How to Make Sense Out of All Those Alerts About Independent Contractor Misclassification

As a regular subscriber to various alerts involving misclassification of employees as independent contractors, I see on a daily basis an array of articles by lawyers warning businesses of impending doom if they continue to use independent contractors. Consultants match these with advertisements and postings offering quick and guaranteed solutions to the misclassification dilemma. As is often the case, the answer lies somewhere in between.

No federal laws prohibit the use of independent contractors and only a few states limit their use. Therefore, there is no need for most companies to follow the ultra-conservative approach of discontinuing their use of non-employee contingent workers and reclassifying all 1099ers as W-2 employees – especially if your business structure relies in whole or in part on a contingent workforce. Reclassification of some or all of your 1099ers into W-2 employees, however, is one option that some companies may wish to consider among a range of alternatives, depending on a host of valid business and legal considerations. Some of the other alternatives available to companies include bona fide restructuring and employee leasing.

Nor is there is any empirical formula or methodology that some consultants say will guarantee your company either an audit-free or lawsuit-free solution, one the one hand, or give you a sure-fire successful defense on the other hand if your organization is targeted by a government agency or a plaintiff’s class action law firm. An individualized assessment of your specific use of each type of contingent worker, analyzed in view of the 48 factors used by the courts and government agencies to determine whether a worker is an independent contractor or employee, is part of the process that affords companies an informed way to minimize or eliminate future misclassification liability.

Companies may wish to use a process such as IC Diagnostics™ to provide them with guidance they need to evaluate which alternatives they wish to consider to pro-actively address their current risks of potential liability due to independent contractor misclassification. Such liabilities includes risks from the labor, tax, and employee benefits perspectives, both on a federal and state-specific level.

Unless you turn off your misclassification alerts, be prepared for a lot more of the same confusing and competing literature over the next year, as Congress debates passage of the Employee Misclassification Prevention Act (EMPA) and as more states pass laws that limit the use of independent contractors or strengthen the penalties for misclassification.

But, there is one refrain in the many articles and blog posts by law firms and consultants that should capture your attention – that there is some urgency in taking action because the landscape of independent contractor misclassification is changing so dramatically. To those businesses that are highly reliant on the use of contingent workers, responding to these and other changes at the federal and state level may be a matter of corporate survival; to other companies that use some 1099ers, making informed adjustments in your business structure will be a way to maintain your profitability and competitive edge.  The only imprudent action at this time is inaction.

Written by Richard Reibstein.

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