Misclassifying an employee as an independent contractor may have many negative impacts on a business, such as fines, penalties, and civil liabilities. Although misclassifying a worker can lead to serious consequences, there are mitigation tips and business processes that can be adopted to lower your business risk. This article covers mitigation tips on independent contractor misclassification, and methods your business can adopt to minimize misclassification risks involved with using independent contractors.

Mitigation Tips – Internal Business Procedures to Adopt

To minimize the risk of misclassification, companies should consider:

1. Conducting an internal audit.

Employers should review existing worker classifications to determine if they comply with applicable federal, state, and local law. It is important to promptly correct any misclassifications.

2. Training personnel on classification issues.

Employers should train managers and employees, including those who interact directly with independent contractors, to ensure proper classification and to reduce the possibility that independent contractor status will be undermined by future changes in company policies or practice.

3. Obtaining a ruling from the IRS.

A company can file a Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS. It can take six months or more to get a determination from the IRS, but the company can rely on the ruling as a reasonable basis.

4. Drafting agreements that document the independent contractor distinction.

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5. Maintaining records that evidence a worker’s independent contractor status and document compliance.

The type of independent contractor records that a company should retain in their vendor files includes the parties’ written agreement, the contractor’s federal EIN (W9 Form), payments made to the independent contractor, copies of invoices, copies of certain forms, contact information, certifications of the contractor’s insurance coverage, and the contractor’s business card.

For more information on best practices for engaging independent contractors, contact us for a complimentary consultation.