Over the last couple of months I’ve seen a real up-tick in inquiries from services procurement and vendor management teams asking about co-employment risk. This is partly due to concern that the U.S. government, in search of new sources of tax revenue, will double down its efforts to identify large companies who are potentially misclassifying workers.
The concerns have been exacerbated by software and consulting vendors over hyping co-employment risks as an avenue to sell vendor management systems and managed services. That’s not to say that software and services can’t help, but I do get the sense that the issue at hand may not necessarily merit the attention it gets in vendor teleconferences and white papers.
All of that aside, we don’t typically advise on co-employment since it tends to be more of a legal/IRS issue. What we do share on a regular basis is the information we’ve found useful to help guide readers to make their own determination.
To level set a little context, when workers are employees, the employer must withhold and pay employment taxes. This includes federal income tax, social security, Medicare, etc. This is a cost to the employer since they pay a part of the FICA contributions. When workers are independent contractors, the employer is not responsible for withholding and paying employment taxes on behalf of the worker.
If a worker is misclassified as an independent contractor as defined by the IRS, it opens the employer up to a whole gamut of liabilities beyond just having to pay the employment taxes. Temporary workers who fall into this camp can claim legal rights to stock option eligibility, social security, family medical leave time off and other benefits standard for full time employees.
Based on my conversations with readers, I have come across two interesting points: 1) using a staffing company who may pay the contractor on a W-2 basis does not insulate your company from liability, and 2) limiting the length of an assignment may not actually be the easy answer to avoiding misclassification — i.e., independent contractors, if misclassified, may still be eligible for benefits even if their assignment length is limited.
Keeping those points in mind, I’ve found one of the more useful tools for readers is the old 20 Factor Test developed by the IRS and Social Security Administration to determine classification. While it is a little ambiguous in places it’s at least a starting point for you to run through and get a sense for the overall level of risk and how much time you should dedicate to this issue. If you answer "yes" to any of the questions, it's an indicator the worker could be classified as an employee and not a contractor and that you should look to clarify your policies. It does not necessarily mean you are misclassifying workers, but it does give you a tool to quickly gauge whether you have an issue that needs attention or not. Here's a summary of the 20 Factor Test questions to ask yourself:
1. Level of instruction. Does your company require that the worker comply with your instruction on when, where, and how he or she is to perform the work?
2. Training. Does your company require the worker attend company provided training? Similar to this, does your company require an employee work directly with the worker to train them? Going back to question 1, this could be interpreted as requiring the work is performed in a specific manner.
3. Degree of integration into the business. Does the success or continuation of a business depend to an appreciable degree on the services of the worker?
4. Services delivered personally. Does your company insist on a specific worker performing the work? Is the contractor not free to assign the work to anyone?
5. Assistants who are company employees. Does your company hire, supervise, and pay assistants to the worker being classified as a contractor? Alternatively, if the contractor hires, supervises, and pays the assistant it suggests an independent contractor relationship.
6. Relationship continuity. Does a continuing relationship exist between the worker and your company?
7. Set schedule/hours of work. Does your company dictate the hours of work and/or days the contractor works?
8. Full time. Does your company require that the worker devote such a substantial amount of time to the services that implies a restriction that the contractor could not perform other gainful work for another client?
9. Control over place of work. Does your company require that the work is performed on site when it could be performed elsewhere?
10. Work sequence. Does your company require that the worker follow a set order, sequence, or schedule and not follow their own pattern of work?
11. Reporting. Does your company require that the worker submit oral or written status reports on the project to the company?
12. Payment. Does your company pay the worker on an hourly, weekly, or monthly schedule?
13. Expenses. Does your company directly reimburse the worker’s business and/or travel expenses?
14. Tools and materials. Does your company provide the worker with the tools, materials, or equipment to perform the work?
15. Facilities. Does the worker rely entirely on your company’s facilities to perform the work? Does the worker not invest in and maintain his or her own facilities to complete the work?
16. Profit and loss. Does the worker not take on the risk of significant financial loss due to expenses, unrelated employee salaries, etc.? Does the worker not have an opportunity to realize significant profit or loss as a result of their services to your company?
17. Working for multiple clients. Is the worker inhibited from performing services for multiple unrelated clients at once by being contracted by your company? Are you the worker’s only client?
18. Publicly available services. Does the worker not make their services available to the general public?
19. Discharge. Can your company discharge the worker at will? Is the worker’s status not tied to specific contract terms?
20. Right to terminate. Can the worker terminate employment without liability?
You could also file a form directly with the IRS to have them determine if a worker is an employee or independent contractor.That form can be found here:. http://www.irs.gov/govt/tribes/article/0,,id=185440,00.html The IRS warns that it can take up to 6 months for them to respond (at least they are being upfront about it!), but if you hire the same type of workers over and over again it may be worth the time.
Chapter 4 in this document (http://www.irs.gov/pub/irs-pdf/p963.pdf) distributed by the IRS is also a good reference point.
Feel free to comment and don’t hesitate to contact me if you have any questions.
Patrick Connaughton | Senior Analyst – Sourcing and Vendor Management
Phone: +1 617-613-6486 | Email: email@example.com|
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