3 Contractor Compliance Challenges & How to Avoid Them

Contractor Compliance

If you’re working with a flexible, contractor workforce, then you’ve no doubt spent time thinking about compliance. Overseeing this type of workforce is much different from the way you manage and oversee your full-time employees. There are different compliance risks that come with classifying, managing, and paying your freelancers, contractors, consultants and anyone else who doesn’t fall into the 9-5, traditional employment. Compliance is one of the most complex pieces of the hiring puzzle and something that many internal HR teams aren’t used to doing for temporary workers. Below are some of the concerns you should look out for while working with contractors:

Challenge #1: Classification

Making sure you’re properly following all local, state, and federal classification laws can be one of the largest compliance issues when hiring and onboarding independent contractors. Misclassifying your contractors can mean penalties and fines from the IRS. Correctly classifying your temporary workforce defines how they are managed, whether certain taxes are collected, and how they are paid.

Different states, especially California, have different classification tests so you need to make sure you’re compliant in every state where you have contractors working. Do you know the difference between the common law test and the ABC test? These two tests help classify W2 vs 1099 and it’s important to know how your workers stand against these classification tests.

Challenge #2: Contracts

While contracts have previously been reserved for vendors or full-time consultants, it’s becoming more and more important to have formal contracts in place for your freelancers as well. Recent laws even require contracts in place for all independent contracts.

New York City’s Freelance Isn’t Free Act requires contracts for all contractors who deliver $800 of services or more during a 4-month period. Contracts protect both you and your independent contractors by outlining exactly what is expected from each party. While this law is only in NYC at the moment, contractor compliance is constantly changing and other jurisdictions may not be far behind.

It may also be a good idea to collect NDAs (non-disclosure agreements) if these workers will be viewing or creating confidential materials for your business. Make sure you have a way to properly store and organize these files so that they are easily accessible and proof can be provided that contracts have been offered and signed for each freelancer.

Challenge #3: Payments

When you begin working with a 1099 freelancer, you will have them fill out a W9 form that verifies their status. Best practices show that you should keep these documents on file for at least 4 years in case you need to reference back to any tax withholding or contact information.

Once your freelancer has been correctly classified, the next challenge becomes actually getting payments to them on time and efficiently. Unfortunately, most companies have a bad track record when it comes to paying freelancers. 71% of freelancers have dealt with clients paying them late or not at all and 84% of freelancers would work more often if they were paid faster.

Relying on traditional payment methods for 1099 freelancers is expensive, time-consuming, and can expose your company to legal liabilities. A freelancer payments platform, however, makes prompt payments possible. Collecting the onboarding documents and then automating, standardizing, and streamlining how invoices get processed means freelancers can get paid on time every time. 

How can you avoid these challenges? 

Meeting all of the compliance requirements when it comes to hiring and paying your contractors can be a challenge, especially when you try to do it alone. You can simplify the process by partnering with a freelancer payment platform and Agent of Record (AOR) provider. That’s where AllWork comes in.

AllWork will help you classify each of your contractors and make sure they are paid on time and compliantly. Our complete management and payment system lets you seamlessly hire independent contractors, store their contracts, and have full visibility into all work assignments as payments – all from one place.

Ready to learn more about how AllWork can help you classify, onboard, manage, and pay your freelancers? Email info@allworknow.com to schedule a demo or reach out here!