What’s worker misclassification, and how do you prevent it?

Independent contractors have become increasingly important to businesses of all kinds, and many cannot operate effectively without them.

However, you don’t want to make the mistake of misclassifying an employee as an independent contractor. That can end up leading to an audit and – quite easily – fines and other problems with the Internal Revenue Service.

How do you know if someone is an employee or an independent contractor?

The differences between the two can be hard to suss out, even for an experienced business operation. It doesn’t help that state and federal laws don’t always agree. In general, you can differentiate an employee from an independent contractor using three basic questions:

1. How much behavioral control do you exert over the worker? Independent contractors typically bring their own skills to the job, and they generally organize their own work and control how, where and when it happens. If you exert firm control over all of these things, the worker is likely an employee.
2. What’s the relationship between the two parties? A written contract that clearly defines the worker’s classification as an independent contractor (along with other important details of their service, such as timelines and payment details) can help protect you in the case of an audit. This may even specify that you are the contractor’s client.
3. How much financial control do you have over the worker? Independent contractors typically supply their own tools (including computers), while workers do not. Workers may or may not be allowed to take second jobs around their primary schedule, but independent contractors are typically running their own business, so they’re free to take on other clients or jobs as they see fit and adjust their schedules accordingly.

When you try to parse out the difference between a worker and an independent contractor, mistakes can be costly (if not outright disastrous). Having regular legal guidance can help you set policies in place that will protect your company and eliminate a lot of confusion.