Classification Misconceptions

A guide to understanding classification and your contingent workforce

“We’re okay – we stay at arm’s length from our contractors”

You may do everything you can to set up your relationship with a contract worker so that it’s a genuine arm’s length relationship, but will the tax authorities agree? If the worker performs the job on your premises, takes direction from your team leader or uses your organization’s equipment they may be considered to be an employee. It’s important to make sure that you choose a service provider who is experienced in this area and has a methodology and approach that will stand up. This will allow you to focus on getting the work done in your organization without the worries of whether your contractors are properly classified.

Magnifying glass with dollar sign

Many organizations think that if the worker is paid through a third-party agency, that agency will take any heat from the tax authorities. But the trend we’ve seen is for tax inspectors to look past the payroll agency to the organization that requested a contract worker. The end employer is involved in the relationship, whether they like it or not. In any news report involving misclassification the end employer is always named, and this impacts its public image.

“We use an online questionnaire about classification”

Online questionnaires have become more sophisticated in recent years, able to consider a wider range of factors that pertain to the current economy. We use online questionnaires ourselves, as part of our VERIFICATION process. But automated forms are no replacement for a skilled advisor who is familiar with the nuances of classification, and knowledgeable about recent trends in how tax authorities are focusing their attention.

desktop and tablet displaying a questionnaire
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We have found that automated questionnaires need to be balanced with personal interaction. This is partly because some contractors have learned how to respond to questionnaires in a way that gets them the result that they want. That can make the questionnaire unreliable when it comes to protecting your organization from the risks of misclassification.

We also find that online questionnaires often determine that the worker is ineligible to be classified as an independent contractor. Our experience shows that an interview with an analyst skilled in this area can often find ways to engage the worker, perhaps through alternative means.

Up next: Where do I start?

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