in place at your company to differentiate independent contractors from employees, don’t risk it. Outsource the responsibility to a back office service provider that has experts on staff who can properly classify, manage, and pay your contingent workers. Outsourcing can provide you with peace of mind, reduce your risks, ensure you’re being compliant with appropriate labor laws, and take the burden off your hands.