Independent Contractor Laws: How MSP/VMS Solutions Drive Compliance


Whether using them as a standalone solution or in conjunction with an MSP, a VMS makes the management of contingent workers much smoother by driving high levels of compliance with worker classification laws and regulations. Let’s examine how these solutions – Managed Service Providers and Vendor Management Systems— help protect organizations from IC-related risks.

There are numerous protections provided by a VMS and MSP combo for the organization using Independent Contractors (IC’s). Within the operating arm of an MSP, the services provided typically include the vetting of ICs to ensure they’re compliant with current laws. The MSP, using relevant data captured in the VMS often provides valuable education to managers. Having managers informed about the role of ICs within the operation is a critical factor in ensuring compliance to laws and mitigating the risks.

nextSource has deployed a technology component to foster easy adoption of IC classification processes by workers, and takes a proactive consultative approach to shepherding client resources through these processes as well. Client managers are provided education in key IC classification best practices. The training and documentation provided begins with an inventory of the risks associated with engaging independent contractors. Managers are schooled on the detailed requirements of a business-to-business relationship including how to attain mutual agreement regarding documentation for outlining the work.

For example, client managers are taught to recognize the key indicators of true IC status, such as the fact that the hiring organization must not be in control of an IC’s workday. The hiring organization may provide initial instruction/direction on the nature of the work; however, the sequence of work performed, work location and hours are all under the purview of the IC and must never be dictated by the hiring company. Client managers are also taught to ensure ICs can legitimately demonstrate the existence of other clients, as it disqualifies a contractor for IC classification if they are only working on one client account. The MSP can help establish means for determining such factors and storing the documentation within the VMS.

After the educational portion has been provided, nextSource then interviews the hiring manager using standard questions regarding the engagement of the proposed IC worker. Immediately following this interview with the client manager, the IC candidate is directed to a web portal where they undergo similar questioning aimed at accurate classification. Overall, this worker evaluation process takes less than four days to complete. Upon hiring, the MSP also assumes responsibility for paying the worker, thereby mitigating the risk that the ICs are paid from the same payroll account as other, non-IC employees. This additional level of protection further distances the organization from any employment obligation.

The automation and standardization of business rules enabled by a VMS provides many benefits.  Chief among them is visibility. Visibility to project start and end dates, alignment of work to the SOW defining the scope of services and many other critical components are all easily recorded and audited in the VMS. The VMS is great for providing automated reminders for compliance activities such as re-evaluation of engagements when there are any extensions or changes in scope or locations. VMS tools also provide additional protections in the form of an additional layer of process wherein relevant and appropriate documentation is stored and recorded within a discrete database, maintained by a third party (the MSP). The overall engagement of a third party tool such as a VMS and third party MSP organization such as nextSource greatly assists clients in their education and overall protection in dealing with independent contractors. As a service, nextSource offers indemnification for any misclassification, which means we not only represent our clients in the event of an audit or investigation, but we also provide financial recompense for any fines or penalties that may be levied.

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