3 Steps To Avoid Misclassifying Your Contractors
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REIB REPORT
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3 Steps To Avoid Misclassifying Your Contractors
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With the increased rise of the “gig economy,” which relies primarily on independent contractors instead of W2 employees, there has been an equally steady climb in the number of independent Contractor (IC) misclassification cases filed against businesses. Most misclassifications are not the result of intentional violations of federal and state law, but rather, unintentional mistakes made by business owners, maybe including you, who aren’t aware of the legal landscape.
Up until the last 10 years, most regulatory agencies did little to enforce classification laws, leaving many to believe there wasn’t much risk in failing to strictly comply with the laws. However, today there’s heightened scrutiny from regulatory agencies at every level and numerous lawsuits in the courts.
You could owe back taxes on behalf of team members you’ve mischaracterized, and you may even be subject to criminal charges for misclassification. That said, with the proper legal guidance from us, it is quite simple to stay safe and compliant.
The following three steps should be taken to ensure that your IC classification are up to snuff.
- Conduct an internal audit of your IC classifications.
The first step is to ensure that your ICs are classified properly is to conduct an internal audit of your current classification policies and practices. If you don’t have any formal policies or practices in place, now is the time to create them. While the federal government, the states, and the courts don’t have a single common test to determine a worker’s classification, there are some overarching themes that they all consider.
In general, if you have the right to control or direct how an IC’s work is done, not just what’s to be done, the worker is more likely to be an employee, not an IC. With ICs, you’re only permitted to direct and control the end result of their work, not the manner and method of getting it done. Since there are many complex legal issues related to this process, it’s important that you work with us as your Creative Business Lawyer® to review each worker’s on-the-job practices. Often an IC’s contract may state one thing, but their actual work performance and relationship with you may be something entirely different.
For example, an IC’s contract might state that they’re to work independently, but in reality, they work under close supervision. Or their contract may state that they’re free to work with other clients, but the audit shows that the way you’ve structured the relationship makes it impractical or impossible for them to work for anyone but you. By auditing your policies and practices in this way, you can identify and change any problem areas internally, before a regulatory agency steps into investigate.
2. Revisit and revise contracts when needed
Even if you’ve worked with someone for years without a problem using only a verbal agreement, it is vital that every IC you hire has a properly drafted written contract in place, describing exactly what is expected of them and laying out the parameters of their relationship with you.
You can see that we bolded, underlined, and italicized the fact that you need a contract in place for each of your ICs, and that’s because we cannot emphasize this point enough. It’s the foundation of your protection from misclassification. Your IC contract should clearly define the scope of work, the time frame involved, their communication process with you, and the terms of payment. Additionally, the contract should clearly state that the worker is responsible for his or her own workplace, equipment, and expenses.
From there, be sure to have us carefully analyze and rework the contract language when and where needed, even if another lawyer prepared the contract for you. In recent court cases, attorneys for IC’s have successfully used the company’s own contracts to show that the business had the right to direct and control the methods and means of the worker’s contracted services, so it’s better to be safe than sorry. A fairly significant safe harbor for you would be if your IC is using their own contract and had their own business entity set up.
3. Implement and enforce classifications
Once you’ve identified and revised any gaps or areas needing improvement in your IC classification policies and practices, the final step is to make sure that these criteria are implemented and enforced. Your policies and contracts are worthless if they’re not actually being followed. Remember, the Department of Labor (DOL), state agencies, and the courts are only concerned with what an IC is doing, not what’s in their contract or job description.
If necessary, revise your company’s operating manual and procedures to ensure that the provisions of the contracts and policies are documented, implemented, and enforced. Try to foresee any likely barriers to implementing your policies, and then develop strategies to overcome those obstacles with an adoption process that can evolve to fit your company’s needs both now and in the future.
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