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Independent Contractors - Are They Classified Correctly?

Posted By: David Drake on December 30, 2015

"Get ready for an intense new round in the long-running fight over which workers are independent contractors … The IRS is taking a closer look at companies that use contractors.”BusinessWeek

According to Business Management Daily (BMD), the federal government is taking this issue very seriously.  It predicts that its new crackdown on employee misclassification will reap at least $7 billion in federal revenue (fines from employers) over the next 10 years.

In summary, BMD goes on to say, the U.S. Department of Labor recently released important new interpretative guidelines that narrow the definition of "independent contractor" and make using contractors more legally risky. The DOL's conclusion is simple: "Most workers are employees."

The guidance that BMD is referring to is part of a massive new "Misclassification Initiative” launched by the IRS and U.S. Department of Labor, targeting employers with more audits and closer scrutiny.  Because of this, the IRS has estimated that 80% of workers currently classified as "independent contractors” are actually employees."

Recently it was announced that the Department of Labor has hired an additional 100 new auditors to work on investigations into the misclassification of employees at American companies. But scrutiny is also coming from state agencies as well, meaning that more and more companies are likely to be audited as time goes on.  But it's not too late to protect your company from this costly liability.

Now is the time to make sure your company fully understands and starts complying with both federal and state employment and Affordable Care Act (ACA) regulations.  Employers of all sizes should ensure that every contract employee is classified properly and that the company is following every regulation before it gets audited.  Because once an audit happens, it’s too late and very hefty fines could be incurred.

Each employer should discuss its potential liability with experts that understand all of the changes, such as a compliant attorney or advisor that is up to speed on all pertinent labor laws.

In my opinion, the easiest way to stay out of legal trouble in this area is to make sure that all of your contractors are actually employees of a competent staffing firm that is in full compliance of all employment regulations.  This includes offering a complete benefits package including access to reasonable healthcare to everyone.  That way companies will know and be able to prove that every contractor working for them is actually an employee of the staffing company that simply performs his or her duties under another company's direction.

That is why I stress that in the end it should prove to be far less expensive for your company to start complying with these regulations now, than to hope you don't get audited.

To learn more about these issues and get information on Business Management Daily's upcoming professional webinar, visit