Independent Contractor Misclassification: Risks and Best Practices

What is Independent Contractor misclassification?

Contractor misclassification occurs when a company incorrectly classifies an individual as an independent contractor rather than an employee. This can happen for a variety of reasons, including a lack of understanding of the legal distinctions between the two, or a desire to avoid the costs associated with hiring employees. 

What are the risks associated with Independent Contractor misclassification?

There are many risks associated with contractor misclassification. Companies can be held liable for unpaid national, state and local taxes and other benefits that would have been the responsibility of the employee if they had been correctly classified. Additionally, misclassified contractors may be entitled to benefits such as worker’s compensation, medical insurance, vacation, and sick pay, all of which can be costly for a company.

Another risk is the potential for legal action against the company. Misclassified employees may be able to sue for back pay and other damages, and the company may also be subject to penalties from government agencies. This can lead to significant legal fees, financial difficulty and potential damage to the company's reputation.

Best practices companies can adopt to avoid the misclassification of contractors and mitigate risks

To avoid the risks of contractor misclassification, it’s important for companies to understand the legal distinctions between employees and independent contractors. The key differences between the two are:

Distinctions between independent contractors vs employees

Companies should have clear and well-defined agreements in place with their contractors which follow country-specific regulations and adhere to contractor tax requirements. The agreement should outline the terms of their engagement and the rights and responsibilities of both parties. It’s also important to keep accurate and detailed records of contractor relationships, including the compensation and benefits provided.

One method to avoid risk is to conduct independent contractor evaluations, which can help identify potential misclassification issues before they become a problem. This can include assessing the nature of the work being performed, the level of control the company has over the worker, and the worker's level of autonomy.

Another best practice is to consult with employment law attorneys, human resources professionals, and other compliance experts to ensure that the company's contractor classification definitions, policies and procedures are in compliance with all applicable laws and regulations which can differ between countries and states. 

In Conclusion

Employing talent in global markets requires due diligence to avoid misclassification of independent contractors and the associated risks. By working with a reliable provider like Thera who can provide in-country insight into locally compliant employment contracts, you can begin or continue your global expansion without the worry of facing misclassification.

Thera’s all-in-one HR platform allows companies to quickly and compliantly hire a global workforce in more than 135 countries—without the need for establishing local entities or relying on foreign contractors. Click here to find out more about hiring, paying, and managing your remote workforce

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Elizabeth Wellington

Liz writes about business, creativity and making meaningful work. Say hello on Twitter or through her website.