CWS 3.0: October 15, 2014

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The IC’s revenge: Using SOW agreements to mitigate risk

Over the past few years, more and more organizations and their CW programs have made a conscious decision to use fewer independent contractors or none at all. With local, state and federal governments’ growing interest in misclassification, it seemed to be a “no brainer.” Why even take the chance, especially when you consider not only the financial penalties applied but the irreversible damage to the organization’s brand.

With the economic downturn and unemployment at an all-time high, CW programs were able to implement this change with minimal impact. Wanting to continue to work, many independent contractors begrudgingly waived their status to become w-2 employees of payrolling firms or staffing companies. However, the tables are turning and we are seeing — especially in hot markets — the revenge of the independent contractor.

Misclassification enforcement has not gone away, as a matter of fact some states are being incentivized with financial grants from the US Department of Labor to dig even deeper. So can an organization engage the talent it needs with an IC and yet minimize their risk? The answer to that question is an emphatic yes, and in fact many are. One critical step is to utilize a bona fide IC compliance test, verifying the behavioral, financial and legal control of the individual in question. Partnering with an IC compliance provider to perform the proper vetting is recommended. This will ensure the individual is a “true” independent contractor.

Is this enough? It can be; however, we have seen an increase in the number of organizations engaging the independent contractor under a statement-of-work (SOW) contract to add another level of risk mitigation. They are in essence, a one-person project with that one person as his or her own business. If properly executed, a SOW contract allows for an even greater definition of a business-to-business relationship. A proper statement of work must establish contractual terms and conditions around work activities, work deliverables and deadlines, and agreed-upon payment terms, which are usually per milestone or at project completion. SOW agreements are about how the agreement is written and there must be no confusion on the IC’s ability to perform the work as they see fit.

Educating your internal staff is also critical with these types of engagements. Organizations should coach and train their engagement managers to understand that the work is not being done by an individual but instead a business. They must allow the independent contractor to maintain control over where, when and how the work will be completed, as long as the agreed-upon deliverable is done on time and on budget. This can be very difficult for some to relinquish this type of control, but it must be done to mitigate the risk.

With the tides changing and independent contractors gaining their ground, buyers need to prepare their programs and their organizations to be able to leverage this talent when necessary. Being able to engage independent contractors and their critical skills as a business to business relationship is truly a win/win for all.