John Thornton, Director, Human Capital Solutions, Allegis Group Services
A contingent workforce provides access to talent on-demand and offers businesses the flexibility to respond to changes as well as the opportunity to create efficiencies and realize costs savings. Sourcing professionals frequently manage the procurement of such services and, in many organizations, may actually oversee the management of the contingent workforce. As strategic sourcing continues to take an active role in helping companies manage and mitigate their risk, it is advisable to better understand the complex, and often risky, landscape of the contingent workforce.
From a compliance stand-point, inappropriate worker classification and co-employment are potential risks for firms. Government agencies proactively search for non-compliance, for which, the associated penalties are steep. Even though there has been plenty of publicity on this topic, many are not aware that there are some measures to help mitigate this risk.
Sourcing professionals can help their organizations manage these risks more effectively by being aware of the principal areas of concern and of some guidelines that can help insulate their companies from these possible employment-related risks. The two key Liabilities are Co-employment and Inappropriate Worker Classification (or Worker Misclassification).
Co-employment, as defined by the American Staffing Association, is a commercial relationship between two or more businesses in which each has actual or potential legal rights and obligations as an employer with respect to the same employee or group of employees. For companies using contingent labor, this means that temporary workers could legally be considered common law employees, even if they are W-2 employees of the temporary staffing firm. If your company is found to exert effective control over a temporary employee’s work or essential terms and conditions of his/her employment, you may be a co-employer and could, therefore, be liable under tax, antidiscrimination, wage and hour, as well as other employment-related statutes. Most significantly, these workers could potentially claim rights to pension and welfare benefits, collective bargaining, and employee stock purchase plans.
Co-employment usually comes to light in the wake of some sort of legal action (lawsuit or complaint, for example). In the well known Vizcaino v. Microsoft Corporation case, workers that Microsoft had categorized as independent contractors successfully sued for: ESPP, retirement, and welfare benefits rights by claiming that they were co-employees. The outcome produced several years of litigation and a very large settlement.
Inappropriate worker classification (worker misclassification) primarily involves a company’s use of independent contractors (or 1099 workers). As an independent contractor, an individual is not considered an employee of the company, does not receive benefits, and the worker is responsible for all employment-related taxes. With this in mind, each 1099 worker should be able to meet the IRS’ criteria, as determined by 20 specific questions. These questions can help an employer determine whether or not a worker is an independent contractor. If the individual cannot meet the criteria, then they may not be appropriately classified. A company may be held liable for back taxes, fines, and penalties for misclassified employees.
The tax penalties may be high and an IRS or government investigation that uncovers misclassification can prove costly. Misclassified employees themselves may also file suit. The IRS, Department of Labor along with state revenue and labor departments, have become more proactive about scrutinizing employers when they suspect employees of under-paying self-employment taxes—it is typically easier to collect from a company than from an employee. This type of inappropriate worker classification can often go unrecognized for long periods of time. When this is exposed by a lawsuit or investigation, the results are problematic.
Whether you manage all your staffing suppliers or have an outside vendor manage your contingent workforce, consider the following suggestions to help mitigate your risk.
Consider creating a centralized program to manage your contingent workforce. Whether this is something that you manage internally or turn to an expert third party, inappropriate worker classification and co-employment risk can be mitigated through the use of an organized and centralized approach. Much like your company has rules and processes for hiring full time talent, you could benefit from creating business rules, standards and processes for managing your temporary labor. Consider this and, you will be on your way to mitigating your exposure.
The staffing suppliers should always control the essential terms and conditions of employment. When utilizing contingent or temporary labor, the employer of record (in this case, the staffing firm), should be the party that exerts the most control over the essential terms and conditions of the assignment. For example, the staffing firm should make the offer, set the wages, communicate the work schedule, and deal with employment-related issues. The staffing supplier should be the sole communicator of performance reviews and offers of employment.
Communicate clear contingent staffing procedures to the hiring community. You should provide your organization with a clear outline for managing contingent workers. Once your business rules are clear and your process is set, then these guidelines must be communicated through-out the company. Communicate everything from how to engage a staffing supplier to how to manage the contingent worker, while on assignment.
Screen every independent contractor for compliance. Section 530(d) of the Revenue Act of 1978 defines the 20 factors that the IRS uses to determine the employment status of workers. In order to be sure that you do not have misclassified employees, you should consider taking all independent contractors through the IRS’ 20 Questions. If the answer to any one of those questions is “yes”, then the worker may be inappropriately classified. In any event, this should trigger some additional screening on your part to help ensure compliance.
These guidelines are intended to provide insight along with some practical steps to help you mitigate any potential risk, so your firm may continue to realize the benefits of utilizing a contingent workforce without undue concern.