Risk Mitigation Services for Dummies: A Closer Look at Compliance


With apologies to the publishers of the informative book series, we’re going to “borrow” the title idea of the popular “For Dummies” instruction publications to unpack the dense and often confusing subject of compliance risk mitigation. 

In the world of contingent workforce management, “compliance” refers to two main topics: the proper regulatory classification of workers and arriving at the legally correct exemption status of said workers.  Here’s what you need to know in the basic sense about each.

Worker classification refers to ensuring every worker active within an organization has been properly classified and identified according to the two categories of employment types currently recognized by the IRS, Department of Labor and state agencies governing employment.  These two broad classifications are simply: Employee and Independent Contractor or ‘IC’.  There are significant differences in the ways employees and IC’s are compensated and, more importantly, taxed.  The nature of the work and how the worker is engaged is examined to determine whether a resource is an employee or an IC, and the IRS provides a detailed checklist to help organizations make the proper determination.  The nextSource Blog published a solid primer on IC classification here to help risk mitigation.

Many companies will also produce a formal worker classification policy and enforce it in their operations.  So, simply put, worker classification is the execution and validation of these two classification types and compliance in this regard indicates that a company is compliant for all of their workers.

The other broad area of compliance focuses on each workers’ exemption status, which impacts the pay being earned by a worker, governs whether or not workers must be paid for overtime. Exemption statuses are defined by the Fair Labor Standards Act (FLSA) and various state laws. It is critical to realize that large changes to this regulation go into effect December 1, 2016 as was outlined in an earlier blog post here.  Exemption status is determined by compensation level and job duties. The two exemption statuses are referred to as “Exempt” and “Non-exempt”.  The explanation of new exempt/non-exempt differentiation under the FLSA was blogged about here.  But, to recap, employees with “exempt” status are exempt from the protections of the wage and hour laws of their state, or of the FLSA.  Exempt employees are not subject to the minimum wage and overtime requirements of the FLSA. These workers are often those considered to be “white collar” and most often the workers in management roles or with decision-making authority.  Conversely, non-exempt employees are subject to minimum wage requirements and overtime for hours worked in excess of 40-hours per week (or 8 hours per day in California).

Risk for both of these categories is defined as “the risk that a governmental agency (the IRS, Department of Labor, or state agency) will disagree with an organization’s classification of the worker (either as employee or Independent Contractor or as an exempt or nonexempt worker).”  Furthermore, the risk involves the potential fines and damages that could be assessed upon the organization if the workforce was found to be non-compliant in any way.  There are numerous examples of high-profile companies recently found in violation of one or more of these regulations.  Uber, FedEx, ViaSource Solutions, Inc. and others have been in the news lately for costly errors stemming from misclassification.

Partnering with a firm such as nextSource – who can review your existing workforce and provide risk mitigation strategies to your organization – is a great way of lowering your risks and saving your organization from hefty fines.

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