Independent Contractor Compliance: What to Expect During an Audit or Investigation


So your organization has been notified by either the IRS, DOL or State Agency of their intent to initiate an investigation into your worker classification compliance. Ideally, your organization should have processes and practices in place to minimize the risk exposure to classification challenges. Yet, they still occur. Although different agencies call them by different names – “audits” are conducted by the Internal Revenue service while “investigations” are conducted by the US Department of Labor – the same root causes and reactions apply. Here’s what to expect during an audit should you be forced to endure one.

First, let’s examine the causes. Whatever triggered the audit or investigation may or may not be made known to you once you’ve been notified. Complaints received by the DOL are typically confidential, and whether a complaint even was made may never be disclosed. Some common examples may include complaints lodged by former or current employee to US DOL or State agency, unemployment claims filed against you, or Independent contractors’ tax returns.

Whatever the reason behind your audit, the Investigation or audit process will typically involve the following actions. First, a review of your records. The audit notification will ask that you prepare and make available documentation of the company’s annual dollar volume of business transactions. It may also ask for your organization’s involvement in interstate commerce, work on government contracts and an examination of payroll and time records, and/or paid invoices. You may also be required to provide any contractual language that may have been signed between your organization and your Independent contractors.

Next, the audit will likely perform interviews with your employees in private. The purpose of these interviews is to verify the company’s payroll, timekeeping records and/or invoices. These interviews are also used to identify workers’ particular duties and to ascertain a more complete understanding of each worker’s particular classification. The interviews are normally conducted on the employer’s premises. In some instances, present and former employees may be interviewed at their homes or by mail or telephone.

When the audit or investigation is completed, the company will receive a final recommendation from the investigating agency. Next the investigation will ask to meet with resources within the organization who have authority to reach decisions and commit to implementing corrective actions if violations have occurred. The resources typically summoned in this regard are Chief Human Resources officers, Chief People officers, or Chief Operating officers. The investigator will review what violations have occurred and, if so, what they are and how to correct them. The investigator will also dictate what fines or penalties will be levied against the organization. Some examples of typical fines can be reviewed at the nextSource Online Worker Misclassification Risk Calculator . The organization will likely also be compelled to pay back wages and if back wages are owed, it is likely that the organization will have to provide proof of payment and sign off by the underpaid resource. All misclassified employees will be subject to immediate reclassification. Some audits reccommend that the organization engage in increased education and draft stronger, compliant contract language. The investigator or the auditor will likely ask the company to come up with a plan to address all these concerns, including timelines, and that the company complete periodic check-ins with the agencies to ensure new compliance practices are being adhered to.

The better way to mitigate risk and avoid this whole problematic process is to engage a firm, such as nextSource, with the expertise to complete employment classification reviews for existing resources, while enacting compliant policies to address robust mitigation plans with an emphasis on education for key stakeholders.

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