Best Practices for Mitigating Co-Employment and Independent Contractor Compliance Risks

A year and a half after the official end to the Great Recession, companies are still looking to rebuild their business and return revenues to pre-recession levels. To do this, ramping up staff will be key.

For many companies, non-employees—that is, independent contractors, temporary and contract workers—will play a crucial role in recovery. Non-employees give employers an unprecedented amount of control and flexibility over their workforce—no small benefit in a period of slow and uncertain economic recovery.

In fact, businesses began recognizing the benefits and relying more heavily on this segment of the workforce even before the Great Recession began. According to the Bureau of Labor Statistics, from 1990 to 2008, temporary employment grew from 1.1 million to 2.3 million individuals.

When properly managed, non-employees give businesses a competitive advantage, allowing the company to quickly respond to changing economic and business conditions in a global marketplace. But improper hiring and management practices can introduce employers to a whole other set of challenges and risks associated with co-employment and independent contractor compliance.

As the population of non-employees has steadily grown, so too has the scrutiny placed on their utilization. Over the years, the courts have heard numerous lawsuits filed by contractors claiming they were improperly classified as non-employees and demanding (and in some cases receiving retroactive benefits.

At the same time, the federal and state governments are making a strong push to capture tax dollars connected to co-employment and independent contractor compliance. For example, in May of last year, Connecticut passed legislation increasing fines for misclassification. And, in the latest Federal budget, there are millions of dollars and provisions set aside to hire 100 new personnel to target misclassification.

Businesses that don’t adhere to compliance regulations could set themselves up for lost revenues at a time when building the bottom line back up is crucial for future success. For example, lawsuits connected to co-employment can result in the company having to repay lost wages, overtime or benefits. In these cases, companies may also be responsible for any associated court fees, which, since many of these cases are protracted, can build up over time.

And yet, business executives are surprisingly unconcerned with the issue. In a Workforce Trends Study conducted in late 2010, Yoh surveyed executives of companies with at least $750 million in annual revenue. When asked about their most pressing contract labor concerns, executives ranked independent contractor compliance and co-employment as least important.

Let’s break down the potential co-employment and independent contractor compliance issues, and discuss the best practices for implementing a compliance program to protect your organization.

Independent Contractors Should Remain Independent

By definition, independent contractors are independent from the business. They are not factored into the company’s overall headcount, nor are they bound by the employee policies and procedures associated with it.

Independent contractors are responsible for performing a specific service for the company, the terms of which are detailed in a statement of work (SOW) or similar contract. In this agreement, an SOW agreement is drawn up by the independent contractor and your company’s procurement team. As part of the contract, the SOW should state what the independent contractor needs to accomplish, but it’s up to the independent contractor to decide how, when and by what means the service or deliverable is provided. Moving forward, any discussions about the project should be in terms of the SOW and any related metrics, milestones or deliverables, and not about employment terms, working hours or daily direction.

Herein lies some of the risk inherent in utilizing this type of contracted labor. Although your procurement team knows and understands the non-employee’s terms of employment, company managers and their teams might not. When independent contractors sit in the facility and work within employee teams, they might appear to function just as a full-time employee would. As project loads increase and managers respond, they could unintentionally shift independent contractors to new projects or begin to manage more of what these contractors are doing on a day-to-day basis.

An all-too-common practice is to create an SOW for an indefinite period of time or for an undefined set of tasks without any related performance measures. This is easier for the manager, and while it may seem like “keeping it vague” might help a company’s case, it actually creates more issues for the organization as the manager provides more and more direction to the independent contractor.

Recently, these potential issues were brought into the national spotlight in the case against FedEx. The main issue in this case was whether or not FedEx truck drivers were independent contractors, as FedEx claimed, or FedEx employees. Technically, if they had been independent contractors, they would have been able to decide how or when to deliver packages. Yet FedEx asked their “independent contractors” to wear FedEx uniforms, work specific days, during certain hours, and drive a FedEx truck. Not very independent, right?

In addition, independent contractors are viewed as an independent business entity, and should be paid like any other vendor providing a service (according to the SOW and the contractual payment terms). It is also the responsibility of the independent contractor to pay both individual and business taxes and obtain the proper insurance.

In many cases, an independent contractor will say they have the proper insurance in place and will be paying the appropriate taxes, but it’s not enough to take them at their word. The business contracting the independent contractor must be vigilant to ensure that the proper insurance is in place (with proper levels of coverage) and up to date.

Implementing Best Practices for Independent Contractor Compliance

• Don’t execute SOWs with indefinite or vague terms. A good SOW should spell out the tasks or deliverables that will be provided and, whenever possible, include some type of performance measurement that defines acceptable completion of the tasks (with dates, numbers or results).
• Determine a process for evaluating the classification of independent contractors. The Internal Revenue Service originally employed a series of 20 questions which were more focused on the business aspects of the independent contractor’s status. Today, there are three main groups of factors that determine an independent contractor: behavioral control, financial control and the type of relationship of the parties.
• Establish a process for understanding how independent contractors come into the organization. Although the SOW will be handled directly with procurement, it’s critical for other business units and managers to know the specific services the independent contractor is to render and any associated details. Force managers to detail the tasks or deliverables expected, and ask them to think about how long they will be used, where they will be working, and what skills they must have. Establish criteria to define which type of non-employee is best suited for which types of projects or engagements.
• Avoid having independent contractors do the exact same work as employees. If an independent contractor is sitting in the same facilities, in the same department, using the same tools, and doing the same job as an employee, there is potential risk.  It’s compounded when a manager is providing day-to-day direction to contractors along with direction provided to company employees.
• Collaboration is key. Determine who will be responsible for what tasks associated with independent contractors and communicate this with necessary parties. Who within the company will vet the independent contractor to determine proper insurance and tax filings? Who within procurement will work with the independent contractor to develop or alter the employment relationship? Does the independent contractor understand that they must represent their services and deliverables honestly and within the guidelines of the contract?

Building Relationships with Temporary or Contract Employees

In the case of temporary employees (sometimes referred to as contract employees), co-employment occurs when two companies attempt to maintain control over a worker’s employment relatioinship. Temporary employees often are provided to the company through a temporary staffing agency. In these cases, the agency is the direct employer, responsible for the payroll, benefits and worker’s compensation for the non-employees in your organization.

However, this distinction can become blurred when these non-employees begin their assignment and start to work closely with their manager. Often, the relationship that develops is similar to a traditional employer-employee engagement. Since anything directly related to the employer-employee relationship (such as salary, performance reviews, benefits, etc.) should be handled by the employer of record (in this case, the temporary agency), if this becomes a shared relationship, it could be considered co-employment.

This is what happened at Microsoft. In the Vizcaino v. Microsoft Corp. ruling, the court found that Microsoft had failed to properly identify the roles of temporary workers. The court cited two main reasons. First, Microsoft had treated their contractors as employees, and not like temporary employees or independent contractors. Second, they did not exclude contract employees provided by third party staffing companies from their stock purchase plan. Although this occurred more than ten years ago, it remains the gold standard case study on the necessity of properly identifying your temporary workers. In the end, this cost Microsoft nearly $100 million.

When bringing on temporary or contract employees, more of the company’s business units will be directly involved in managing this relationship. The procurement department will work directly with the temporary agency to manage the contract. Meanwhile, the human resources department will be more directly involved in transitioning these non-employees into the organization, and eventually, transitioning them out appropriately. As a result, HR should be responsible for establishing the policies and procedures for temporary employees and ensuring that all managers and employees throughout the company are trained in these procedures once developed.

Best Practices for Avoiding Co-Employment

• Implement specific policies and procedures for temporary or contract employees. Highlight the types of interactions and conversations that are appropriate to have with your contract employees and those that open up the company to co-employment risks. In addition, provide adequate training to your managers, so these policies can be adequately implemented and followed throughout the organization.
• Share responsibility with other departments and your staffing vendors. Create a detailed process that delegates which parties are responsible for which tasks. Who is responsible for touching base with the staffing agency regarding contract details? Who trains managers and internal employees on appropriate business relationships with non-employees? Are non-employees aware that employment issues should be directly addressed with their temporary agency? Is there language within your contract with the vendor that states they are the sole employer? Has the non-employee signed a waiver that they are not entitled to or will not seek the benefits of the company?
• Utilize a single point of contact that is responsible for coordinating efforts throughout the organization. To make sure nothing falls through the cracks, identify someone within the business to monitor processes, supervise any processes where handoffs occur and coordinate with vendors. This is particularly important during the onboarding and offboarding processes. For example, deciding who will facilitate getting the non-employee a security badge, identifying a place for them to sit in the facility, what equipment they will receive, and how those things will be tracked and recovered at the end of the assignment.
• Consider using a managed service provider. Having a single point of contact for vendor management, processes and procedures will help keep communications clear and provide an additional level of visibility and risk mitigation. A managed service provider can also monitor compliance, quality and vendor performance.

Mitigating co-employment and independent contractor compliance risks is an ongoing process. A one-and-done strategy will not protect your business. Implementing periodic internal audits of your entire workforce can help, as well as identifying the number and classifications of non-employees throughout your business. If a misclassification issue has occurred, it must be immediately addressed and remedied.

With a consistent and compliant process in place, co-employment and misclassification risks can be greatly reduced, along with the potential costs associated with them.