The Important Question to Ask About Classifying Workers in Light of Uber's Contractor Fiasco

Outsourcing is and will continue to be a vital way for small- and medium-sized companies to grow. But just knowing what to outsource isn't the issue.

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By Gene Marks

Monica Dipres

Opinions expressed by Entrepreneur contributors are their own.

In just the past few weeks we've seen a few big-name companies come under the microscope on how they outsource services.

In the most publicized of these cases, car-sharing service Uber was told by the California Labor Commission that the company was misclassifying its drivers as independent contractors when they should be employees. Cases were also filed against Shyp, Lyft, Washio, Postmates and others.

The issue affects all of us. Are all those services we've been "outsourcing" to non-employees no longer considered to be outsourcing? Is outsourcing in trouble? Should we be concerned?

Related: Uber Pushes Back Against California Driver Lawsuit

Not at all. Outsourcing is and will continue to be a vital way for small- and medium-sized companies to grow. But just knowing what to outsource isn't the right question. The most important question you have to ask yourself is, who is doing the work for you? Because who you choose will directly affect the exposure you have to scrutiny from the government. My advice: narrow it down to these three options.

1. Companies

The easiest and safest form of outsourcing is to partner with larger companies that will take over the work you've been doing internally. For example, Tim Chase runs a non-profit organization called Community Bible Study and partners heavily with office supply store Staples.

Chase's organization only has 35 employees that has to support more than 2,500 trained volunteer leaders, 700 bible study classes in the U.S. and more than 220,000 Bible study participants of all ages globally. Purchasing and managing supplies is an enormous undertaking, but instead of having to hire in-house people to do that, he relies on a national program established by Staples.

"That means that our volunteer leaders are making individual choices across the country," he tells me. Staples is his purchasing department with significant benefits. "We have been able to leverage the plan to reduce central printing, storage and fulfillment costs of other items by switching to electronic distribution and allowing our classes to print locally on an as needed basis."

Staples (a client of my company, but I am not being compensated by them to write this piece) is an established corporation. As a business owner you can outsource your printing, copying, fulfillment, signage and mailing services to a company like it and not to have to worry about classifying an employee.

2. Professional firms.

Closer to home, I outsource my bookkeeping, payroll and collection needs to a bookkeeping service. This is really just an individual named Susan. But hers is a professional firm that serves other clients like me. We have a contract with her firm and a system for getting her the information she needs. She performs all of her work remotely from her own office. She sends me an invoice every week for her services. She serves other clients. She makes her own schedule, takes her own time off and is free to have others do my work for her under her supervision.

Related: W-2 or 1099? Why It Pays to Classify Your Employees Correctly.

I have zero control over her workday. I do not provide her with benefits. I do not pay her when she's not providing services. This is the case with professional firms -- from legal to accounting to marketing to consulting -- you will have little risk of "employee" vs. "contractor" classification when you're using an established firm of professionals.

3. Individuals

Using individuals is the most risky practice of outsourcing and where Uber got into trouble. That's because there's a less clear difference between an individual contractor and an employee.

But outsourcing services to individuals is not against the law. You just have to be very careful about how you do it. Many of my friends in the IT world do this all the time.

"I would be out of business if it weren't for my ability to outsource development and data integration work to individual contractors," one of my colleagues recently told me. "There's no way I would have enough work to keep that person busy full time."

When you outsource work to individuals you have to make sure you're following the IRS's rules. And you must have them under agreement. You should consider sourcing your work through established freelance sites such as Elance or Guru, who have a process for finding, using and paying their independent people.

And you should know your exposure. If you ever find yourself in the same situation as Uber you could be faced with additional employment taxes, penalties and possibly criminal proceedings if it was found that you willfully outsourced work to independent contractors when you knew that they should be classified as employees.

In my opinion though, the biggest consideration should be whether the person wants to be independent. In my colleague's case, the contractors he uses are tech people who desire their independence and have no interest in being fully employed by one company. These people have little risk of raising concerns.

Outsourcing is far from dead. In fact, as the costs of employment rise and technology enables people all over the world to set up shop in their homes and provide work whenever they want and for whoever they want we'll continue to see a rise in outsourcing popularity. But Uber's case reminds us that it's still very important to consider the risks of who we're outsourcing work to, and to choose those partners carefully.

Related: How to Incorporate Freelancers Into Your Business

Gene Marks

Entrepreneur Leadership Network VIP

President of The Marks Group

Gene Marks is a CPA and owner of The Marks Group PC, a ten-person technology and financial consulting firm located near Philadelphia founded in 1994.

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