Independent Contractor 101

Independent Contractor 101

What your organization needs to know to avoid independent contractor misclassification

Classifying a worker as an independent contractor has never been more complicated or fraught with risk. Independent contractor lawsuits are in the news daily, new IC tests and often contradictory regulations go into effect constantly, and multiple government agencies evaluate employee classification with different requirements.

In this complicated regulatory environment, engaging an independent contractor is risky. How can an employer know what is a myth and what is a reality?

In this blog series, we will share 13 common myths related to engaging independent contractors within your organization and the corresponding reality for each. 

Before we jump into the myths, let’s start by answering some common questions.

What is an independent contractor?

In the United States, workers are often classified as either an employee or an independent contractor. An employee is an individual to whom statutory wage payment and other legal protections apply. Whereas an independent contractor is an individual to whom such protections generally do not apply.

Typically, companies engage independent contractors for a discrete period of time. During this time, ICs perform a task or produce a deliverable outside the scope of expertise or capability of the company’s employee-workforce. However, contractors are not engaged like employees. For example, they are not asked to complete employment applications or W-4 forms. They are not paid a salary, they do not receive benefits, and they do not receive a copy of the company’s employee handbook.

In addition, independent contractors usually remain free from direct supervision and control. These individuals can negotiate their own pay rates, and they have latitude to perform their assigned task(s) in any manner and on any schedule they choose. That is, so long as their work product is delivered by company-required deadlines. Additionally, independent contractors provide their own tools and equipment to do the job. Finally, they are not prevented from simultaneously performing work for multiple businesses, including your competitors.

Why engage an independent contractor?

An independent contractor relationship can be beneficial to the worker and the company, if properly implemented. For the independent contractor, the relationship offers greater flexibility and control over their work, along with tax benefits. For the organization, engaging an independent contractor offers flexibility and greater access to talent. Another benefit for the organization is the cost of engaging an IC pales in comparison with those associated with employee hiring and retention. For instance, the company is not required to contribute to unemployment insurance funds, provide expensive employee benefits, or allow participation in retirement, profit sharing, and similar plans.

In today’s dynamic economy, many workers prefer to work as independent contractors. These workers seek the greater freedom and income potential that the IC model can offer. By extension, many organizations prefer to engage independent contractors for the flexibility, potential cost savings, and greater access to talent. 

This alignment of interests seems perfect… Until you recognize that numerous federal and state regulatory agencies have established guidelines, which presume that workers should be classified as employees unless they meet very specific, and often differing, requirements to qualify as independent contractors. These strict regulations create significant misclassification risk for organizations that engage independent contractors. 

What is employee misclassification?

Employee misclassification is defined as the practice of engaging workers as independent contractors when they should be considered employees. Worker misclassification allows businesses to avoid their share of employment and tax laws, such as workers’ compensation, unemployment insurance and payroll taxes, in addition to denying workers of important employee benefits and protections.

How can I learn The 13 Myths of Independent Contractors?

Sign up to receive the email alert when a new IC myth is published here. Or, if you would prefer not to receive the email, you can check back in to the Resources section of our website weekly. 

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