One of the hottest topics on this blog is the government’s crackdown on the misclassification of W-2 Employees as Independent Contractors (IC’s). We always strive to educate recruiters on this issue and keep you abreast of the latest developments.
To that end, the recent CNNMoney.com article “Why America is going the way of the freelancer“ does a good job of explaining the difference between temps and independent contractors. (Note: we generally refer to “temps” on this blog as “contractors.”) The article also explores the risks associated with using IC’s.
In the article, Gene Zaino, CEO of independent consultancy services firm MBO Partners, describes temporary employees as workers employed by a staffing agency (or in the case of Top Echelon Contracting, a contracting back-office) who are placed by a recruiter and are paid on a W-2. IC’s are self-employed and are paid on a 1099.
Companies are increasingly using both temporary/contract employees and IC’s to run leaner organizations, but they take on significant risks when doing so with IC’s, including the following most common risks:
- Companies don’t pay the employer share of payroll taxes on IC’s, which is part of what makes them so attractive. But if the IRS finds that a worker has been misclassified, the company could end up paying massive amounts of back taxes.
- If a company gets a disgruntled group of IC’s who believe they are employees and should therefore be entitled to overtime and benefits, the company could have a nasty (and expensive) class-action lawsuit on its hands.
- If an IC doesn’t have the proper insurance coverages (liability insurance, errors and omissions, etc.), and they harm a company’s property, employees, or customers, the company can’t go after them for negligence.
As the article states, it does appear that “America is going the way of the freelancer” as companies’ need flexibility continues to increase. But companies must be careful to obtain that flexibility the right way and not fall victim to the risks that come with misclassifying workers.
You can help them do this by offering to convert their IC’s to W-2 employees working on contract through a contracting back-office, such as Top Echelon Contracting. Utilizing contractors through a contracting back-offers provides the same flexibility as IC’s without the additional misclassification risks.