By Shawn Smith
The use of contingent workers—including
temporary, part-time, seasonal, leased, contract, on-call workers
and independent contractors—can provide staffing flexibility,
cost reductions and tax savings for employers. Especially in times
of economic uncertainty, with employers either downsizing or hesitant
to hire additional staff, companies turn to these workers to assume
work that they might otherwise assign to full-time employees. Today,
there are few companies that do not use contingent workers in some
aspect of their business.
As the use of alternative staffing increases,
regulators and the courts are increasingly concerned with preventing
companies from taking unfair advantage of contingent employment
arrangements. Since employment-related laws generally do not apply
to independent contractors, many employers erroneously assume that
by using contingent workers—especially those from staffing
agencies or contract firms—they are not obligated to comply
with federal and state employment laws with respect to these individuals.
This attitude can result in costly legal liabilities and financial
penalties. In order to avoid potential legal liability, employers
should carefully evaluate whether their contingent workers are legally
considered to be “employees.”
There is no precise legal definition of an independent
contractor and, to make matters even more confusing, the major employment
laws have differing standards for determining an independent contractor
relationship. As a rule, the more control a company exerts over
the direction of the individual’s work, the more likely it
is that the worker will be considered an employee rather than an
independent contractor.
Here are some of the key legal areas
that an employer should understand in evaluating its obligations
to contingent workers:
- Internal Revenue Service Regulations. If employers misclassify
employees as independent contractors for employment tax purposes,
they may be held liable for employment taxes for those individuals.
The IRS has established its own criteria to distinguish independent
contractors from employees. These factors include whether the
organization tells the individual where, when and how to perform
the work; whether the individual is free to offer services to
other entities and whether the individual is free to subcontract
the work to others. More detailed information and informative
examples are available in IRS Tax Publication 15-A, Employer’s
Supplemental Tax Guide.
- Equal Employment Opportunity Commission Guidelines. Under
EEOC guidelines even if the contingent worker is technically employed
by a staffing or contract firm, if the client has the right to
control the manner and means of a worker’s performance, the
staffing firm and the client are considered “joint employers.”
This concept of joint employment makes both parties responsible
for compliance with anti-discrimination and anti-harassment laws,
and requires both parties to take investigative action and refrain
from retaliation if an employee complains of discrimination or
harassment. Recently, EEOC has also expanded its guidelines to
the Americans with Disabilities Act.
These guidelines hold both staffing agencies and their clients
responsible for providing reasonable accommodations to disabled
workers, and state that if either party knows the other to have
violated the law, both parties may be sued. For more information
go to www.eeoc.gov.
- Wage and Hour Regulations. Under the Fair Labor Standards
Act, federal minimum wage and overtime requirements apply to all
contingent workers except independent contractors and self-employed
individuals. This law also includes coverage for joint employers.
For example, if a company fails to pay proper overtime to a temporary
employee procured from an agency, both the company and the agency
can be held liable.
- Labor Issues. Recent decisions of the National Labor
Relations Board have allowed temporary employees working side
by side with permanent employees in a union setting to become
part of the same collective bargaining units as regular employees.
One such decision even applied to temporary workers supplied by
a temporary agency.
- Employee Benefits. In general, contingent workers are
not entitled to participate in company health and pension benefit
plans. However, if a company misclassifies a worker who is later
found to be an employee, it may be responsible for retroactive
payment of benefits that were denied under its benefit plans.
Employers should also pay careful attention to the language used
in their benefit plans to ensure that covered and excluded classes
of workers are clearly defined.
Due to the potentially substantial legal
and financial consequences for failing to adhere to all of the relevant
guidelines, it is important that employers in doubt about the applicability
of any regulation or guideline discuss their specific situations
with a qualified legal professional. The laws regarding contingent
workers are constantly changing, so organizations should continually
reevaluate their situations to ensure ongoing compliance.
Shawn A. Smith is a human resources consultant
and attorney. She is the founder and president of Next Level Consulting,
LLC, an organization that specializes in helping companies build
the human resources and legal infrastructure necessary to support
growth.
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