Many employers use contingent workers: independent contractors, leased employees, consultants, and temporary employees. While using an alternative workforce has benefits, it can create legal and practical risks as well. If you use or are considering using contingent workers, here are some benefits and risks to weigh.
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Benefits of contingent workers
There are many potential benefits to using contingent workers. Although the specific benefits vary from case to case, some of the more common benefits include:
- Cost savings. Perhaps the most significant motivation for using workers such as independent contractors and temps is cost savings. You often must pay employees for nonproductive time, but you don’t usually pay contingent workers for downtime (e.g., you cut back on temps during periods of low production). Additionally, you generally don’t provide workers such as independent contractors and temps with the benefits you provide to regular employees, such as vacation time, holiday pay, sick leave, and health insurance. Finally, using independent contractors allows you to avoid withholding payroll taxes, paying social security and Medicare taxes, and making unemployment contributions.
- Increased efficiency. You can increase efficiency by using contingent workers to staff peak hours, days, or periods of demand or for one-time projects. During periods of lower demand, you can stop using them.
- Administrative savings. Using contingent workers can ease your administrative burdens by alleviating the need to complete routine employment documentation and other administrative tasks. For example, participating in a leased employee arrangement may save you from having to review employment applications, interview job candidates, or prepare tax withholding forms. Additionally, workers such as independent contractors and tempscan be replaced or removed from service without the significant administrative and personnel headaches often associated with firing someone.
- Better job security. Contingent workers often serve as a buffer that allows stable employment for the “core” workforce. Because workers such as independent contractors and temps allow you to use labor fluidly and adapt strategies for expanding and reducing hours with minimal effect on the employment of the core workforce, regular employees may feel an increased sense of job security. That’s particularly true in difficult economic times, when core employees may develop a perception that contingent workers will be first to go if job cuts are made. (HR Hero White Paper: 5 Alternatives to a RIF)
- Recruiting opportunities. Contingent workers often provide a valuable base of workers from which to recruit for regular jobs. They also provide you with an opportunity to evaluate their performance on the job.
- Broad talent pool. Contingent workers may offer a broad talent pool from which to select, particularly during special projects of limited duration. For example, you may be able to secure an independent contractor with more skill and talent than you would be able to afford on a long-term, full-time basis.
- Flexibility. Contingent workers allow you greater flexibility in maintaining and adjusting staffing levels. You can readily increase staffing when your labor needs are high and decrease staffing with minimal legal risks and economic consequences when your labor needs are low.
Learn more about wage laws and correctly classifying workers in the Wage and Hour Compliance Manual
Practical risks of contingent workers
Many employers become so overwhelmed by the potential benefits of using contingent workers that they don’t recognize the legal and practical risks. Again, although the risks vary from case to case, some of the more common practical risks include:
- Decreased loyalty and productivity. Some employers express concern that workers such as independent contractors and temps who aren’t dependent on any particular employer for their livelihood or motivated by normal advancement opportunities will be less loyal, less productive, and more apt to produce lower quality work than regular employees.
- Status. Some contingent workers feel as though they are treated as “second-class citizens” compared to regular employees or as if they aren’t a part of the team. That can lead them to believe their contributions aren’t recognized or rewarded to the same extent as employees’ contributions.
- Impact on employees. For one reason or another, some employees resent contingent workers. Employees may feel that workers such as independent contractors and temps are robbing them of overtime opportunities or taking a full-time job from someone who’s more deserving. Or they may know former employees who were discharged during a reduction in force only to later have their jobs filled by contingent workers. (HR Hero Line article: Downsizing: 7 steps to help employees cope)
- Confidentiality. An employer that uses contingent workers has no guarantee that they won’t move on to a competitor. That’s particularly true when workers possess specialized skills and expertise that limit the number of companies for which they can work.
- Increased training costs. Sometimes you face higher turnover rates with contingent workers than with employees, which can lead to increased training costs.
Perhaps the most significant risks of using contingent workers lie in the legal consequences of misclassification, especially with regard to independent contractors. You’ll face significant liability under tax law, wage and hour regulations, and other employment laws if a court or administrative agency determines that your contingent workers were actually employees. Here are some of the legal risks of misclassifying workers:
- Tax liability. One of the more significant risks facing employers that misclassify employees as independent contractors is liability for failing to withhold employment taxes. Misclassifying workers can subject you to liability for accrued and unpaid income taxes, FICA and FUTA withholding, and equivalent state taxes and withholding as well as interest and penalties.
- Wage and hour violations. The Fair Labor Standards Act (FLSA) is another source of liability. FLSA liability generally arises when you fail to pay non-exempt employees minimum wage and overtime. Employers that fail to comply with the FLSA’s requirements can be liable for past wages due, interest, attorneys’ fees, costs, and liquidated (or double) damages.
- Discrimination charges. The distinction between employees and nonemployees is critical for determining coverage under the employment discrimination statutes. Usually, however, agencies and courts are apt to find that a staffing agency and its client are actually joint employers of contingent workers; both employers will therefore be deemed liable for discrimination or harassment affecting contingent workers under certain circumstances.
- Liability for job-related injuries and workers’ compensation. One advantage of using independent contractors rather than employees may be avoiding worker’s compensation premiums. But be aware that an independent contractor who is injured on the job may be able to sue your company for negligence and recover a multimillion-dollar damages award. Employees generally don’t have the right to sue you for negligence because they’re limited to the rights and remedies available under the workers’ comp laws.
- Employee benefits liability. Misclassifying employees as nonemployees can have drastic effects on your benefit plans and ultimately result in plan disqualification.
- Occupational safety and health issues. Another important issue, particularly in the leased employee context, is responsibility for safety and recordkeeping under the Occupational Safety and Health Act (OSHA). As a practical matter, OSHA liability often rests on the shoulders of the entity using the services of a particular worker.
- Family and medical leave issues. Failing to comply with the Family and Medical Leave Act (FMLA) can also result in significant liability. FMLA regulations generally state that only the primary employer in a joint employer situation is responsible for providing the required employee notices, granting leave, maintaining health benefits, and restoring job status following leave. However, if you erroneously believe that workers aren’t actually your employees, you could face liability for FMLA violations.
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The decision to use workers such as independent contractors and temps should not be made lightly. While substantial practical benefits often accompany such arrangements, equally substantial legal and practical pitfalls may await careless employers. Indeed, the risks posed in this article, though many, aren’t even an exhaustive list. If you’re considering a contingent worker arrangement, begin by consulting employment counsel and giving careful thought to whether the benefits outweigh the risks.