As independent contractors become an integral part of the workforce, it is more important than ever for enterprises to understand independent contractor compliance. Compliance is not a static issue, and can evolve with a simple change in scope of work.
Co-employment is an arrangement where two companies both have rights and obligations as an employer—the business maintains responsibilities for the worker's job duties and day-to-day functions while the co-employer manages personnel-related functions such as payroll. In this way, the worker is technically employed both by the business and the co-employer.
In the world of independent contracting, co-employment commonly occurs when staffing agencies hire independent contractors for their clients. While the staffing company is primarily responsible for HR functions such as recruiting, hiring, and payroll, the company handles the work agreement. In this situation, because the staffing agency and client have obligations to the contractor they can both be viewed as an employer.
Some businesses may use co-employment as a way to engage independent contractors without taking on the additional responsibilities of personnel issues such as payment and tax responsibility. However, this structural arrangement does not eliminate risk.
If the contractor decides to take legal action because they think they should be treated as an employee, or if your company is audited and is found to have treated independent contractors as employees or vice versa, both your company and the staffing agency can be held responsible and have to pay damages.
The most famous example of co-employment gone wrong is the Microsoft vs. Vizcaino lawsuit where Microsoft was found to have treated a number of independent contractors they hired as employees. The contractors had worked on teams with regular employees, shared the same supervisors, performed the same functions, worked the same hours, and worked on-site using Microsoft’s equipment and supplies. The lawsuit cost Microsoft nearly $100 million.
It’s important to realize that independent contractors come from varying backgrounds. Some will easily pass a compliance review while others may have accepted an independent contractor label due to an economic circumstance, but are employee-minded. A worker who is begrudgingly working as an independent in a co-employment arrangement can expose your company to risks.
While a co-employment agreement can relieve companies of some of the administrative burdens of independent contractor engagement, it does not eliminate inherent risks. Here are four steps you can take to avoid co-employment risk:
To avoid being audited for employee misclassification, it is important to ensure that any independent contractor you engage is properly vetted and classified. Use federal government, state government, and government agency tests as guidelines to assess potential workers and keep documents on file that support their status. If you are working with a staffing agency, make sure they have a classification process in place.
You and your team may develop good working relationships with independent contractors, but it’s important not to place yourself in an employer-employee position. Implement specific policies and procedures for how your managers and employees should interact with independent contractors. As much as you may value the services of an independent contractor, they are not your employee.
Control is an important factor in determining worker status. Co-employment agreements do not protect you from unsafe management of independent contractors. Unlike a full-time employee, an independent worker has freedom in how they meet the obligations of the project contract. For example, unless their work requires them to be on site, you should not require them to work from your offices. Remember, an independent contractor is a business and should be treated as such.
Partnering with an established firm can help you navigate these processes and procedures, lower your risk, and assist in compliantly engaging independent talent. Companies like MBO Partners have years of experience and solid methodologies for evaluating and engaging independent talent for clients.
When engaging independent contractors, compliance is a primary concern. To learn more about lessening your risk, read IRS and State Misclassification Penalties: What are the Risks and How to Avoid Them.
Follow these three tips to ensure you compliantly engage independent contractor talent.
Independent contractor compliance varies depending on worker types, length of engagement, and contract size. Why compliance matters and how to determine the best type of program for your business.