Are You Classifying Your Employees Correctly?

Alexandra Levit, People Results
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My organization, the Career Advisory Board, which was established in 2010 by DeVry University, recently completed a research study with MBO Partners on the future of independent work.  We were interested in this topic because we had seen statistics that by 2020, nearly half the American workforce will consist of contract workers.

Although organizations are employing increasing numbers of freelance workers, many are not properly schooled on how to classify these workers – which often leads to trouble down the line.  Fortunately, staffing, recruiting and search firm Wunderland has provided these tips for accurately telling the difference between a full-time employee and a contractor.

Self-Employed

  • Duration of employment is on a per project basis
  • Individual is employed by many companies or other individuals
  • Individual uses their own tools and resources to perform work functions
  • Individual does not receive training from the company
  • Individual does not receive supervision on work hours or requirements
  • Individual is compensated per project and the employer does not withhold taxes
  • Individual is not eligible for benefits

Company-Employed

  • Individual is considered to be a long-term, integral part of the business
  • Individual is employed by one company
  • Individual uses company tools and resources to perform work functions
  • Individual does receive training from the company
  • Individual adheres to company policies and requirements
  • Individual is compensated hourly or via salary and the employer withholds taxes
  • Individual is eligible for benefits

The Misclassification of Workers

According to Wunderland, organizations sometimes think that classifying a full-time employee as a contractor saves them time and eliminates the need to pay taxes and benefits.  Sometimes, they just don’t know better.

So what happens to an organization that misclassifies employees?  Occasionally nothing, but often the IRS finds out.  A misclassified worker can file an anonymous report, or you could arouse attention when you report IC earnings on a 1099 form that look suspiciously like a salary.  Either circumstance could trigger an IRS audit and/or financial penalty, which you certainly do not want.

In addition to IRS problems, misclassification can result in the diminishing of employee trust and company reputation. Employees won’t feel good about working for an organization that doesn’t leverage sound business practices, and if the word were to get out publicly that you aren’t paying employees their due, you could find yourself in the middle of a PR nightmare.  And finally, misclassification could negatively impact culture.

How to Protect Your Organization

It’s best for HR managers to have a strategic policy in place from the get go to prevent the misclassification of workers.  Work with your legal counsel to create an independent contractor hiring procedure and agreement that’s in compliance with IRS regulations, and distribute it to anyone in your company who works with ICs. You might also require that certain or all ICs are hired through staffing firms. In this way, the ICs are actually employees of that staffing firm – reducing the risk that you could be penalized for misclassification.

What’s your process for bringing contractors onboard?  How do you ensure that you’re classifying individuals correctly?

Interested in learning more about onboarding?  Take a look at the Ultimate Guide to Onboarding.

Looking for an onboarding solution?  Take a look at SilkRoad Onboarding!

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