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HCMWorks Insights

Worker misclassification: 5 little things that can cost you a bundle

Posted by Julia Fournier on 12 Apr 2016

The devil is in the details

Worker misclassification rulings can cost organizations hundreds of thousands if not millions in taxes and penalties, overtime, and benefits. Could your business survive that kind of unforeseen expense?

Contrary to popular belief, an ironclad contract is not enough. The courts will only consider the intent of the parties as a portion of the overall factors taken into consideration.

Failing to take adequate steps to protect your organization can have major consequences. But sometimes what you do is more important than what you don’t.  So here are five critical areas that can trip you up and have their status as independent contractors classified called into question. Do NOT do the following:

Treat them like you would an employee

Team spirit is important, and making your consultants and freelancers feel like they’re a part of it may be a morale booster, BUT it can have serious negative repercussions. That’s because the degree of integration in the organization is one of the factors that help to determine if a worker should be classified as an employee.

So being treated like an employee, invited to company events organized for employees, etc. can weigh in the balance. If you want your independent contractors, consultants and freelancers to be there, make sure you also invite your vendors as well.


Provide them with tool, equipment and supplies

Giving your independent contractors access to company tools, supplies and equipment is one critical area that can wind you up in a lot of trouble since it is an important factor considered by federal and state agencies when investigating potential cased of worker misclassification. A painter should be supplying brushes, ladders, covers; a consultant should bring their own computer; a driver, their own truck, etc. 

In certain cases, there are good reasons not to allow this – for security reasons in the case of a computer, or because it is cost prohibitive and expected to be supplied by the organization, such as in the case of a drilling rig or heavy equipment. If you need your contractors to use equipment that meets specific requirements, why not have them purchase it as part of the contract.


Direct how and when they perform the work

The degree of control that your organization exerts over how and when the work is done will weigh in the balance. Unless there’s some compelling reason why they need to be physically present during specific hours, or the work absolutely needs to be done in a certain way, you should focus on the outcome of the contract, not on how it is delivered.

Give them their first big break!

Some times you come across an individual who is the perfect fit for an engagement, but has no experience working as a contractor or consultant. So why not give them their first gig and help them start their consulting business? Not to mention that you could probably negotiate a favorable rate with this first-timer. Much as it sounds like win-win, think again. 

Helping someone start their business as an independent contractor by becoming their first (and only client) is a risky idea. Make sure that your ICs are truly a business, preferably with more than one client or at a minimum, a history of providing services to multiple clients over time.  And make sure they have business cards and a website.


Ask them to help manage your team

Consultants are usually experienced, seasoned professionals who have often been in high-level leadership roles. So it’s only natural to want to take advantage of their management skills, in addition to their technical expertise. As tempting as it may seem, resist the urge. Here’s why: assuming a management function within the organization is a major red flag and has been a deciding factor in many landmark misclassification cases. 

Your independent contractors and freelancers should only be retained if they act as consultants, providing skills and experience that you don’t have internally, or to augment your team to get things done faster, meet peaks in demand or complete a major project. Otherwise, beware.

As you can see, little things that make a big difference when determining if a worker should be classified as an employee or as an independent contractor. A contract is not enough.

Want more information on the factors that go into distinguishing independent contracts from employees? Contact a Contingent Workforce Advisor to set up an executive brief in employee misclassification. 

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Independent Contractor Misclassifcation: Could you be next?
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Contingent Workforce MSP: Paying Too Much for Your Flexible Workers?

 

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Tags: Independent Contractors, Misclassification

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