Be Aware of the Hidden Risks Involved with Misclassified SOW Workers


Misclassification of SOW labor is a special kettle of fish. While there is a wealth of information to underscore the risks and consequences of independent contractor (IC) misclassification, there seems to be far less out there on the risks of misclassification of SOW vendors/resources. Let us examine the specific classification pitfalls inherent in leveraging SOW services so as to avoid painful consequences for your operation.

While both ICs and SOWs fall under the umbrella of contract labor, ICs are typically individual contractors, whereas SOWs are almost always companies fielding a team of workers to deliver a project to their client. So, while your contingent workforce management practice may have strong IC classification processes in effect, these may not be applicable to SOWs, leaving you potentially exposed.

The most encountered misconception (and the resultant risk) among contingent workforce managers is the idea that an incorporated SOW vendor provides protection to its customer by virtue of its incorporation. Engaging a SOW vendor with “Inc.” after their brand does not protect an organization from misclassification risk. Typically, SOW vendors are niche staffing firms, consultancies, professional services, and offshoring companies of much smaller size and resources than large workforce vendors. Nevertheless, they are providing what purports to be properly classified labor to benefit the hiring/client company and therein lies the risk. Simply put, contract law (like the articles of incorporation) are not an exemption from labor law.

Another common risk arises from improper classification of subcontractors. If the SOW vendor is not properly paying taxes and/or benefits to its workers or to its subcontracted ICs deployed on your behalf, you could still end up in the crosshairs of a costly misclassification action. A contingent workforce manager cannot simply rest easy under the false assumption that it is the sole responsibility of the SOW vendor to ensure proper tax (payroll tax, unemployment, Social Security and Medicare) and other regulatory guidelines are being observed. In short, the vendor’s problem can indeed become your problem if their personnel are working at your behest.

Straddling both the “incorporation risk” and the “subcontractor classification risk” is the extent to which the small SOW vendor you’re working with is actually operating as a business and not just a loose consortium of ICs sharing a logo and a web domain. It is up to you as the client to confirm that the business entity deploying professional services workers to benefit your company is – in actuality – a business and operates according to all applicable state and federal laws. If the vendor is not providing all the required tax remittance, benefits and protections under the law, the authorities can effectively hold your organization accountable and compel you to classify those resources as your own employees. Then hold you liable for their misclassification.

What becomes clear quite quickly in pondering these risks, is the imperative of proper vetting and due diligence in the acquisition and engagement of SOW vendors. This is certainly not something that is within the wheelhouse of most HR departments or even many contingent workforce managers. That is why operations of all sizes and compositions should consult with nextSource to leverage the years of exposure to SOW vendors and expertise at identifying the necessary prerequisites for engagement in full compliance with all applicable law.

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