There are always some horror stories with temp workers, from industry to industry; however, those horror stories don’t always come from the temps, but also from the companies hiring them. How so? Think legal. Think legal compliance. Yes, there are rules to hiring temporary workers, specifically from a staffing agency, and you’d do well to review those guidelines before getting yourself into hot water.
I Get It — You Want to Save Money on Taxes and Benefits
It’s a nice convenience. The temp worker fills a role without any of the additional ‘weight’ from a direct hire. Know this, though: those temps, also known as contractors, are not employees; therefore, you really shouldn’t treat them as such.
While they may have higher hourly pay wages or day rates due to the offset for lack of tenure, security and benefits, know that they’re completely separate from your permanent workforce. Their purpose is to fill a specific role, often specialized. Know, though, that you make a big mistake by….
Misclassifying Them as “Employees”
This can cause massive problems tax-wise. Don’t do it. Believe it or not, you could get yourself in big trouble even by inviting independent contractors to company picnics. Watch yourself. Your own background checks and performance reviews, too, could be in violation of a lot of staffing agencies as well as government regulations. Again…. Don’t do it.
More importantly, you ultimately don’t want to become so dependent on independent contractors and temps by constantly viewing them as a part of your permanent workforce. In the end, that can spell disaster for your company. Before you know it, that one contractor you like so much is actually working for a longer tenure than your average permanent employee — and, yet, you’re still paying that contractor on a 1099 format, which could result in you facing penalties for some tax avoidance.
Some Questions You Can Ask to Determine If You’ve “Crossed the Line”
Misclassification can be tricky, actually. Luckily, though, you can tell the difference if you ask these specific questions:
- Do you supervise the worker?
- Does the worker work right on site?
- Is the temp working full-time?
- Are you the only source of income for that worker?
- Do they freely use your equipment?
- Is there no deadline at all for the project for which they’ve been commissioned?
- Are you basically telling the contractor what to do?
- How much control do you have, really?
Understand that if you’re dealing with an independent contractor, that professional already knows what to do. That contractor was hired for a specific reason. That contractor either answers to himself/herself or the staffing agency. Not you. If that contractor answered to you for any reason, chances are you’re treating that contractor like your own employee.
If the IRS finds that the evidence shows all the answers of these questions pointing to you treating your contractors like employees, guess what: you’re going to be liable for additional payment of taxes, plus benefits…retroactively. You don’t want that to happen. That can add up to a lot of money.
The IRS, Though, Is Only One Thing You Need to Worry About
These contractors aren’t daft, honestly. They do make decisions. They do listen. They see the writing on the wall. Hence if you’re treating them like employees, and they see their fellow ‘constituents’ receiving X amount of benefits, raises, promotions and so on and so forth, understand that it allows such contractors the right to file lawsuits for misclassification.
In other words, if you’re treating them just like those employees, why are they not receiving the same perks? It could spell disaster. Simply take a look at the infamous Vizcaino Vs. Microsoft class action suit, which involved 10K workers this past year, settled for $97MM. That’s a big chunk of money, all because someone there at Microsoft didn’t know how to differentiate between temp and permanent employee!
How Can I Avoid Those Lawsuits and IRS Sanctions?
You’ve already read the warning signs. Pay close attention to them. If you even read two or three of those questions, and your answers are “yes” for all of them, you might be on thin ice. Hold back on your own supervision, your authority, because you have to remember that the temps and contractors on staff are not working under your authority.
This, though, is especially difficult if there is no employer of record, such as a staffing agency. Thankfully, you have a wealth of services allowing for the immediate supervision of some of those specific characteristics to be monitored without any crazy agency fees, specifically the ability to limit the risk of co-employment and misclassification.
It’s a Tough Line to Draw
You must, however, draw it. As much as you love those contractors for what they provide, know that there is a line. You must distinguish it. Discuss it with your business lawyer for further information, too. The good thing, though, is that oftentimes there are options to basically “buy out” that contractor as a full-time permanent employee.
Just be patient. Remember: those temps are temps. Soon the expiration date will arrive, and you’ll be free to take them on permanently!
License: Creative Commons image source
Matt Faustman is the CEO at UpCounsel. You can follow his business insights on Twitter at @upcounsel.