Mitigating The Risk Of Non-Compliance With Independent Contractors

Post written by

Gene Zaino


The way we work is changing. As the demand for qualified workers continues to contend with the extensive U.S. skills gap, the independent workforce has stepped in, providing specialized expertise on an as-needed basis, along with staffing flexibility and better control over employment costs. This talent pool has proven to be more than just a growing trend: Over the next five years, my firm estimates that roughly half of the U.S. adult workforce will be (or will have spent time as) an independent worker.

When engaging independent professionals, however, businesses must keep compliance front of mind. Worker classification is a complex and evolving issue. A recently proposed House bill seeks to provide clarity and guidance on independent contractor classification, but in the meantime, organizations must adhere to a complex web of guidelines and laws from local, state and federal government agencies.

Proper classification is important because businesses don’t have to provide common benefits such as health care options, unemployment insurance or minimum wage to independent contractors. On the other hand, failing to correctly classify a worker can result in hefty consequences ranging from serious fines, penalties and back-tax payments, to audits, negative press and loss of trust.

In order to operate legally, it is essential that businesses understand existing compliance guidelines and laws. Here are three principle areas businesses should be aware of in order to minimize risk when engaging independent contractors.

Economic Dependency

The U.S. Department of Labor (DOL) uses an economic realities test to help define what an "employment relationship" means in the context of the Fair Labor Standards Act (FLSA) provisions. The test looks at factors that determine if a worker is economically dependent on an organization. An economically-dependent worker is more likely to be considered an employee in the eyes of the DOL.

For example, if a worker performs work that is integral to their employer’s business — part of the production process or service the employer provides — they are likely to be economically dependent on that employer and be classified as an employee. This would be the case of a lawyer who handles cases for a law firm. Conversely, a worker engaged by the law firm to update computer software is not performing work integral to the law firm’s business and could therefore be classified as an independent contractor.

Degree Of Control

The Internal Revenue Service (IRS) is involved in worker classification because it is responsible for providing guidelines for employers’ tax liabilities. When it comes to tax obligations, businesses must abide by common law rules — facts that provide evidence of the degree of control and independence in the relationship between a worker and a business.

The IRS identifies three degrees of control: behavioral, financial and the relationship of the parties. As an example of behavioral control, independent contractors do not typically require guidance or or-the-job training. They complete work as they see fit, working when and where they like -- as opposed to an employee who is typically told when, where and how to do a job.

Many individual states also use the ABC Test, which applies three factors that must all be met in order for a worker to be considered an independent contractor. Businesses should be familiar with these tests and degrees of control in order to minimize risk and stay compliant when engaging independent contractors.

Joint Employer Status

Co-employment is an arrangement where two companies both have rights and obligations as an employer. For example, a business may maintain responsibilities for a worker’s job duties and daily functions, while a staffing agency manages HR functions like recruiting, hiring and payroll. This means that technically the worker is employed by both the business and the staffing agency.

Historically, if a worker decided to take legal action because they thought they were being misclassified, or if a company was audited for misclassification, both the business and the staffing agency could be deemed liable for violations of wage and hour laws — even if one of them did not exercise direct control over the other’s workers.

However, while recent withdrawal from the 2015 and 2016 memos on informal guidance on independent contractors doesn’t relieve companies of their legal obligations under the FLSA or Migrant and Seasonal Agricultural Worker Protection Act (MSPA), it does suggest that joint-employer status may only be applied when one company has direct control over another’s workers.


While removal of this guidance document may make it harder to prove joint employer status, this is still an issue that businesses need to be aware of if they use staffing agencies to engage independent talent.

In order to minimize risk and remain compliant when engaging independent talent, businesses should adhere to applicable federal, state and government agency laws as closely as possible.

Gene Zaino, an expert in the contract workforce, launched MBO Partners to improve how independent consultants and clients work together....
