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How to Avoid Misclassification of Independent Contractors

Posted on April 4th, 2016 Read time: 2 minutes

As owner of a company that utilizes independent contractors, it’s imperative you look closely at their signed agreements and at-work practices to ensure those workers aren’t categorized as your employees under Internal Revenue Service (IRS) rules. Learn how to avoid misclassification penalties and lawsuits by following these simple guidelines.

  • Audit Worker Practices

Have an attorney audit each worker’s practices on the job to ensure they align with characteristics outlined in independent contractor agreements and true contractor relationship. Make necessary changes before issues arise and are challenged by lawsuits or the government. For example, an agreement might state a contractor decides his/her method of performance, but an audit shows the company exerting a high amount of control in practice. Likewise, an agreement may say the work relationship is nonexclusive, yet an audit shows it’s impractical for the worker to perform tasks elsewhere.  Anything discovered is covered under attorney-client privilege, so you’re more protected than if you conducted the audit yourself.

  • Review Statements of Work

Review each contractor’s statement of work to make sure they match the worker’s actual workpractices and responsibilities. For example, the statement of work might require the contractor to work independently when in reality the work is performed with a lot of supervision. The Department of Labor (DOL) and courts maintain it matters what the worker is doing, not what a job description says he’s doing.

  • Evaluate Economic Independence

Determine whether the worker is truly in business as an independent contractor or is economically dependent on the company as an employee. If the worker owns a company and you’re paying that company, the contractor’s being paid as your other vendors and isn’t your employee. Also, don’t start a worker as an independent contractor and later move the person to an employee position unless a different job is being performed. Otherwise the contractor may argue he/she was an employee the entire time and demand compensation as such.

  • Revisit Contractor Agreements

Ensure you address the duration of the work and expected outcome in each worker’s contract. Contractor relationships should have a limited timeframe and involve little or no supervision. Each contract should state the worker’s responsible for his own facilities, tools, and equipment needed to fulfill tasks. As an employer, you need to be more concerned about output rather than means of attaining it.

Avoid expensive penalties and lawsuits by properly classifying your workers. For additional help with this or related issues, contact the trained experts at Innovative Employee Solutions today!

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