Independent Contractors vs. Employees: The SEC Weighs In

(DGIwire) – It has never been more important for organizations to know which of its workers are independent contractors (IC) and which are fully fledged employees. As recently reported by Employee Benefit News, the U.S. Securities and Exchange Commission (SEC) drove this point home via guidance it issued about a new rule for public companies: the CEO Pay Ratio Rule. This rule, which went into effect for each public company’s 2017 fiscal year, mandates that companies need to disclose the ratio of median annual compensation of employees to that of CEO compensation in their 2018 proxy statements.

According to Employee Benefit News, the SEC’s new guidance should simplify a public company’s ability to comply with the Pay Ratio Rule allowing more flexibility for identifying and calculating the median employee. Additionally, the interpretive guidance expanded on the exclusion of ICs from the calculation, as ICs generally dictate their level of payment. The rule defines an employee as “an individual employed by the [company] or any of its consolidated subsidiaries,” but excludes from the definition of employee “workers who are employed, and whose compensation is determined, by an unaffiliated third party but who provide services to the [company] or its consolidated subsidiaries as independent contractors or ‘leased’ workers.” However, a public company can determine whether a worker is an “employee” for purposes of the rule by applying a widely recognized test used under another area of law, such as tax law or employment law.

Public companies, Employee Benefit News also notes, can use “reasonable estimates” at all stages of calculating the median employee’s compensation. The factors to be used in calculating these estimates include analyzing the composition of the company’s workforce, i.e., whether its workers are employees or ICs.

“Now that all U.S. public companies are required by law to comply with the Pay Ratio Rule, it is more important than ever for them to be able to know how many individuals working for them are ICs versus employees,” says Rebecca Cenni, founder and CEO of Atrium Staffing. “Not doing so could mean misreporting numbers that skew the pay ratio it publicly reports.”

Atrium is focused on providing contingent workforce solutions for mid-size and Fortune 500 companies in nearly every industry. Atrium’s expertise includes regional Temporary and Direct Hire Staffing, national Payrolling Services, national Independent Contractor Engagement and Intern Program Design. The company has extensive experience matching the right candidates for a range of positions within a variety of industries.

“In order to accurately audit a company’s workforce, it might pay to consult with an external team of experts with a proven track record in assessing independent contractor compliance,” Cenni adds.