by Paul McCormack

The U.S. Department of Labor, the Internal Revenue Service and state regulators monitor the gig economy and how businesses classify their workers.

The emergence of the “gig economy” has led many organizations to eschew the hiring of long-term employees in favor of routinely engaging contract workers for all manner of tasks — ranging from the mundane to the highly specialized.

What’s Driving the Gig Economy?

Workers today crave flexibility. A contract worker swaps the trappings of a traditional employment arrangement — such as a steady paycheck, sick days, vacation time and matching 401(k) contributions — for the ability to work from any location, as well as set their hours and rates of pay. In return, employers engage workers on an “as needed” basis without incurring the costs related to hiring a permanent employee.

While the size of the gig economy continues to grow exponentially, legal risks abound for unsuspecting firms that embrace contractor workers without considering the compliance-related issues that might arise. In particular, when employers misclassify workers, fines may follow from the U.S. Department of Labor, the International Revenue Service or a state agency.

So how can your firm participate in the gig economy while ensuring compliance with relevant laws and regulations?

Understand what it means to misclassify a contractor

Much of the legal risk associated with the hiring of contractors stems from their misclassification. In general terms, the more control your company maintains regarding how a contractor works, the more likely they meet the legal definition of an employee. A recently updated article from the Internal Revenue Service shows the test to determine whether an individual is an employee or a contractor is far from straightforward and contingent on a detailed understanding of the facts.

Seek input from legal counsel

Minimizing legal risk depends on your firm’s ability to manage gig workers in a manner consistent with state and federal laws. If your organization is already a participant in the gig economy, or plans to do so in the near future, share the process that your firm follows to engage and manage contractor workers with an experienced employment attorney. In addition, provide the attorney with the paperwork your firm provides or intends to provide to contract workers. They’ll help assess whether your firm could withstand scrutiny regarding its contractor hiring practices.

Document and share your policies and procedures

Maintaining compliance requires everyone who comes into contact with an independent contractor to follow the agreed upon policies and procedures. Deviating from the agreed upon approach increases the potential for legal risk — especially when such activity takes place over an extended time period. In addition to making your firm’s independent contractor policies and procedures freely available to hiring managers, periodically assess the degree of compliance, making sure to resolve exceptions quickly.

As the size of the gig economy increases, businesses can expect increased oversight from government agencies. But by carefully following all relevant regulations and creating and adhering to strict contract worker guidelines, your organization should be able to feel confident it can take full advantage of this critical business hiring trend.

This article originally appeared on the ADP Spark blog.

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