Independent contractor vs. employee: Understanding classification for compliance

As the gig economy continues to expand so has the shift in traditional working models. Today’s workforce is more empowered than ever, and they are prioritizing flexibility and freedom. The question for businesses of implementing an independent contractor vs. employee, or a hybrid of both, business model is certainly not new, but it is significant in attracting and retaining quality people to the organization. Transportation companies have long utilized independent contractors to fill in critical gaps when demand fluctuates and when workers demand flexibility, and lately many other industries are integrating more of these non-traditional work relationships, allowing companies to better meet those challenges.  

However, independent contractor status is not just a label. Creating and maintaining a quality independent contractor program that attracts and retains quality people and meets heavy state and federal agency enforcement takes strong commitment throughout every inch of your business.  

So how do you know if you are classifying independent contractors correctly? 

Independent Contractor vs. Employee 

Several key factors can be used to distinguish the difference between the classification types. 

Other factors and helpful questions to consider for independent contractor classification include: 

BEHAVIOR : Does the company dictate control? 
Independent contractors are not subject to control or guidance. The independent contractor decides how to provide the contracted services and determines their hours of work, work site and equipment. 

FINANCIAL : Are the business aspects controlled by the company?
Independent contractors provide their own training and tools and are responsible for their own costs and expenses. 

RELATIONSHIP TYPE : How is the relationship governed and are benefits provided?
The relationship with the independent contractor is not an employment relationship, rather a contractual arrangement exists. Independent contractors perform a specific project, are paid in accordance with the agreement, do not receive benefits beyond their financial compensation, and are not eligible for unemployment or workers’ compensation. 

While these factors are high-level guidelines, there are still quite a few grey areas that can be tricky to navigate without implementing independent contractor management best practices. No one factor stands alone in making this determination. It’s vital to look at the entire relationship and consider the degree or extent of the company’s right to direct and control the independent contractor’s services. Look at the operational decisions and economic decisions you and your independent contractors make. 

Maintain an arm’s length relationship to help mitigate risk 

Adhering to best practices regarding classification and verifying documentation to stay current is crucial to maintain independence in your independent contractor program. Companies conducting business with independent contractors need to be prepared for agency investigations and have the required documentation to support their position of ‘an arm’s length relationship.’ 

Here are some additional best practices to help ensure compliance is maintained: 

• Develop a company-wide independent contractor policy to ensure a distinct and separate relationship 
• Verify your independent contractors have an established business entity with a business name and EIN to make invoiced payments 
• Negotiate rates for service, agreed upon by both parties and outlined in a signed contract with a detailed statement of work and a non-renewable contract end date 

Trying to achieve compliance without a systematic approach can put your business at risk. One way to reduce this risk is to leverage a technology and services provider like Openforce. Openforce has proven streamlined onboarding workflows, established documentation practices to demonstrate compliance, and processed billions in on-time settlement for tens of thousands of independent contractors. Openforce’s technology solutions integrates your best practices with custom streamlined compliance workflows specific to your business needs, then designs a complete solution to automate your current process. 

To learn more about how Openforce can help your business maintain compliance in classifying your workforce, contact us today.