America’s Trickiest Laws, Vol. II – Contractor-Employee Classification

The use of contingent workers has become a key component of many companies' human capital management.  Independent contractors minimize headcount, maximize flexibility and often allow a company to use more specialists than its size would ordinarily permit.


But, the era of contingent staffing has created a tricky challenge.  Federal and state governments have taken a strong interest in the classification of workers as contractors versus employees.  In a nutshell, a contractor classification costs the government revenue.  And the misclassification of employees as contractors has reportedly cost the government billions of dollars.


Unfortunately for business, getting the classification right is no easy task. The 11 factor test of the IRS is helpful but it is neither clear cut nor weighted.  On top of this, the states have different, fluid standards of their own.  The costs of getting it wrong are significant, from fines to the possibility of personal criminal liability for company officers.


The good news is that as attention to classification issues increases, so have the resources for helping to address the challenges.  Experienced commentators have taken a renewed interest in the topic, publishing useful guides to dealing with contractor management.  Third party vendors have emerged that will provide objective contractor testing and employer of record services to insulate companies from many of the risks of using contractors.  One that I have personally used with great satisfaction is MBO Enterprise Solutions, which recently published a case study on its success at Levi Strauss.


Contingent staff have become a critical tool in achieving big goals in corporate America.  Being aware of the challenges that come with contractor classification is important to running a successful workforce solution.