Employing independent contractors can come with huge benefits — or consequences, if you misclassify them.
By Ben Young, Christie Vu and Greg Boornazian
With a growing number of U.S. workers choosing non-traditional employment via gig work and the fact that 29.5% of total employer compensation costs account for benefits,[1] the appeal of using independent contractors versus full-fledged employees is clear. Complications emerge when a company does not ensure their working relationships are clearly defined, or adhere to classification requirements laid out by the Department of Labor (DOL) as well as their state.
Here are four steps to ensure compliance with independent contractor classification.
- Audit your employment practices. Before making any moves, businesses who currently operate with independent contractors will want to work with an Employment Practices Liability attorney to perform a full audit of their current employment practices, as neither the “control test” nor the economic reality test are fool-proof methods for classifying employees.
TIP: Don’t dwell on any mistakes or misunderstandings made in the past; instead, focus on identifying which laws and tests apply to your business today, your current classification practices, and whether your classification decisions are properly supported.
- Get your documentation in order. One of the most important parts of both the audit and how you move forward will be documentation. It cannot be said enough: document, document, document.
Organizing the documentation you already have on current independent contractors will help support classification decisions if they are questioned. If you do not have this information already on file, gather insurance, business license and payroll information for all workers currently providing services for your business.
If you’re in an industry that involves hazardous operations, ensure your policies and procedures are in compliance with Occupational Safety and Health Administration (OSHA) standards, and that all workers — both full-time employees and independent contractors — are properly trained, and establish proof of this training.
TIP: As time progresses, documentation will continue to be crucial. Establish employment practices that feed into a robust and organized documentation system, and require proper documentation before any work is performed.
- Employ an independent contractor contract. A written contract between your organization and the independent contractor you’re hiring is one of the crucial documents needed to prove independent contractor status since it clearly defines the working relationship between the business and the independent contractor. The information in the contract will indicate whether or not the worker is an employee eligible for benefits or an independent contractor.
Contracts should include details regarding:
- Scope of work/services being provided
- Project duration and/or deadline for provided services
- Payment
- Tax payments and indemnity clauses
- A list of requirements of the contractor, including business insurance and any training or supplies needed for the job
- Confidentiality clauses, if they apply
Remember, determining independent contractor status is all about control and economic dependency. Therefore, a non-compete clause should never be present in an independent contractor’s contract — unless it’s narrowly written and allowed in the state where the independent contractor would be working (e.g., Florida). Non-disclosure or agreements to not solicit company clients, on the other hand, are acceptable.
It’s essential to factor in the working conditions and relationship between the employer and person hired when determining if someone is actually an employee or independent contractor. Some employers take advantage of the independent contractor option, when those workers should legally be classified as employees. These employers are playing with fire and could face back wages, fines and jail time.
TIP: A company cannot include the means and manner by which independent contract work is accomplished within the contract’s scope. It can, however, include the expected quality and outcome of the work.
- Establish a cycle of due diligence and review. Like any other operating process within the business, employment practices for independent contractors should be consistent and followed by every member of the organization. This includes individuals with significant authority who may feel their power allows them to dictate rules as they see fit.
There are legal and financial consequences to inconsistency. Training is a great example for businesses with hazardous operations. If independent contractors are not required to verify proper training for the tasks they will perform at your organization, OSHA can hold the business liable for any reported incident. You have to prove that you trained, or collected proof of training, before the contractor was put to work. The same can be said for proof of insurance.
For industries like healthcare, where independent contractors such as dentists may bring in their own staff of dental assistants, the contract and documentation requirements extend to each of these additional contractors.
TIP: If resources allow, dedicate staff to ensure proper adherence to and maintenance of your independent contractor employment practices. Steps are less likely to be missed or processes overlooked when it is made clear who is responsible.
In a world where freelancing continues to thrive and where the distinction between employees and independent contractors can have significant financial and legal implications, it is imperative for businesses to take proactive steps to avoid incorrect categorization. By auditing employment practices, meticulously documenting crucial information, establishing clear independent contractor contracts, and maintaining a consistent cycle of due diligence and review, companies can safeguard themselves from the potential pitfalls of misclassification and foster stronger, more transparent working relationships.
For more insight on today’s evolving employment landscape, check out our eBook: Knowing the Difference Between Employee & Independent Contractor and Why It Matters.
[1] U.S. Bureau of Labor Statistics “Employer Costs for Employee Compensation Summary,” June 16, 2023.
This information is intended for informational purposes only. Protector Plans Executive Liability is not liable for any loss or damage arising out of or in connection with the use of this information.