Mitigating Independent Contractor Risk

There’s a lot at stake if independent contractors are not properly classified. In a survey by Staffing Industry Analysts, fewer than 1 in 5 respondents are sure that their independent contractors are properly classified. How confident are you about your independent contractor compliance?


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There’s a lot at stake if independent contractors aren’t properly classified.

Corporate United has your back with a comprehensive independent contractor compliance program.

A company’s obligation to a worker, whether it is paying overtime or providing health and welfare benefits, depends on getting a critical question correct: Is she an employee or an independent contractor? You’d be surprised how many companies answer this question the wrong way, and this mistake is a costly one riddled with legal ramifications.

In a survey by Staffing Industry Analysts of companies in various industries with 1,000 or more employees, fewer than 1 in 5 respondents said they are sure that their independent contractors (IC) are properly classified. How confident are you about the status of independent contractors?

Who’s in control?

IC classification is all about control. Who is in control of finances and behavior? And what is the relationship of the parties? If the company is controlling the means and manner of the duties being performed, that worker is an employee.

So, what exactly is the definition of an “employee” and “independent contractor”? But the catch is, the definition of “employee” and “independent contractor” varies by state, and states’ laws may be inconsistent with the federal government. In other words, a worker—a freelance graphic designer, for example—may be considered an IC by the State of New Jersey where he works. But the federal government may classify him as an employee based on his relationship with the company that contracted him. Confusing, isn’t it?

To make matters more stressful, the burden is on the company to properly classify workers. Now more than ever, companies need expert guidance so they can properly classify workers and avoid costly legal ramifications.

If businesses are not careful about properly classifying ICs, they could take on a serious financial and legal liability. The financial penalties alone can amount to up to 40 percent of the individual’s compensation—and considering many companies have large populations of ICs in various roles, those fees can really add up.

Meanwhile, the courtroom is becoming more populated with lawsuits where wage and hour disputes are pinned on wrongful employee classification. Take A&M Drywall Construction Inc., a Woodbridge, Va.-based company that endured a U.S. Department of Labor investigation before it agreed to pay $101,007 in back wages to 120 employees that were found to be misclassified as independent contractors. Failure to pay proper overtime compensation is a violation of the Fair Labor Standards Act (FLSA) and Contract Work Hours and Safety Standards Act. Misclassification of employees is common in industries such as construction.

Pressure Is On: More Government Oversight

And the reality is the government is counting on those misclassification cases to raise funds. State and federal agencies are stepping up their enforcement activities and cracking down with penalties fees. Internal Revenue Services (IRS) penalties can hit a company hard, especially when you consider there is a three-year look-back period on any misclassified workers.

IRS Penalties for Unintentional Misclassification

  • 20% of FICA employee should have paid
  • 1.5% of all wages paid to the misclassified worker
  • 100% of FICA employer should have paid
  • 100% of FUTA that should have been paid
  • All federal income taxes that were not withheld

It’s not just the IRS employers have to worry about. It’s more common today for ex-contractors to sue their previous employers for denial of benefits, stock options or compensation such as overtime pay. A classic case is Vizcaino v. Microsoft, a $97 million settlement that favored long-time contractors who demanded equal benefits. These “perma-temps” were misclassified as independent contractors, and they worked alongside Microsoft employees who were making millions on stock options. The contractors wanted their piece of the pie, and so they retroactively sued—and won.

Now more than ever, companies need a trusted adviser who can partner with them to ensure IC compliance, mitigate risk, and support the organization if IC status is called into question by state or federal agencies.

While there are staffing companies out there that will collect documentation and make recommendations, that’s not enough. Companies need a provider who will stand behind those recommendations on IC compliance and indemnify their findings. That’s what you’ll find with Corporate United’s comprehensive Independent Contractor Compliance program through Populus Group.

We’ll Stand by You

Corporate United has partnered with Populus Group, a specialist in providing payroll and IC compliance services, to bring you a progressive IC compliance solution. Your bona fide ICs will act as subcontractors and Populus Group will serve as the prime vendor. In essence, Populus Group acts as a firewall, providing an IC compliance software platform and a team of qualified IC evaluation specialists to provide ongoing compliance recommendations and support.

Corporate United’s member-exclusive Payroll and Independent Contractor Compliance programs work hand-in-hand during the IC classification process. Members can elect either or both solutions to bolster savings through payroll cost reduction or by avoiding damaging penal fees associated with IC misclassification.

Interested in learning more about the IC compliance agreement with Populus Group? Visit the IC category sheet or watch a webinar.

Nicole Shedden: Marketing Strategist at Corporate United
As a marketing strategist for Corporate United, Nicole's goal is to get the word out about group purchasing organizations – CU in particular. Since GPOs free up time, money and resources for indirect procurement teams, she focuses most of her blogging on those three elements. Nicole has been marketing to a procurement audience for nearly a decade; prior to that, she worked in sales and marketing consulting.