IC Misclassification Risk: It’s About the Right Engagement Programs

I have been leading the charge in supporting independent contractors (ICs) for more than a few decades. I have seen the good, the bad and the ugly issues from all perspectives, including the contractor, the client and the regulators. Here a few words that summarize my observations.

First, the biggest risk that any client can have with IC compliance is not the IRS: it’s an irate or disgruntled contractor. This risk has become even more critical over the past few years as there are now so many ways for individuals to create problems for their client organization. These run the gamut from the new whistle blower rules of the IRS, the old SS-8 form, social networking rants, or the lawyer friend that everyone has and who is ready to figure out how to extort some flesh from the client. Let’s not forget the state auditors, federal tax auditors, DOL enforcers and class action lawyers.

The reason this is so critical is because the reality is there are a growing number of independent contractors. In 2011, MBO Partners released the first research report on independent workers. We reported that there are 16 million workers in the US and we forecasted an independent worker majority by 2020. We are about to release the second annual report and we are launching a new inaugural independent workforce index. The 2012 report is exciting, and it only confirms that ICs are not a trend; they are a new structural change to the way work gets done.

At the same time, the state, federal and other misclassification risks are only intensifying. It is the perfect storm: increased usage of ICs and increased regulatory enforcement risks — and it’s all exacerbated by poor IC engagement practices.

And yet, among our industry, we never speak to the biggest risk. That is the risk of the unhappy or disgruntled IC. In my mind, it all comes down to common sense. Treat people right, educate them on the rules of law, communicate clearly with them and make sure they have a reasonably good experience. This means you cannot treat these individuals as if one size fits all, especially if that one size was never even intended for their situation. In our industry, however, when it comes to IC engagement, this does not seem to be the case.

Assessing risk is one thing, using cool new online assessment tools is another, but the bottom line is making sure you have the right tools and programs in place. The programs should engage them without surprises, and offer the tools that fit their particular situation, all while mitigating risk with the regulators and lawyers.

Unfortunately, many of the MSP and VMS processes are not tuned into this philosophy. For example, you cannot treat an IC like a staffing supplier. ICs are very different. They do not see any value in using VMSs or MSPs. They are not getting job reqs and they cannot make it up on volume. They do not have pay rates, they have bill rates, and they often choose to work on a fixed price. In spite of this, they are forced into these processes and tools due to client program mandates. To complicate the situation, there are new assessment tools and compliance providers popping up everywhere. In reality, these tools are worthless if the IC is disenchanted and believes no good program exists for them. They will either be disgruntled or find ways around the program.

If the staffing industry does not want to be pushed aside when it comes to ICs, then procurement leaders, MSP providers, VMS product developers and staffing industry leaders should start learning about this demographic.  If you still need a compelling reason, here’s one: In the United States, spend for ICs is more than triple that of the entire staffing industry.

Gene Zaino

Gene Zaino
Gene Zaino, an accomplished and nationally recognized expert in the contract workforce market, is CEO of MBO Partners. He can be reached at gzaino (at) mbopartners (dot) com.

Gene Zaino

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