With the IRS and many states looking more closely at independent contractor arrangements, it is important that your company be in contractor compliance. While the IRS has a list of twenty questions that it uses to determine if someone is an independent contractor, no one factor allows for a clear determination of compliance, and there are many shades of grey. In addition, situations can change rapidly, and, as an employer, it can be difficult to stay up to date on the status of everyone working within your company.

There are three ways to maintain your compliance, and a successful contract workforce management strategy may employ all or some of these: having only W-2 employees, having a rigorous standard of contractor compliance that all contractors must meet, and/or using a safe intermediary. There are complications to each one, of course. If your employee is truly an independent contractor, and meets all of the guidelines under the 20 questions provided by the IRS, then that individual is serving multiple clients and truly operating as an independent business entity; therefore, employing them as a W-2 worker does not make business sense for either party. Maintaining a rigorous standard sounds good, in theory, but in practice, it creates a great deal of additional work for the Human Resources or Procurement departments responsible for contingent workforce management. Using an intermediary is a method used by many companies to prevent the headaches of independent contractors. When a company uses an intermediary, the independent contractor is employed through the intermediary, who bills your company for services. They take care of the employment paperwork and details of contractor compliance.

When choosing an intermediary, there are several things that you should consider. The first is the fee. The fee structure varies among companies from 5% to 60%. It is also important to know exactly what is included in the services provided by the intermediary. Will your contractor be covered by the intermediaries insurance? How much contact will you have with the intermediary? Will your contractor work for other companies? Is there co employment risk involved in the proposed structure? These are all questions that should be answered before entering into an agreement with an intermediary.

Engaging talent on a contract basis may sound like a great way to reduce costs, but the consequences of improperly classifying employees as contractors should give you pause. The IRS and a multitude of other regulatory agencies are currently cracking down on improper classification of employees as contractors, and the consequences are increasing astronomically. Make sure your workforce management practices are in compliance and that you manage your contractor risks, by making sure actual employees are engaged as W-2s, maintaining true compliance on legitimate small business contractors, and/or by using an intermediary to more safely engage workers as contractors.

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