Ensure your company stays compliant when engaging independent contractors. Learn key considerations around behavioral control, financial control, and contractor relationships.
Table of Contents
Question
Which recommendation would you make to a new HR practitioner tasked with developing working arrangements with independent contractors (ICs)?
Answer
Understand local laws regarding employment status. The relationship with an IC can create many compliance issues, so understanding the government agency guidance on determining independent contractor status is critical. In the U.S., for example, IC classification is based on behavioral control, financial control, and the relationship of the parties.
Explanation
When a new HR practitioner is tasked with developing working arrangements with independent contractors (ICs), the most important recommendation is to thoroughly understand the local laws and regulations regarding employment status and contractor classification. Engaging ICs can create significant compliance risks if not handled properly.
The specific criteria for determining whether a worker is an employee or independent contractor varies by jurisdiction. In the United States, for example, IC status is generally assessed based on three key factors:
- Behavioral Control – The extent to which the company controls what work is done and how it is done, such as through training, instructions, or oversight. More company control suggests an employment relationship.
- Financial Control – Considerations include whether the worker has a significant investment in their own business, whether expenses are reimbursed, and the opportunity for profit or loss. More financial independence of the worker points to IC status.
- Relationship of the Parties – Looks at factors like contracts, benefits, permanency of the relationship, and whether the work performed is a key part of the company’s regular business. More integration points to employment.
HR must carefully evaluate prospective ICs in light of the relevant statutory and case law standards. Misclassification can lead to substantial liabilities, such as retroactive pay, tax consequences, and penalties.
Some key steps and best practices for HR include:
- Reviewing and understanding the applicable federal and state tests for IC status
- Auditing existing and proposed contractor relationships for red flags
- Ensuring contracts and policies reflect a non-employment relationship
- Limiting company control over the means and manner of the IC’s work
- Properly issuing 1099s and avoiding provision of benefits
- Monitoring the relationship over time for changes
By proactively understanding and navigating the legal landscape around worker classification, HR practitioners can mitigate risks and build compliant, effective independent contractor arrangements. Staying on top of evolving laws and guidance in this area should be an ongoing priority.
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