There has been a steady increase in HR-related risk ever since the 1990s. The whirlwind of change in the nature of employment since the pandemic, however, has added massively to both risk and employment-related compliance concerns.
This is due, in part, to the dramatic changes taking place in how we employ people. Demand for new workstyles and a tight talent pool have increased the use of independent contractors, which introduce new challenges for maintaining compliance. Confusion abounds with regard to employee classification, state-by-state laws, IRS and Department of Labor enforcement, and independent contractor taxation and reporting. This confusion increases risk levels for businesses across the country and the globe.
As planning for 2023 begins, it benefits executives to take new employee definitions seriously and to analyze how partnerships can benefit your organization’s employee risk and compliance programs.
Independent Contractors: The Blurry Classification Landscape
Companies fall out of compliance most if they use independent contractors or ICs. The correct categorization of workers as part-time or full-time employees versus contractors is not determined by a single factor, such as whether you are required to work on-site or provide your own laptop. Instead, there is a preponderance of answers to be sought out, and layers of evidence to wade through.
In both the U.S. and Canada, sorting through qualifications for ICs tops the risk list for employment errors. That occurs for two reasons: the rules are changing, and the descriptions are confusing. The IRS lists 20 factors of employment to consider alone, and each of the various states’ employment categorizations can confuse the most diligent human resources executive. And in Canada, you can have employees, independent contractors, and even dependent contractors.
It is important that proper classifications are addressed not just for your country’s system, but also state-by-state, and province-by-province. No one factor determines the correct classification status, rather it’s the prevalence of the answers and evidence.
Increasingly, corporations have turned to managed services programs (MSPs) to outsource their contingent workforce program and ensure compliance. The expertise they offer can help streamline the complexities that stem from increased use of ICs, and even help by outsourcing the entire IC process. Most companies reading this article already have a MSP partner.
These MSP providers, in turn, work with outsourced Agent of Record (AOR) service providers for specific onboarding and offboarding functions as well as both national and global compliance assurance.
An Agent of Record is utilized when clients engage with independent contractors. AOR services support both the IC and the MSP’s client from start to finish. In some regions, this is referred to as “independent contractor compliance,” and services can include:
- Independent contractor classification
- Documentation and pre-engagement management
- Audit defense file maintenance
- Contract administration
- Invoicing and payments
- Ongoing compliance
- Risk mitigation and indemnification
AORs work directly with the MSP to provide these services on the corporation’s behalf, increasing the likelihood of your company remaining in compliance.
Of Note for 2023 Planning
As we’ve noted, compliance can be tricky, especially when independent contractors are involved. It’s no longer a binary situation where you are either an employee or not an employee – the lines have become blurred and nuance is the watchword.
As you begin your planning, consider the following:
- Intellectual Property Transfer: This is a complex point of discussion because intellectual property sits on both sides of the table: the employer’s and the IC’s. Because ICs occupy such a special and often high-level role in the organization, they may receive access to corporate intelligence. The shoe is often on the other foot as well, as the wealth of expertise the IC brings to the engagement means they also bring their own intellectual property, which is not always consigned to the company. It becomes important, then, to create a process and build an infrastructure that secures intellectual property for its owner.
- Contractor Bill of Rights/Unionization: ICs are slowly working toward securing a kind of “bill of rights” to gain access to the same rights employees have. And as conversations about unionization are again on the rise, the movement is likely to pick up speed. This will undoubtedly have a significant impact on corporations and is bound to increase risk.
- Ongoing Talent Shortage: As we continue the drought of available workers, it behooves companies to expand their talent search outside of the U.S. For those who have engaged an AOR, there is security in expanding your search area to include workers in other geographies, because the AOR will assure you remain compliant.
Creating solutions that help you plan ahead to remain in compliance can come down to selecting the right AOR partner. Failure to plan can result in non-compliance, which leads to fines and penalties…and often worse. Connect with your MSP provider or People2.0 to learn more about how using an Agent of Record can ensure your company remains compliant when engaging independent contractors.