As a brief refresher, worker misclassification is generally “defined” as a worker who is paid on 1099/independent contractor basis (e.g., no taxes withheld) who is, in fact, subject to the same direction and control as a regular W-2 employee. The government takes notice of this misclassification because, among other things, employers are required by law to withhold federal income tax from employees’ wages, while an IC is responsible for remitting their own income tax. If an IC is determined to be an employee of the company engaged with them, the IRS and similar agencies go after the employer for payment of missed taxes and penalties.
No clear definition for an independent contractor
You may have noticed the quotes around the word “defined.” This is because there is no single or clear definition of what an independent contractor (IC) is at the present time. All that may change soon.
Currently pending before Congress is new legislation that attempts to clarify the definition of an IC under the Internal Revenue Code — https://www.congress.gov/bill/115th-congress/senate-bill/1549/text. The Act, named the New Economy Works to Guarantee Independence and Growth Act of 2017, or the NEW GIG Act of 2017, sets forth a series of requirements and factors, that if met, would establish the worker as an IC for tax purposes. Most of the test elements revolve around factors well-known to those in the contingent workforce space, such as nature of the working relationship, location of services, and the presence of a written contract. The Act further seeks to create safe harbors for employers that fail to satisfy requirements and includes provisions that address the emerging gig economy.
While there was initially a good deal of buzz about the Act, those familiar with the history of similar attempts to define ICs under federal law may feel a sense of skepticism. As a pattern, proposed legislative attempts to create a specific classification for ICs have traditionally died before becoming law. The Act, currently in the Committee for Finance, may or may not suffer the same fate as its predecessors. Regardless, it is important for employers to remain vigilant in their handling of workers that they classify as an IC. Even if the bill does become a law, there may remain questions over how to apply it and whether loopholes will emerge that create confusion in those companies seeking to benefit from it.
Companies that wish to continue to classify their workers as ICs should diligently evaluate their business relationships to ensure the barest level of direction and control is present and that their ICs have an independent business set up, whether as a sole proprietor, or under a corporate form.
Businesses must do this when working with an independent contractor
- True IC relationships are peer to peer, meaning that you partner with a contractor because that contractor possesses the know how to perform the services without your instructions and…
- It is never too late to change policies and procedures to remove or minimize the control factor over your workforce. If companies create strong contingent workforce programs or partner with third-party specialists who have expertise in the IC space, the passage or failure of the Act or similar legislation may be irrelevant, as the risk of worker misclassification will be properly mitigated.
Take action now
Regardless of the definition of an independent contractor, or pending changes in state and federal employment laws, best-in-class organizations are actively taking steps to mitigate risk with their contingent workforces.
Working with an Independent Contractor Compliance and Engagement expert, like TalentWave, can be a very smart bet, helping your organization build and manage a comprehensive IC engagement and risk mitigation program. Learn more about TalentWave or Click here to contact TalentWave directly.