Top 9 Misconceptions of Independent Contractor Engagement
Independent contractors can be a viable resource for growing your business, fitting seasonal demands and often adding in-demand or specialized skills. However, it is vital to have a compliant process for engaging independent workers or risk wage and hour violations or tax reclassification. Typical approaches often make faulty assumptions, doing nothing to reduce your risk profile. Below are the top 9 misconceptions about independent contractor engagement.
1. Compliant once, compliant forever. An independent contractor who may have been qualified in the past could no longer be compliant due to changing circumstances. In addition, there may be regulatory changes at the local level that impact your hiring criteria. Keep updated independent contractor files and review them with each new scope of work (SOW) (or at least annually).
2. Term limits, safe haven. Limiting the length of an independent contractor engagement does not make you automatically compliant. Regardless of the length of time specified in your contract, make sure your workers are qualified to work as independent contractors and manage them in adherence with federal, state and local regulations.
3. It’s in the contract. Many companies mistakenly believe that a signed contract Indicating that the provider is an “independent contractor” is sufficient to be compliant. While a necessary component, the existence of a contract will not trump the behavioral aspects of the relationship. In short, if you treat them as an employee, the contract could be voided.
4. Made in America? There is a preconceived notion that reclassification is not an issue outside the United States, so hiring contractors that reside in other countries eliminates the risk. This is false: while the rules governing independent contractor engagement vary, most western states have regulations regarding what entities can be treated as businesses. In some cases, the laws are stricter than the US.
5. Pass or Fail. Some companies take a hard line on qualifying independent contractors. If a potential contactor fails just one of the qualification criteria, the company will not hire the worker. It is a mistake to hinge your independent contractor engagement on a single criterion.
6. A layer of protection. Burying 1099s under intermediaries does not eliminate risk. While an audit may start with the intermediary, it may quickly expand to the entity for which the work is being done. The exception here is leveraging an intermediary whose specific expertise is IC risk mitigation.
7. Compliance by self-incorporation. Hiring an independent worker that is incorporated does not automatically protect you from the risk of reclassification. While a good practice, few independent contractor tests specifically state incorporation as a criterion towards compliance.
8. No IRS audit, no risk. Many believe that employee misclassification usually starts as an IRS audit. While this can happen, it is far from the only trigger. Business competitors alleging unfair practices, disgruntled workers who file a lawsuit or even working in a certain industry can all result in an audit. Some of the most common and often overlooked triggers are state unemployment agencies. If an independent consultant files for unemployment and lists your company as their last employer, a normal claim investigation may result in an audit. Independent contractors are not eligible for unemployment, but if the individual did not meet the independent contractor criteria for that state, they can be reclassified for unemployment purposes. Further, many states share this misclassification information with the IRS.
9. The paperwork is in order. It is not uncommon for companies to hire former employees as independent contractors, or to hire a 1099 as a permanent employee. However, doing so in the same year significantly raises the risk of reclassification. This does not mean that the classification is never justified, but it is important to be aware of the risk and proceed accordingly.
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