Worker classification is all about having a strategy to keep problems off your desk. Those “problems” can include the tax authorities and/or the regulatory bodies that may deem one or more of the contract workers that your organization is engaging as an independent contractor, to be your employees. As a result, your organization may be liable for back payments of payroll deductions, plus penalties. And, your organization will be “on the radar” of those tax authorities, so that you can expect more audits in future.

The worker misclassification issue is one that arises from the government’s concern that organizations might try to dodge their tax obligations by misclassifying workers, either accidentally or on purpose. Avoiding employee payroll deductions has a negative effect on tax revenue and the viability of public benefits such as pensions and worker injury compensation.

So, in jurisdictions including the USA and Canada, tax authorities have instituted a culture of enforcement. This culture includes looking through an organization’s accounts to identify contract workers who are being paid as independent contractors, however should have been engaged as employees because they have been misclassified.

The question of classification used to be fairly straightforward. If a worker showed up on a Client’s premises equipped with their own tools and supplies to do the work, it was quite clear that this person was an independent contractor. As well, it was assumed that if the worker set their own hours and decided how best to perform the work, the independent contractor argument was met.

But much of an organization’s success today involves “knowledge workers,” whose value lies in their knowledge and ability to use it, as described in the Harvard Business Review. The article points out that being able to use knowledge workers effectively is increasingly important to organizations’ success.

And in the case of knowledge workers, it’s not possible to define “independent contractor” based on whether they bring along a toolbox with their name on it.

The worker may have their own laptop computer, but not be allowed to use it on the job for security reasons. They may end up using your organization’s equipment in order to access firewall-protected files and work effectively with the organization’s employees. So, the “own tools” test is not as clear any more.

Most jurisdictions have established tests to provide guidance on classification, but the information collected for these tests is subject to interpretation – and in a dispute between an organization and the tax authorities, the authorities’ view often prevails.

The days of an organization being able to offload the risk of misclassification entirely on a third party just doesn’t cut it any more. Increasingly, tax authorities are putting responsibility for misclassification on the organization benefitting from the worker’s skills.

So how do you solve this issue in a way that protects your organization and still allows you to access the specialized skills available through contract workers?

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