Conducting a Worker Classification Audit: A Guide for HR Teams

Many companies don’t realize they’ve misclassified workers until it’s too late—when an audit, lawsuit, or funding due diligence exposes the issue. But you don’t have to wait for trouble to find you. By proactively conducting a worker classification audit, HR can identify risks and correct them before they become legal liabilities.

What Is a Worker Classification Audit?

The goal is to:

• Confirm legal alignment with how work relationships are documented and practiced
• Uncover high-risk misclassifications
• Improve documentation and policy consistency
• Mitigate penalties and reputational damage

Why Auditing Matters

A classification audit is especially important during:

• Rapid hiring or expansion
• Mergers and acquisitions
• International growth
• Legal or investor due diligence

Who Should Lead the Audit?

HR should take the lead, in collaboration with:

• Legal: to apply the appropriate jurisdictional tests
• Finance/Payroll: to evaluate tax and benefits implications
• IT/Security: to assess access and integration levels
• People managers: to validate actual work conditions

Step-by-Step Classification Audit Process

Step 1: Create a Worker Inventory

Compile a complete list of current workers, categorized by:

• Employees (full-time, part-time)
• Contractors/freelancers
• Interns, volunteers, temp staff

Include details such as:

• Jurisdiction
• Role description
• Contract type and duration
• Reporting manager

Step 2: Select a Legal Framework

Choose the appropriate classification test(s) based on the worker’s country. Examples include:

• IRS 20-Factor or ABC Test (US)
• IR35 (UK)
• Functional tests (EU)

Apply consistently.

Step 3: Assess Worker Status

For each non-employee:

• Evaluate their actual working relationship (e.g. autonomy, control, tools)
• Compare contract terms to daily practice
• Check for red flags (e.g. fixed schedule, manager approval, company email)

Record your determination: correct, borderline, or misclassified.

Step 4: Document Evidence

Capture your reasoning and supporting evidence:

• Signed contracts
• Timesheets or deliverables
• Communication records
• Onboarding or orientation documents

Consistency is key. Regulators often evaluate substance over form.

Step 5: Take Remedial Action

If a misclassification is found:

• Consult legal before taking action
• Offer new contracts or employment terms
• Adjust working conditions to align with contractor status
• Inform finance for tax and benefits updates

Be transparent and proactive—courts often consider your remediation efforts during enforcement.

Step 6: Report Findings

Create a written audit report that includes:

• Summary of findings
• Risk heatmap
• Recommended actions
• Timeline and accountability

Share with leadership and update classification policy as needed.

Tools to Support the Process

• Audit templates and pre-built checklists
• HRIS platforms with contractor tracking
• Classification calculators from legal vendors
• External counsel for complex or cross-border roles

Building a Repeatable Audit Framework

To make audits scalable:

• Schedule regular reviews (e.g. semi-annually)
• Assign a classification lead in HR
• Create a shared documentation hub
• Use version control for legal guidance and templates

Conclusion

Worker classification audits are not just for legal teams—they are a strategic HR practice that protects the business. By implementing a structured, repeatable process, you can identify issues early, avoid penalties, and build a reputation as a responsible employer.