Misclassified Workers: Taking Steps to Make it Right

It's no secret that the liability of misclassifying workers within a company can be crippling for any organization, regardless of whether or not these employees were mistakenly or intentionally misclassified. In many cases, businesses unintentionally misclassify individuals as independent contractors because they fail to structure, document and implement the engagement so that it complies with both federal and state laws.


Whether your company occasionally taps the insight and expertise of independent contractors, or if you consistently engage them to meet the demands of your business, your focus should be on mitigating your legal and tax risks that are often associated with employee misclassification. However, if you find that your organization has inadvertently misclassified individual workers or a group of workers, there are several steps you can take to rectify the situation and avoid steep penalties from the Internal Revenue Service (IRS).

Evaluate and Reassess the Relationship - The key issue comes down to the amount of control your organization has over your worker. If the worker is not integrated into regular business operations and you do not exercise "right of control" over the worker, meaning that you do not provide training, set work hours, require reports, etc., you are reasonably safe to consider them as an independent contractor, as long as the relationship is temporary and the worker has other customers. However, if the worker is integrated into your business operations, you exercise the "right of control" over the worker, and they work solely for your organization, they would be classified as an employee. We suggest evaluating your relationship with all members of your workforce to ensure that they are independent contractors, and reassess these relationships as necessary.

Structure the Work So the Relationship Meets Requirements - If evaluating your relationships with your indendent contractors raises concerns over their status, we recommend restructuring the work performed by your independent contractor workforce to ensure that it truly reflects such an arrangement. You can achieve this by modifing the work so that your contractor can perform their duties off-site, offering the ability for the worker to conduct work activities at their convenience and more. However, it is important make sure that the work is being completed satisfactorily and in accordance with your agreement.

Institute a Company-Wide Policy for Independent Contractors - Once you have taken the steps to evaluate your company's relationship with independent contractors, and you've structured the work for independent contractors correctly, we suggest creating and implementing a company-wide policy for how your business engages this segment of your workforce. It's important to do this because in most organizations, the ability to hire independent contractors is spread across multiple departments. So, having a policy firmly in place ensures that all departments and managers will follow the rules and minimizes your risk for penalties.

Implement a Third-Party Provider to Manage Your Independent Contractor Workforce - Many organizations have successfully enlisted the help of professional service firms to increase efficiency, reduce their labor and employee benefit costs and shift the responsibility of managing contract workers. If you contract with multiple independent workers, or if the day-to-day management of this group takes time away from other job requirements, a third-party provider may be the perfect answer for your company.

If you're looking for help on how to manage your independent contractor workforce, or if you are unsure whether or not all members of your organization are categorized correctly, we encourage you to check out our free Employee Classification Scorecard. This helpful resource will evaluate your level of compliance with federal and state regulations, which will benefit your entire organization. 

Free Employee Classification Scorecard