Risk Mitigation When Using Contingent Workers

When using contingent workers, defined as non-traditional and non-employee workers (often either independent contractors or workers leased from temp agencies or professional employer organizations), employers remove a lot of the hassles associated with managing a workforce internally. However, they also introduce some risks, especially since the decisions are often out of their hands.

The primary risks involve misclassification of contingent workers or denial of benefits they should be entitled to. And the employer is not entirely off the hook just because they're leasing the employees. There are also risks involved when utilizing your own (non-leased) employees in a contingent capacity.

"We want to make sure we remember that there's risks in misclassifying employees. If we're going to be using our own employees for contingent workers—as part-timers, interns, or any other kind of capacity—we want to make sure that we understand Uncle Sam is out there keeping an eye on our taxes. Making sure that we're paying them, and if we're not paying people as an employee (and we're paying them as something else) as an employer, we can have some liability." Amy Letke explained in a recent BLR webinar.

There are, however, steps you can take to mitigate the risks in this scenario.

Risk Mitigation When Using Contingent Workers

Each of these areas represents risks for the employer:

  • Unpaid federal taxes and penalties
  • Unpaid state taxes including workers' compensation and unemployment and penalties
  • State law fines
  • Title VII, FMLA, ADA, ADEA, OSHA and State EEO compliance
  • Benefits such as 401(k) or stock options
  • Other state labor code violations
  • Other benefit plans and other fringe benefits
  • Healthcare reform compliance
  • NLRA compliance (union organizing rights)
  • Immigration/I-9/E-verify compliance
  • FLSA and overtime compliance
  • Rest and meal period compliance
  • Business expense reimbursement concerns
  • Back pay owed for any misclassifications
  • Litigation and attorney's fees for any lawsuits filed as a result of any of the above issues
  • IRS penalties for non-payment of taxes

And these can be some of the results of misclassifications or issues noted above:

  • Unpaid federal and state taxes, including penalties and interest that may be up to 50 percent of the compensation paid to the worker over the last 3 years
  • Unpaid overtime and time off the clock
  • Meal and break time violations
  • Penalties for denying access to medical benefits, 401(k) benefits, stock options, and other fringe benefits
  • Direct responsibility under employment laws for harassment, discrimination, retaliation, wrongful termination, etc.
  • Immigration issues

In a number of areas, misclassification "can really be problematic for an employer when an employee is not classified properly. Again, that's one of the major reasons employers will go to a temp agency or to a PEO—is for help managing some of those issues." Letke told us. Using an agency to handle your workforce decreases risk as an employer, but it doesn't eliminate it—so be careful.

For more information on mitigating the risks associated with using a contingent workforce, order the webinar recording of "The Contingent Workforce: How to Strategically Integrate Temps and Contractors to Fulfill Your Full-Time Needs." To register for a future webinar, visit

Amy Letke, SPHR, GPHR, is the founder and CEO of the HR consulting and HR outsourcing company HR Integrity, Inc. She has 20 years of progressive experience in human resources management and senior leadership in various industries.