How to Avoid Regulatory Fire in the Gig Economy…

Employing contingent workers is a hot trend, but startups embracing this strategy must take steps to shield themselves from blowback. In fact, entrepreneurs unfamiliar with the gig economy and its unique liabilities are getting burned.

Related: Warning: Avoid These 3 Gig Economy Onboarding Mistakes

In March, worker misclassification blew up in the face of Instacart, which spent $4.6 million to settle a class-action lawsuit. Cleaning startup Homejoy was scorched so badly by worker misclassification in 2015 that it was forced to shut down.

Why, then, are more and more entrepreneurs playing with fire? While the new economy brings fresh challenges, embracing a contingent-workforce strategy can cut labor costs by up to 40 percent, according to the AFL-CIO’s Department for Professional Employees. Representing nearly 30 percent of the U.S. workforce, contingent workers include temporary workers (either sourced directly or via staffing agencies), independent contractors, third-party consultants and human cloud workers.

What portion of those are misclassified employees? Nobody is quite sure, but Instacart and Homejoy are hardly the only ones to get it wrong. The Equal Opportunity Employment Commission collects $404 million per year from noncompliant employers.

Fortunately, entrepreneurs can enjoy the fire without becoming engulfed. The following steps can shield your company from unexpected regulatory heat:

1. Classify with care.

Just because you don’t control a worker’s hours and projects doesn’t automatically make that person an independent contractor. In Pennsylvania, for example, an online expert network came under fire for misclassifying a mapping and navigation consultant. Simply because the worker was free to pursue other clients, the presiding court found, didn’t necessarily mean he “customarily engaged in other business.” Under Pennsylvania law, that worker’s economic dependence on the online network made him a misclassified employee.

Related: Think Twice Because Your Freelancer Might Legally Be an Employee

How can you protect yourself from similar mistakes? Thoroughly vet all potential independent contractors to ensure they qualify. The IRS provides a 20-point test for this very purpose. Do they have business cards and their own websites? Have they recently done work for other clients? When in doubt, consult an employment law expert or find an HR provider to vet 1099 contractors for you.

2. Revisit workplace conduct policies.

Whether you have one employee or 1,000, you need equal employment opportunity and anti-harassment policies. Proactively seek samples of lawyer-reviewed policies from your HR provider. Provide them to all W-2 employees, including temporary hires. Conduct in-person trainings for all new hires and whenever policies are updated.