Misclassification of workers as independent contractors is considered a significant risk for many companies, to the extent many indicate in SIA’s annual buyer surveys their plans to limit the use of such workers. However, some of the best talent in the marketplace are drawn to independent work. In fact, estimates suggest 60 to 70 million people are operating as independent contractors in some form, full or part time, in the US marketplace today.
Faced with not being able to avoid their use, companies turn to other measures to mitigate their misclassification risk and potential financial jeopardy. Enter the concept of control. Because how much control a company exercises over a worker becomes a factor in the determination of worker engagement status, limiting control of ICs is a common measure to mitigate those risks. Indeed, as much as possible, IC engagements should be treated as a traditional vendor or supplier. This is especially true if the IC talent is wrapped in an SOW arrangement — buy the service and focus on the engagement result, not controlling how it is executed.
But do other elements of risk mitigation count as controlling the worker and thereby increase misclassification risk — conducting background checks, for example? Some might consider it fairly controlling to have that level of professional and personal visibility into someone you are looking to engage in a work-related situation. Does conducting such checks attract attention from regulators interested in rooting out IC engagement misclassification? If background checks are conducted in a compliant manner, there is no additional misclassification risk. A common sense approach along with sound legal counsel should dissipate such concerns. In fact, there are some approaches that can be damaging to the contignent workfrce program in the long run.
Reactionary measures. There are a lot of false interpretations and bad management practices that are developed in the name of risk mitigation. Some organizations take extreme risk mitigation positions when concerning independent contractor talent and deploy policies that might feel effective but do not add any real misclassification risk protection value — for example, instituting strict tenure limits and color-coded badges shortly after the infamous Microsoft ruling. In fact, some of the reactionary measures can have a negative effect because this “risk-less/over-medicated” approach deprives the organization of reasonable, safe access to some really brilliant IC talent in the marketplace — clearly a competitive disadvantage.
Control is just one element used in determining worker classification, and the final determination depends on a number of factors, such as jurisdiction, the structure of the actual engagement and what test, regulation or statute is being applied. The good news is an effective compliance map can be adopted by incorporating some of the key elements of a state’s ABC test or, at the federal level, the Fair Labor Standards Act’s economic reality test. The idea here is to incorporate the definition standards that might be used by government agencies or used in judicial proceedings to define if an engaged talent is an independent contractor or not.
Back to background checks. Two considerations come to mind. The first consideration, as previously stated, is to treat ICs as you would a traditional vendor and conduct some of the background checks you would normally execute for a supplier. Background check execution has its own strategy application depending on the type of work being conducted and risk being managed. Execute these accordingly.
The second consideration is how established IC classification tests in the marketplace treat the execution of background checks and/or companies possessing that detailed visibility of professional and personal information for such workers. The legal classification tests in the marketplace do not focus on some perceived control issue when executing a background check for ICs. In fact, neither state-level ABC tests, the Darden Test nor the FLSA’s economic reality test reflect any concerns with conducting a background check on ICs before executing an engagement.
So, it is not surprising that that most larger firms in the marketplace conduct background checks for independent contractor engagements presently. And in some industries, focused clean background checks are absolutely required to participate in that marketplace, such as with financial institutions.
Evaluating other mitigation. When looking to discern whether a risk mitigation or management practice could negatively impact IC classification risk management, a solid first step would be to evaluate what the current applicable classification tests in the market say. A solid IC compliance plan will align with core elements of these marketplace IC classification tests. This will allow for safe, competitive access to engage IC talent and not keep you awake at night worrying about misclassification or traditional, executable background check requirements.