Ensuring Compliance for Your Independent Contractors

76721756As business needs change and workforce models continue to evolve, more companies have turned to free agent talent as a key source for in-demand skills. By leveraging these individuals, companies create an “on-demand” workforce that scales up or down as business needs dictate. At the same time, free agents benefit from having greater independence and flexibility. Engaging small businesses, including the “business of one,” is a great strategy but does pose unique challenges and often requires change management for a company to achieve and remain compliant with very dynamic regulatory enforcement agencies and the aggressively litigious environment.

A 432 percent increase in federal wage and hour cases over the last 20 years, and nearly 8,000 cases filed in the federal courts from April 2012 through March 2013, highlight the need for companies to develop effective business processes to ensure compliance and avoid the perils, consequences and pitfalls of worker misclassification. Wage and hour compliance is not just a federal concern, as key states like California, Illinois, New York, New Jersey and Massachusetts, have at least similar increases in state court wage and hour lawsuits.

It is important to note that no single legal definition of employee exists for companies to hang their hat on to validate compliance. Every agency has its own definition and criteria for who qualifies as an employee, and hence who is NOT an employee. For example, a company may be compliant for tax/IRS worker classification purposes, yet not qualified as an independent contractor for state agency workers’ compensation. One element remains true for virtually all worker classification tests – the level of direction and control a company’s engagement manager has  the right to, and exerts over when, where and how to do the work, is the most heavily weighted criteria.   

A company might identify certain workers as independent contractors, or small legitimate businesses, but if an auditor finds that same company exerts too much direction and control over a population of workers, or in many cases, if the work to be performed is found to be core or integral to the company’s business, an auditor may find that those workers should be considered employees. The company potentially would then face stiff fines, penalties, back wages and benefits liability, as well as negative press and damage to its reputation and employer brand. Additionally, once reclassified, the company may also be subject to additional audits from other federal and state agencies that are now sharing information.  This includes ICE (Immigration and Customs Enforcement) looking for an I-9, E-verify and validation of eligibility to work in the U.S., which were most likely not completed at the time of engagement.  With this increased regulation and the costs of penalties for non-compliance continuing to rise, it is critical to ensure your contingent workforce management strategies are fully insulated from potential agency scrutiny.

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Protect your company against non-compliance by performing an operational analysis and risk assessment to identify gaps in compliance processes and uncover any issues that could potentially trigger an audit. Such an analysis should include an evaluation of all existing independent contractor relationships, as well as any engagements with small companies with less than three employees, against local, state and federal regulations. The company should also review its current policies and procedures to confirm continued compliance with engaging all categories of contingent labor, including independent contractor, niche suppliers, vendors, statement of work engagements and non-employees. Doing so will not only help to uncover any auditable issues, but also identify areas for program improvement. Regular audits also help to demonstrate a good faith effort to comply and may limit the exposure/look back period and penalties in the event of an agency audit.

Another key aspect to ensure contingent workforce compliance is to establish best practices for managing your independent contractor, as well as the other categories of contingent labor. Identifying a clear owner who can develop and maintain subject matter expertise in contingent labor is key.  Determining who will be responsible for compliance for the various types of workers is essential. Moreover, put clear processes in place for monitoring laws and regulations and creating, collecting and storing information to help protect the company against audits. Technology can help in this regard, allowing you to standardize data capture and reporting (http://www.staffingindustry.com/Research-Publications/Publications/CWS-3.0/February-2013/February-20-2013/Who-Will-Own-Candidate-Data), build a repository of individual compliance files to provide support in the event of an audit, as well as aid in tracking state and federal laws and enforcement actions.

Although technology can help facilitate compliance, onus falls on your company’s engagement managers. To better ensure your policies meet compliance with constantly changing laws, it is crucial that all stakeholders understand their roles. Providing continuous compliance training will help to keep those responsible for implementing those policies and engaging contingent talent – whether HR professionals, procurement, executives, shared services, or engagement managers – well informed and up to date as regulations change. In addition, working with a contingent workforce compliance expert, especially a Certified Contingent Workforce Professional with expertise in contingent labor, and specific expertise in all aspects of independent contractor compliance, can further help you maintain an efficient, effective and compliant contingent workforce program.

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Beth Mesechoff
Beth Mesechoff is Randstad Sourceright's director of contractor compliance services.

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1 comments
SusanFentin
SusanFentin

Be aware that in some states, most notably Massachusetts and Maryland, it is almost impossible to have an independent contractor relationship with a worker unless that individual is truly performing work that is outside your normal course of business and maintains an independent business providing such services to others.  I can count on the fingers of one hand the number of times I've told a client that it was okay to contract with a worker as an independent contractor.  Many states have statutes with similar restrictions.  Be sure you are aware of what the state law requirements are in your jurisdiction.

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