Contingent workforce engagement is riskier than ever.
Growing risk means more resources allocated to minimizing risk. More resource allocation to risk mitigation means less resource aimed at growing revenue. And even then – has the risk been removed? How do you know?
The harsh reality of engaging contingent workers is that the majority of companies aren’t doing it correctly. Whether they’re misclassifying employees as independent contractors, lack the sufficient liability insurances to protect themselves and the talent, or aren’t adhering to proper employment regulations regarding pay frequency, sick leave, overtime law, vacation pay or an array of other laws, most companies are slipping up somewhere along the way, and in most cases are doing so without realizing the potential impact that even the slightest oversight can have on their ability to continue doing business.
To make things even more confusing, the lines aren’t always black and white here. There’s a lot of messy gray area.
One example is with regard to employee misclassification. There seem to be guidelines, but then we’re finding that the guidelines aren’t holding up in some cases.
One recent case study features a small engineering consulting company based on the west coast, that recently had an auditor from the Department of Labor come in and classify more than 30 of its “Independent Contractors” as “Employees” because, despite those workers meeting the vast majority of the criteria that the Department of Labor has set forth as needing to be met in order to be considered truly “independent”, some of these workers were being told when they had to show up to the work site.
Just like that, everything changed.
One small caveat resembling an employer-employee relationship (start time), and suddenly they’re out of compliance.
The result? Back taxes and workers compensation instantly due from the consulting company for those workers, going all the way back to the first date they were engaged for assignment. And that’s not even getting into the potential penalties that could come down (as high as 75% of payroll in some cases).
And what about the individual? Well, now that they’re no longer a “1099 contractor” they have to re-file their taxes, and potentially pay higher ones. Not to mention, change their company structure to be a corporation, if they want to continue being paid as an independent contractor.
“And how did this come about,” you may ask? Did the Department of Labor decide to run a random audit? No, one of the contractors filed for unemployment at the conclusion of his/her assignment, thus prompting a more expansive probe into the consulting company’s contingent workforce.
What are the risks? Below, we will look at the five most common situations.
- Employee Misclassification Risk. Contingent workers who are 1099 but are working in a full-time role with a client are at risk of IRS or DOL Employee Misclassification. This carries huge potential tax implications and government assessed penalties to all parties involved, including the client, agency, and contractor. See case study above.
- Employer Practices Liability and Employer Compliance. Recent studies show that contingent workers are up to five times more likely than permanent workers to file harassment, discrimination, and other workplace-related complaints, thus exposing agencies, clients, and their Partners/Directors to lawsuit risk.
As for compliance, thousands of contractors are not being paid in accordance with their given state’s requirements. Whether it be an issue of improper pay frequency, unpaid mandatory overtime premiums, or state-required mandatory sick leave, agencies and clients stand to incur big penalties if found to be out of compliance, which can happen as easily as a contractor filing a complaint with the Department of Labor.
- Rising Unemployment Ratings. Contingent worker claims for unemployment insurance are on the rise and are being granted at the expense of the client or agency. The more claims, the higher the rate you pay. A single unemployment claim from a 1099 contractor could lead to a determination of misclassification, and result in damaging consequences for all parties (see risk No. 1).
- Worker’s Compensation Exposure. Workers comp. markets are hardening to the contingent workforce sphere. Providers are becoming extremely reluctant to issue these policies, and thus many agencies are illegally employing contractors without proper workers comp insurance in place, exposing themselves and the client to a variety of potential lawsuits.
- General Liability Exposure. Thousands of contractors are working without liability insurance, leaving their clients and agencies exposed to substantial risk in the case of a critical on-site error, or damage to intellectual or physical property at the workplace.
If you’re an individual or a company that engages heavily in the contingent/contractor arena, chances are you’ve already come to the realization in reading this, that you’re currently exposed to at least one of the risks above, and need to come up with a solution to eliminate the exposure.
If you’re really honest, unless your company specializes and holds an expertise in the area of employer risk mitigation and/or HR compliance, you’ve probably also come to the realization that you don’t have the capability (or desire) to handle all of this in-house. The ever-changing landscape of employer risk mitigation is simply too volatile to stay on top of. That is unless you want to engage and retain a costly attorney whose job it is to monitor this stuff on a daily basis.
You need simple solutions.
Solutions that transfers these and other risks completely off you and/or your company’s back, and puts them squarely on the that of a company that lives and breathes this day in and day out.
The good news is, despite the grim picture laid out, there is hope!
There are experts in the field of both employer risk mitigation and contingent workforce management who can provide an all-in-one solution that removes these risks and responsibilities from you/your company, and manages them for you.
For a no obligation business review that leads a path to these solutions, reach out to Employers Logic today!