Worker Misclassification: How to Avoid an Employee Audit


The nextSource Blog has done numerous posts on the subject of employee audits and the need for rigorous risk mitigation policies and practices as part of a successful workforce management regime.  Today’s post will zero in on some of the steps an organization can take to proactively avoid employee audits.  As is often said, an ounce of prevention is worth a pound of the cure.  So here’s a small cap of preventative efforts to be undertaken so as to avoid potential million-dollar curative actions.

Did you know the IRS is planning to release the data of a three-year compliance study in early 2017?  One of the objectives of the study is to determine which industries exhibit higher incidences of noncompliance when it comes to worker misclassification.  To prepare, in advance of the release of this study, or in the event your company falls into the higher risk category, we offer the following strategies to avoid an audit:

Establish baseline requirements for contracts to engage outside workers

  • Articulate and enforce all insurance requirements
  • Codify and enforce background and onboarding requirements
  • Define and execute workforce classification requirements
  • Have a written policy for determining the difference between employees and Independent Contractors
  • Conduct regularly scheduled internal audits to review your workforce

For Employees

  • Verify proper exemption classification
  • Be ready for the December 1st changes impacting the new salary level required for time and half

For Contingent Workers

  • Engaging temporary workers through staffing suppliers which provides the most protection
  • Ensure all contracts are up to date and current
  • Verify contracts require that the staffing companies have workers’ compensation and that those insurances are up to date
  • As the staffing agency is the employer of these workers they are required to determine the exemption status of the workers and invoice your organization accordingly
  • Verify that workers are being offered benefits compliant with the Affordable Care Act (Obamacare) and ensure your organization is properly reporting to the IRS regarding these workers

For Independent Contractors

  • Determine your independent contractor population by reviewing your AP files to identify workers being paid directly
  • Identify contracts and statements of work (SOW) governing the work relationship
  • Determine if all workers are properly classified as an Independent Contractor and reclassify those found to be erroneously classified. (This can be done by verifying that the work being completed is not under your organization’s daily control, and that IC worker has several other clients besides your organization)

For Outsourced or Statement of Work (SOW) Providers

These workers are often engaged in large groups and are frequently employees of companies engaged to complete work for an organization such as cafeteria staff or security guards.  Outsourced project workers and SOW’s can even be large firms like IBM, Accenture or Oracle to which whole projects are farmed out. Much like the temporary worker population, there is protection afforded by ensuring the organization has robust, well-defined contracts with these providers.

Ensure that the contracts are up to date with insurance requirements and that there is language clearly stipulating that providers are in control of their workers and responsible for associated taxes and liabilities.

If all of this sounds like too much, identify a partner like nextSource which specializes in these services for their clients.  A trusted partner like nextSource can accomplish all of these items for you and even take on the responsibility for representing you in the event of an audit or indemnify you against any damages or penalties.

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