Hiring independent contractors can save an employer from having to provide benefits and provide staffing flexibility to address temporary projects or demands. However, misclassification of workers may result in significant liability to the employer if a federal or state agency audit or a lawsuit challenging workers' status occurs.
To help reduce the risk of reclassification, employers can use the following checklist to perform due diligence on an independent contractor to confirm that this person runs a real business and is not an employee in disguise. Genuine independent contractors should be able to demonstrate that they operate a business by providing the employer with basic documentation. Once the independent contractor is hired, an employer should require additional documentation.
Not every independent contractor will be able to provide each type of document. However, the more documentary support provided by the worker, the more defensible their status as an independent contractor will be if the employer gets audited by a governmental agency or sued in court.
If an employer is having doubts about whether or not a worker can be classified as an independent contractor or should be an employee, the most conservative approach would be to classify as an employee and comply with applicable laws. When in doubt, play it safe.