What Is Contractor Compliance?

The use of contract labor by businesses and organizations of all sizes continues to grow by leaps and bounds. Entire app-driven industries have been helping to drive the popularity of contract labor—as has the decentralization of the traditional workplace fueled by COVID and the downsizing of brick and mortar offices. However, as more and more organizations avail themselves of the significant benefits of contract labor, awareness surrounding risk mitigation becomes a more pressing and critical concern.

There are increasing numbers of service providers entering the field offering “contractor compliance” services. At the same time, many internal workforce management operations are developing internal processes aimed at managing contractor compliance. Whether you’re inclined to build (or buy) contractor compliance functionality, here’s a little bit by way of definition, explaining what contractor compliance is and what is involved in standing up a process.

Understanding Contractor Compliance

The primary element of contractor compliance involves developing a formal process for independent contractor classification—something we’ve written about at length in earlier posts on the nextSource blog.  This link contains information culled from the IRS, which explains both the 20-point list as well as the more recent “1099 versus W-2” classification guidelines. These focus on three main factors that provide evidence of the degree of control and independence:

1. Behavioral. Does the company control or have the right to control what the worker does and how the worker does their job?
2. Financial. Are the business aspects of the worker’s job controlled by the payer (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?
3. Type of Relationship. Are there written contracts or employee type benefits (e.g. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

nextSource has substantial experience and resources available to help organizations better understand and execute on contractor classification policies. IC classification strategy is a key component to ensuring contractor compliance.

The other function of contractor compliance addresses the “contract” in contractor compliance. Contract compliance is the process of ensuring that the contracts governing IC/employer relations are properly drafted and protect equally: the rights of the contractor and the legal standing of the hiring authority. It is essentially a contract management strategy that ensures conformity with regulations and performance of obligations within the contract agreement. It also deals with putting controls and metrics in place to ensure all contract parties are following through as they should, in a legal manner. 

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For more information or assistance in developing a contractor compliance strategy and practice within your organization, reach out to nextSource experts for guidance and support.