Employee vs. Independent Contractor: Why It’s Your Challenge as CEO

The U.S. Government Accountability Office reported in April 2015 that more than 40% of the workforce is now comprised of contingent workers. Knowing how your business is managing the issue of employee vs. independent contractor is vital to your bottom line. This knowledge is increasingly essential since the Obama administration—in an effort to retrieve tax revenue and ensure proper worker rights—allocated millions of dollars, hired a sizeable task force and engaged the help of state governments to go after companies not playing by the rules.

To avoid the major consequences of misclassification, including back payment of taxes, providing benefits retroactively (vacation pay, stock options and 401(k) contributions), and paying stiff penalties, here are 3 steps you can take immediately:

1. Initiate a review of your corporate compliance structure. How many independent contractors are working for you today? What are they doing for you? If you’re not sure of the numbers and facts, it’s important for you to find out—right now. Getting a pulse on the amount of risk that exists by conducting a census is one of the easiest steps to take. Best-case scenario—your exposure is minimal. Worst-case scenario—you find out there’s more risk than you’re comfortable with, but are armed with the information needed to reduce it. Keep in mind that hefty tax penalties for misclassification can be assessed not only against your company but also against you and your fellow officers, should you be found liable.

2. Be mindful of what other companies got wrong. Even Microsoft wasn’t immune to a misclassification lawsuit—Vizcaino vs. Microsoft, which cost the company $97 million to settle—after it failed to treat its independent contractors appropriately. A similar lawsuit befell FedEx earlier this year. The big lessons are to allow your independent contractor workforce an appropriate degree of independence and not integrate them so much with your employees that there is little distinction between the two. Also, monitor your potential level of exposure: larger companies are easier targets for government audits, and having a larger independent workforce poses a higher risk for class-action lawsuits.

3. Harness internal and external resources to ensure compliance.If you haven’t done so already, schedule a meeting with your HR and legal directors. Work collaboratively to determine your risk tolerance and then initiate a thorough analysis of your company’s documentation and classification practices. Ensure that your HR department has access to the legal experts it may need to accomplish this task, as proper classification of your workers can be extremely challenging. Consider engaging the services of a firm with expertise in worker classification.

As the contingent workforce continues to grow, the challenge will not simply exist, it will be compounded. Following the 3 steps outlined above will lay the foundation to avoid the long-term repercussions of being found non-compliant. As Chief Everything Officer, you are ultimately responsible for everything—including ensuring all workers in your company are properly classified.