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Contingent Workers – What You Need to Be Aware of
You have probably heard of contingent workers, but maybe not by that name. More common names for these workers include: temporary workers, freelance, consultants, independent contractor or temps. The one thing all of these workers have in common is that they work for a company or individual on a temporary basis.
The practice of using contingent workers has been around longer than some might realize, with employers bringing on extra, temporary help whenever needed. Many employers have hired these workers – in many instances – to reduce costly overhead, as the savings from payroll expenses and benefit costs can be substantial. The lure of these savings has led many an employer down the road of misclassification.
As we have discussed in previous articles, there can be serious repercussions when employees are misclassified. In addition to the various federal, state, and local agencies that may assess fines and penalties for misclassification, there is the potential for individual and class action lawsuits. The case that has been the best example of this is Vizcaino v. Microsoft. Initially, the Internal Revenue Service (IRS) found that Microsoft was misclassifying its temporary employees as independent contractors. Microsoft complied with the IRS, reclassified its workers, and in many cases assigned workers to temporary staffing agencies. This reclassification left many workers unhappy and opened the door to class action lawsuits.
Either directly or through agencies, Microsoft hired many employees and classified them as temporary employees. The term “temporary” implies a limited or short duration of time. In many instances, the temporary employees at Microsoft worked for years alongside permanent employees and both sets of employees performed the same job functions. This practice led to a group of very unsatisfied workers as the company continued to deny them access to Microsoft’s employee benefit plans. A class action lawsuit was filed against Microsoft and the employees claimed their rights to equal treatment with the permanent employees, including the benefit plans.
In the end, the monetary value of the lawsuit was determined by how much the employees would have made – had been correctly classified and allowed to participate in the company’s employee stock purchase plan. Before a final ruling could be issued, Microsoft settled the case for $97 million dollars. The basis of the prior ruling was that the temporary employees’ jobs were defined by Microsoft; the temporary employees worked alongside the regular Microsoft employees; the same work was performed by both the temporary and permanent employees, and as stated before, in many instances the temporary employees worked for long periods of time (in many cases, years).
At the same time as Vizcaino, the IRS ruled that Microsoft owed millions of dollars in payroll taxes. The IRS determined that the temporary employees Microsoft employed through a staffing agency were common law employees of Microsoft and the staffing firm’s role was simply that of payroll processor. No doubt Microsoft believed they were utilizing a cost saving measure and in the end it cost them $100+ million dollars and issued a huge wake up call to the rest of the business world that was employing these same tactics.
The combination of increased employment liability claims (including sexual harassment, discrimination, and wage and hour violations), emerging co-employment doctrine, and active government enforcement have raised the stakes and consequent risks for employers far beyond the tax and benefit issues in Microsoft and the similar cases that followed.
Below are some items tips to avoid the pitfalls of using contingent workers:
1. Determine if employees are properly classified.
2. Limit the length of temporary assignments.
3. Require a period of non-employment between temporary assignments.
4. Evaluate the position and type of employment with regard to the IRS worker status test.
5. Be familiar with the standards of other federal, state, and local agencies when determining employment status.
6. Be clear about which employees are, and specifically not covered, by the employee benefits plan.
7. Ensure your Employee Handbook addresses the issue of contingent employees.
8. Provide appropriate training(s) such as sexual harassment prevention to all employees.
9. Review your insurance policy. Does it cover the risks of contingent employment, including “co-employment” and other employment liability risks?
In regards to staffing agencies:
1. Only utilize experienced and reputable staffing agencies.
2. Ensure the staffing agency is properly insured (ex: Workers Compensation and Employment Practices Liability Insurance)
3. The contract between the user employer and the staffing employer should specify the responsibilities of each entity, including all aspects of employment and legal compliance issues.
4. The user employer should also require the staffing employer to indemnify them for any liabilities resultant of a function for which the staffing employer is responsible.
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