EOR: Avoid Misclassification and Penalties


The last recession and its impact on hiring budgets fueled a significant increase in the usage of independent contractors by companies seeking to save on labor costs. With the recession squarely in the rear view mirror and employment numbers showing consistent improvement, we might expect to see the ranks of those working as ICs begin to thin. Yet, the popularity of the IC structure among both employers and workers shows no signs of abating. What is changing though is a stepped up enforcement of misclassification by the IRS resulting in significant penalties for those companies found to have misclassified; either by accident or intentionally.

As we’ve written about before in this blog, the so-called “gig economy” as typified by Uber and others like it, has been built atop the usage of ICs. Gig economy companies embrace the use of independent contractors because it provides the flexibility to react quickly to market demands and drives cost-savings by reducing or even eliminating the cost of providing benefits. However, as numerous high-profile litigations suggest, there are conflicting ideas about what truly constitutes an IC. The potential downside for companies leveraging ICs improperly can be significant.

Enter the Employer of Record service, or EOR. EORs function as the conduit between the client and IC workers. The IC pays the EOR a modest fee in exchange for all the benefits associated with traditional W2 employment – easier tax filing, benefits packages, tax-advantaged savings programs, etc. It is a win for all concerned. Companies avoid risky IC classification issues and can rest easily knowing contractors in their employ are receiving solid benefits and won’t likely be filing any grievance lawsuits. The workers are able to continue to enjoy the flexibility associated with IC work in terms of work hours, locations and methods.

Perhaps the most important benefit provided by the use of an EOR is the peace of mind that comes with knowing a good provider is keeping abreast of changes to this quickly evolving facet of workforce management. The gig economy and other economic trends are forcing regulatory bodies to continuously reassess their positions on worker classification. For example, the “Degree of Control” standard for determining IC classification may no longer be the best gauge for determining who is an employee and who is a contractor. As recently as this week, the Department of Labor issued new guidance on IC classification and “joint-employment” as part of the Fair Labor Standards Act (FLSA). According to legal firm Sullivan and Cromwell, the DOL’s “Non-binding administrative interpretation takes position that joint-employer liability under the Fair Labor Standards Act should be based on the ‘economic realities’ of the working relationship and not the traditional degree of control test”. Reputable EOR agencies protect their businesses by being on top of up-to-the-minute changes in the regulatory environment. Trying to stay ahead of evolving practices would be a full-time role for someone in an internal HR position. Partnering with reputable EOR, a company can leverage the benefits of contractors while avoiding the cost and effort associated with their proper usage.

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