3 Steps to Avoid Fines for Misclassifying Independent Contractors

By Jamie Moore Marcario, Esq.

The new millennium has seen the meteoric rise of the  “gig economy,” in which businesses engage independent contractors (“IC”) to do the lion’s share of the work instead of  W-2 employees. While ICs may seem like the way to go, the equally meteoric rise in the number of IC   misclassification cases filed against businesses suggests that businesses relying on ICs should think again.

When a company misclassifies its independent contractors, the error is typically an honest mistake rather than an intentional end-run around the federal requirements. Accordingly, until the last 10 years, most regulatory agencies made little to no effort to enforce employee-independent contractor classification laws and regulations, leaving business owners to believe there was little risk if they chose not to strictly comply with the laws. But those days are gone. Today, both federal and state regulatory agencies apply heightened scrutiny when analyzing classification questions at all levels, leading to a new spike in classification lawsuits.

The penalties for misclassification are no laughing matter. If you misclassify an IC, your business may very well owe back taxes on behalf of team members you’ve mischaracterized, and you and your business may even be subject to criminal charges for misclassification. That said, with proper legal guidance from a business law firm like Thrive Law,  it’s actually relatively easy to stay safe and compliant with respect to employee and IC classification issues. We make it simple by walking you through the following three steps ensure your IC classifications pass regulatory muster.

1) Conduct an internal audit of your IC classifications.

The first step to ensuring 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, this is the time to create them, and the experienced team at Thrive Law can help.

While the federal government,  states, and courts don’t have a single common test to determine a worker’s classification, all of them consider similar overarching themes. In general, if your business has 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, your business is only permitted to direct and control the end-result of the IC’s work, not the manner and methods he or she uses to get it done.

Since there are many complex legal issues related to this process, it’s important that you work with a qualified business lawyer, such as Thrive Law, to review each worker’s on-the-job practices. Often an IC’s contract may state one thing, but his or her actual work performance and relationship with your business may be something entirely different.

For instance, an IC’s contract might state that he or she is to work independently, but in reality, they work under close supervision. Or his or her contract may state that he or she is free to work with other clients, but the audit shows that the way you’ve structured the relationship makes it impractical or impossible for the IC to work for anyone but you.

By thoroughly auditing your policies and practices, you can identify and change any problem areas internally before a regulatory agency steps in to investigate.

2) Revisit and revise contracts when needed

Even if you’ve worked with someone for years without any problems using only a verbal agreement, it’s vital that every IC you hire has a properly drafted written contract in place, describing exactly what’s 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 a business law firm like Thrive Law 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 ICs 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 his or her own contract and had his or her 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 certain 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.

Whether you need help reviewing your IC classification practices and/or properly drafting IC contracts, trust us as your Creative Business Lawyer® to guide and assist you. Although there’s an uptick in IC misclassification cases right now, with the proper policies and contracts in place, you can rest assured your company is entirely compliant and up to date.

 

This article is an educational service of Thrive LawTM, a business law boutique. It does not constitute legal or tax advice or imply an attorney-client or accountant-client relationship. At Thrive Law, we offer a full spectrum of legal services for businesses and are equipped to help you make the wisest choices about your business dealings while you’re alive and well or in the event of your incapacity or death. We also offer a Healthy Business & Creative Checkup for ongoing ventures, as well as outsourced company counsel plans for businesses who need a legal team on speed dial. Contact us today to schedule: 727.300.1990 or hello@thrivelaw.com. We cannot wait to meet you!