How to Avoid a Workforce Audit: Lessons in Worker Classification Compliance


The workforce management experts at nextSource are called on thousands of times every year by organizations of all sizes and compositions to answer critical questions about workforce management. One of the most commonly asked questions they hear is, “how can my organization avoid a worker classification audit?” While the answer to this question may vary depending on the nature of the workforce in question, there are definitely best compliance practices that organizations should adhere to if they want to mitigate the risk involved in contract worker engagement. Here are some of the most useful and current audit events/examples and what all companies can do to avoid audits (and minimize the pain if they are audited).

From a fifty-thousand-foot perspective, the best thing any organization can do is to provide consistent audit and upfront classification procedures for all incoming contract workers. Having a detailed written policy enunciating the organization’s policies and compliance protocols shows both the worker and the authorities that the organization is serious about its responsibility when it comes to worker classification compliance. To this end, always produce and maintain a billing services agreement (contract) and a Statement of Work (SOW) for contractors that includes details such as engagement start and end dates and clearly-defined lists of the work that is to be completed for the project. Other key info to include in this documentation is the agreed upon payrate.

A corollary to the abovementioned documentation is the creation of an easily accessible “defense file” to be produced in the event of an audit. This file should have all of the qualifying documents that assisted with your classification review. This practice demonstrates to authorities that the organization has a policy in effect for worker classification compliance and has taken the steps needed to prove the organization has been diligent in its maintenance and execution.

What are some of the policies that should be included in the documentation? Here are a few best practices for audit avoidance that may be useful in producing these documents for your own workforce management program:

  • Never switch a full-time W2 worker in the same position to an Independent Contractor in the same calendar year. This is a huge red flag to auditors that classification may be “flexible” in ways it shouldn’t be.
  • Ensure that there is a set entry point through which IC’s and contract labor are brought on board. Someone needs to own the on-boarding process (HR, Procurement, Legal) and it must be replicable and uniformly applied by whichever department assumes ownership of these tasks.
  • Never engage a worker who is sub-contracting through several companies to work with your organization. This contractor is so far removed from the procurement ladder that they may not have any of the proper documentation or insurance standards to be an independent contractor or W2 contractor.  
  • Always engage in some type of bi-annual audit of existing contractors to ensure that their status has not changed. Utilize your same vetting and classification procedure to ensure consistency.

These are only a few of the best practices an organization might seek to implement as a means of mitigating worker classification risk. For more detailed suggestions relevant to your specific business challenges, ask your nextSource expert for assistance in producing a worker classification compliance program that adequately protects your organization.

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