Commentary: Twenty years ago, the workplace entered a period of dramatic transformation. Large companies were downsizing their workforces to reduce costs and provide greater flexibility. Temporary staffing providers and a wave of independent contractors rushed to fill the void and to meet the realities of this new contingent labor landscape. Contingent workers soon became a crucial cornerstone for many companies.

Yet with this proliferation also came greater complexities and cost. Often growing out of grassroot efforts at the departmental or even managerial levels, many companies woke up to discover contingent labor programs scattered in silos throughout their organization. As they lacked transparent visibility across all of the groups and managers using contingent workers, they could not answer basic questions such as:

  • Which departments and managers are using contingent labor?
  • What staffing suppliers are being used?
  • How much is being paid to individual workers, and how do those bill rates compare to market rates?

In addition to the above, due to the absence of standard controls and procedures, companies found themselves exposed to risks associated with tax and benefit liabilities.
Also see: Employers face crackdown over worker misclassification

And these challenges have not shrunk in magnitude over the past 20 years; rather, they have grown in scope, posing an even greater risk and financial impact today than just a few years ago.

The 1099 challenge

Central to managing these risks is the issue of proper worker classification. This relates to the systems and processes used to determine the status of independent contractors. The IRS uses a “common law test” to determine whether a worker is an employee or independent contractor. The test originally consisted of a list of 20 factors but was reduced to 13. They largely fall into three broad categories: behavioral controls, financial controls and relationship of the parties.

Worker misclassification issues present serious repercussions that could quickly accumulate into the millions of dollars in fines, not to mention back payment of taxes and other related benefits. The U.S. Internal Revenue Service, state authorities, the U.S. Department of Labor, and other regulatory organizations frequently review contingent labor engagements, offering their own interpretations of independent contractor versus full-time employment classification.

Also see: The hidden pitfalls of worker misclassification

Complicating matters is the lack of a uniform standard at the state level for worker classification. Some states employ what is called the “ABC test,” consisting of three prongs. Others use the “economic realities test” found in the Fair Labor Standards Act, while others use a hybrid approach. Further, the penalties for unintentional and intentional violations vary from state-to-state.

When it comes to benefits and the contingent workforce, there are a few areas that companies need to consider:

1. Talent sourced through a supplier. For instances where workers are supplied by staffing agencies to work on-site at a client facility alongside full-time employees, the lines between the two roles can quickly blur if not correctly managed. It is therefore crucial for companies to verify that those suppliers of talent have the right systems and processes in place to minimize co-employment. Co-employment is a situation where two or more businesses have legal rights and obligations of an employer with respect to a worker or group of workers.

Also see: Obama’s 2015 budget proposes crackdown on misclassified workers

In addition, companies must ensure that their staffing agencies are compliant with overtime eligibility regulations (reflected in the Fair Labor Standards Act), the Patient Protection and Affordability Care Act, as well as state-specific requirements such as mandatory sick pay. Noncompliance can result in substantial penalties — both for the supplier and buyer.

2. Independent contractors.Independent contractors — namely, workers not paid on a W-2 by a staffing agency or other provider — need to be vetted carefully. Workers must be classified correctly, and certain parameters must be instituted to govern the business working relationship between the independent contractor and the recipient of the services.

Companies should look to a trusted partner that has an expertise in independent contractor compliance to help them navigate this issue on an ongoing basis. Former auditors and legal experts with a niche focus in this complex arena are required.

Also see: Worker classification question: Is you or is you ain’t my employee?

3. Liabilities. There are various worker classifications based on IRS and state guidelines. Tax and benefit requirements can activate when workers are determined to be misclassified as 1099 wage earners. Penalties can be substantial, and often require back taxes to both the IRS and state taxing authorities. In addition, a host of potential benefit plan issues may arise if a number of 1099 workers are determined to be, in fact, company employees. Repercussions can even extend to discrimination testing, which could potentially disqualify previously qualified plans.

The ACA applies to all companies with 100 or more employees in 2015, and to all companies with 50 or more after 2016. Instances where companies are below the minimum employee count, reclassification of workers could suddenly make ACA compliance a reality. Other penalties may also apply.

Also see: White House backs worker classification bill

The management of contingent labor is a complicated undertaking, and the costs of mistakes can be substantial. Companies need to ensure that they have the right systems and processes in place and are tapping the expertise of third-party experts on all applicable aspects of the relationship, including benefits.

Andrew Schultz is CEO and co-founder of PRO Unlimited, a vendor specializing in contingent workforce management. He has served as the featured speaker at more than 400 seminars on contingent workforce issues, authored numerous articles in leading publications, and is frequently quoted in national print and broadcast media. 

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