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Has your company misclassified its independent contractors?

The larger the company, the more departments it has, which makes it easy to mix up the classifications for employees versus independent contractors.

A misclassification problem could lead to all sorts of business headaches, including wage disputes and questions as to whether there could or should be a change to a contractor’s status.

Understanding the difference

An employee has the right to company benefits, such as overtime pay, a medical and dental plan, vacation and sick leave, unemployment insurance, and a 401K plan, among others. Taxes are also taken out of employee paychecks. In return, the company expects the employee to provide a certain number of hours of work each week and follow whatever company policies are in place. Independent contractors control their own businesses. They are responsible for their own insurance and payment of their own taxes. Their link to the company they serve will either be by verbal or written contract. 

How a problem arises

Independent contractor misclassification is often the result of miscommunication. Here is an example: If the operations manager in charge of a particular department hires an outside contractor to fill a need, neither the legal department nor the human resources department may be aware of it. Information slips through the cracks, and the contractor may find that there is an unaccountable delay in payment for the services he or she has provided. The contractor will eventually receive the payment, but the company took out taxes because they misclassified the contractor as an employee. Stranger things have happened. 

Developing a remedy

An effective way to head off the misclassification dilemma in a large company is to put a gatekeeper in place, someone who will be in charge of approving all department requests to hire independent contractors and keep other interested departments, such as HR, up to date.

Looking ahead

Legal assistance will likely be necessary either to help interpret an existing contract between a company and its independent contractors or to draw up a new one so as to avoid such problems as misclassification in the future.

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