Managing Independent Contractors: Tracking, Classification, and Compliance

VectorVMS Brand Manager, Nikki Williams, recently caught up with Julie Brown, Mindlance’s Pay+ Practice Leader, to discuss all things compliance and classification when it comes to independent contractors. 

Independent contractors are a growing part of the contingent workforce, and factoring them into your compliance management can feel a little intimidating. With so many regulatory specifics to factor in, it can be hard to know where to start. So I caught up with Julie Brown from Mindlance to help you get a better understanding of the ins and outs.

Let’s start with a definition.

How Do We Define an Independent Contractor?

An independent contractor (IC) is a small incorporated business filing its taxes from a corporate perspective through its FEIN number. Typically, this business will have less than five employees.

The key thing to remember is that in order for this to be classified as independent contractor work, the owner of the entity themselves should be performing the work. If one of their employees conducts this work, they act as a subcontractor, which needs to be treated differently.

What Does This Mean for Employers Engaging an Independent Contractor?

There are a lot of benefits to engaging ICs—for example, a cost reduction versus engaging a W-2 employee due to employer taxes and other costs. This also opens an organization up to more niche talent and specialists, which can be critical in areas of work that require specialties like IT, engineering, science, and medical. They will be much more specialized in their field of work than an employee who may need training in that area.

ICs should also provide their own materials and equipment to get the work done. Many ICs work remotely, which saves costs per seat, and the market for specialized and experienced talent who can consult and advise is getting increasingly competitive. We’re seeing an increase in folks who want to be engaged as an IC rather than an employee due to the flexibility. They get to choose their work, set their work schedule, and select their clients, etc. This gives them flexibility and negotiation power.

As such, employers need to be prepared to engage ICs in a model that’s going to serve them and encourage them to engage in the work.

RECOMMENDED READING | 4 Reasons to Track Your Independent Contractors in a VMS

Classification and Compliance Requirements

When engaging an independent contractor, there are a number of documents you need to ensure compliance and cover yourself against risk. Not all of these are required by law, but it is best practice to ensure you have as much information as possible.

  • Certificate of insurance
  • Executed IC agreement that outlines the engagement and makes lines between employee and IC clear
  • Copies of their tax filings at the federal and state level (remember to check that they are properly filing their taxes)
  • Statement of work outlining clearly what the deliverables are. This should also specify that the IC takes the risk associated with product performance.

Mishandling of taxes is a common trigger for a regulatory audit of your contingent workforce compliance practices. Additionally, revetting the IC classification every six months of the engagement, assures your organization that nothing in the original engagement has changed. If it has, this needs to be accounted for.

RELATED READING | What To Look for in an Agent of Record (AOR)

Risks of Misclassification

There are a number of fines and penalties in place for the misclassification of independent contractors within your workforce, covering a range of tax discrepancies and falsely or incorrectly classified worker status. You can find out more about the list of fines and penalties here.

Beyond the financial penalties, the cost of misclassification can have a wider impact. For example, it poses a reputational risk that may cause you problems when accessing talent in the future. As such, it can impact your employer brand as your organization may become less trustworthy. Even if you misclassify someone as an IC by accident, there may be a perception in the market that your organization has done something underhanded to cut workers off from employment benefits and safeguards.

Therefore, it’s vital to have a person or a team responsible for handling the processing of your independent contractors. If you’re an organization that engages with ICs on a large scale, an in-house team and possibly an external solution will be the best combination to manage the compliance and regulatory side of your contingent workforce.

MORE FROM THE BLOG | Navigating the Ever-Changing Contingent Workforce Landscape

Tips for Tracking Compliance for Independent Contractors

You’ll want to make sure you have an easy engagement with the ICs, so automating these processes wherever possible will only help. The best practice is to combine technologies: one for your overall contingent or total talent workforce management like a VMS, and an integrated solution to help you manage your independent contractor payroll and compliance directly.

Tailored systems and technologies can support you with audits, onboarding, processing engagements, and increasing time-to-productivity once your ICs or other contingent workers have been hired. Using these technologies can also create a better user or candidate experience, making it easier to retain and attract talent in the long run. For example, having the hiring manager questionnaire for independent contractor classification integrated into your VMS can be a huge plus for accessibility and usability.

We’re big believers in the power of automation and streamlined integrations. Managing the compliance of a contingent workforce can be a real challenge, with so many elements involved, and automation takes the pressure off (as well as reducing the risk of human error in a process that is so highly regulated).

If you would like to learn more about managing the compliance of your contingent workforce, get in touch with our experts.