How To Avoid Misclassifying Employees As Independent Contractors


In the last decade, the rise of the gig economy has fueled an unprecedented increase in the number of independent contractors in the ever-changing workforce. With more companies relying on remote work arrangements, this growth has increased even more. In fact, the number of independent contractors in the U.S. workforce rose by 34% in 2021, according to MBO Partners’ 11th Annual State of Independence in America report. As a business owner, using independent contractors in lieu of full-time employees has a number of advantages. This includes saving on labor costs, taxes, and training—but using contractors is not without risks.


In January the DOL and the National Labor Relations Board struck an agreement to collaborate on investigations and share information on potential violations, specifically targeting independent contractor misclassification. This deal has created a new referral process for violations of federal labor and employment laws which makes it easier for the government to pursue employers who have breached laws enforced by both agencies.


Misclassifying an employee can result in hefty fines and this can cause you to be held responsible for paying back taxes and interest on employee wages. Some claims can go back as far as three years if it’s found you knowingly made the misclassification. If the IRS believes your misclassification was intentional, there’s also the possibility of criminal penalties.


Best Practices To Avoid Misclassification Fortunately, with the support and guidance from a professional who studies each case thoroughly, you can easily avoid these risks and stay totally compliant. Taking precautions and meeting with us at a Truest Law can put you at ease as we conduct an in-depth review of your employment agreements and worker classification procedures.

1) Conduct An Audit Of Your Classification Process

The first step to ensuring that your employees are classified properly is to conduct an internal audit of your current classification policies and practices. If you don’t have any formal policies or practices in place, now is the time to create them.


Many times an IC’s employment agreement may state one thing, but their actual work performance and relationship with you may be something entirely different. By auditing your policies and practices you can identify and change any problem areas internally, before a regulatory agency steps in to investigate.


2) Review And Revise Your Employment Agreements

Even if you’ve worked with someone for years without any problems using a verbal agreement, it’s crucial that every contractor you hire has a properly drafted contractor agreement in place. This contract needs to describe exactly what services the contractor is providing for you and outlay the specific parameters of their relationship with you.


We cannot emphasize this point enough: Well-drafted agreements are the foundation of your protection from misclassification.


3) Implement And Enforce Classification Once you’ve identified and fixed any gaps or areas needing improvement in your IC classification policies and practices, the most important step is to make sure that this criteria is implemented and enforced. These policies and agreements are worthless if they’re not actually being followed.

Keep in mind, the DOL, state agencies, and courts are only concerned with what an IC is doing, not what’s in their contract or job description. If necessary, revise your company’s operating manual and procedures to ensure that the provisions of the agreements and policies are thoroughly documented, implemented, and enforced.


Using contractors can definitely give your company an edge in today’s thriving gig economy, but if you’re not careful, they can also be a serious liability for your business. That’s why you should always consult with a professional. Meet with us today at Truest Law to keep your business safe.

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