Is there really a risk of independent contractor misclassification?

Does the name not say it all in the prefix, mis classification; (mis- 1. a prefix applied to various parts of speech, meaning “ill,” “mistaken,” “wrong,” or simply negating: mistrial; mistrust). We are a people governed by laws, so why has this one caused so many companies to choose compliance through abstinence? Laws govern how we drive, yet we don’t give up driving to avoid speeding tickets. Like speeding, if we misclassify workers we may get away with it for a period, but eventually we are likely to be caught and will be subject to fines (back taxes and interest).  Those that decide to forgo the risk of misclassification open themselves up to a higher likelihood of an audit. Just one workers-comp or unemployment claim, a whistleblower or a worker submitting an SS-8 requesting a classification determination could easily trigger an audit. If there is a violation, there will be a fine.

So, don’t misclassify workers – simple enough, right?

Not exactly.

There are (at least) two components to misclassification, intentional and unintentional. The first can be cared for with ethical practices that forgo the financial incentives to misclassify.The second can also be cared for, requiring education and again, smart process. It is critical to classify workers correctly before they begin an engagement. Be sure to have a strong validation process, one that you’d be happy to share with the IRS in an audit. Be sure to care for contracts, insurances and all local laws as there is no single process that fits all situations/states. Next, educate managers on how-to manage this population and avoid co-employment behaviors. ICs are businesses, not employees. Misclassification is to be taken seriously and can’t be fully covered in two paragraphs, but it can be cared for with proper controls.

The project-based, freelance, Me2B economy is here and growing. Over the next five years it is projected that half of all US workers will be or will have experience as an IC. The risk of misclassification is real, and so is the skills gap. The need for talent will drive the engagement of ICs, which will drive the development of vetting and classification processes. There is a lot to consider when engaging ICs, local laws differ from state to state, and nobody wants to be ill prepared for an IRS audit.

If you have questions about how to find and engage independent talent, contact us at info@thinkfreeagents.com.