Finally, it is becoming more common for clients/prospects to question compliance companies about “having a bias toward classifying workers as W-2s vs. independent contractors.”
Is it because clients have figured out that although they are lowering their perceived classification risk, they are experiencing higher overall cost for their talent? Or are they frustrated with having Independent Contractors walk away from their project rather than accepting a W-2 status? Neither of these scenarios support a competitive advantage or sustainable position in talent acquisition for any company.
Compliance suppliers are well versed in providing reliable evidence as to financial risks and consequences of misclassifying an IC. It’s not often, however, that compliance companies will look at the opposite position, reverse Misclassification (RM), which is the unacceptable financial risks and consequences of misclassifying an IC to a W-2.
Applying government regulations too literally or conservatively may leave out acceptable exceptions or circumstances that can cause a legitimate IC to be misclassified as a W-2. Such an oversight drives up costs by an estimated 15 percent to 20 percent in payroll markup. Think about what $75hr vs. $88.50hr applied across all business units can do to a company’s budget. It can be argued that the incentive for a compliance provider to default borderline evaluation results to W-2 is driven by profit, but it can also be driven by a lack of regulatory expertise. Without the confidence to apply the complex regulations to achieve an accurate classification, a conservative W-2 classification is the safest path to take for the compliance provider.
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Here are 4 points to choose the right compliance provider.
- Make sure that compliance, both state and Federal is a core competency for your provider. Companies that “dabble” in compliance as a non-core business often lack the investment, knowledge and resources to confidently qualify the “non obvious” ICs accurately. Defaulting to W-2 is a safety strategy for the client and the service provider, but at a higher overall cost to the client in actual $’s and loss of talent.
- Ask about the overall “pass rate” of the service provider. Low isn’t necessarily better and high needs to be substantiated. Bottom line, look for a company that is an experienced advocate for legitimate Independent Contractors and can prove it with data.
- Have your compliance provider’s results audited by a third party compliance expert. Specialized consulting firms, Employment law firms, and Ernst & Young are examples of reliable sources.
- Don’t be fooled by scare tactics. There is a difference between “perceived” and “real” risk of misclassification. An overly conservative approach to classification is not necessary and will cost the client more in the end.
MORE: Willful misclassification
