In this article, Joseph “Trey” L. Wood, III, a Board-certified labor and employment lawyer with BoyarMiller, discusses how the right co-employment relationship can prevent contractor woes for employers.
For most U.S. companies today, contingent workers—contract and temporary personnel provided by a staffing company or hired independently—are an essential part of the productivity mix.
Regardless of the recruiting process, contract employment is a growing trend. A study published by a large international staffing company in September 2012 found that approximately 66 percent of companies surveyed employ contingent workers. According to the study, this sector of the workforce grew by some 25,000 jobs per month in 2011 and 2012, and the trend is expected to continue.
While contract workers provide agility to growing companies and bring expertise to special projects, properly classifying the employment relationship can get tricky. The IRS applies a complex set of rules to determine whether a worker is an employee or a contractor. Employers who incorrectly classify employees as contractors face potentially costly risks.
Enter co-employment. Businessdictionary.com defines co-employment as a “situation in which two legally distinct employers have an employer-employee relationship with the same person.” This is often the case when the recruiting process involves a staffing company.
Wood points out that the last legislative session of Congress tried to impose more stringent laws against improper classification of contractors. He says that working with recruiters who are savvy about co-employment arrangements can mitigate potential liabilities in three areas: Wage and hour laws, IRS withholding and employee benefits.
Wage and hour laws – The U.S. Department of Labor’s Fair Labor Standards Act (FLSA) stipulates that an hourly employee who works more than 40 hours in a week must receive no less than time-and-a-half for each overtime hour. If a contract worker who is paid a flat hourly rate works more than 40 hours a week and is deemed a “non-exempt” employee, the company is liable for overtime.
IRS withholding – Misclassifying an employee as an independent contractor creates a liability with the IRS for not withholding taxes. The employer can bear penalties and interest on back taxes for that worker.
Employee Benefits – When “independent contractors” and employees work side by side and the only noticeable difference is that some have “Contractor” on their badges, the employer may be opening itself to contractors demanding reclassification as employees—and demanding the benefits employees receive. In a famous suit that cost nearly $100 million, Microsoft was required to reclassify a group of contractors as employees and provide them with stock options.
Wood elaborates on the wage and hour issue, saying, “The Department of Labor has made it a priority in recent years to catch discrepancies. There have been more overtime lawsuits in the past six years than in the history of our current labor laws.”
He adds, “Private attorneys are also pursuing overtime cases. For each misclassified non-exempt employee, the company must pay overtime for as many as the past three years, plus liquidated damages, plus attorney fees. These cases are almost indefensible.”
A knowledgeable staffing company does everything by the book, serving as the employer of record and handling recruiting, hiring, payroll, benefits and other employer responsibilities. The contractor adheres to a defined scope of work and reports to the employer of record—not the end-user employer—for day-to-day logistics of getting the job done. In this way, the contractor status is retained, and the staffing company bears any misclassification liability.
The co-employment relationship also provides protection against class action discrimination suits from the U.S. Equal Employment Opportunity Commission (EEOC), because the staffing company handles the recruiting process and the hiring. An experienced firm documents hiring reasons and knows how to defend its position.
Co-employment through a partnership with a reputable staffing company can serve as shield from liability. Wood concludes, “Are you considering hiring an independent contractor? Don’t do it!”