“I have always believed that the way you treat your employees is the way they will treat your customers, and that people flourish when they are praised.” Sir Richard Branson.
Thanks for coming back and welcome to our 4th conversation on my favorite subject – IT People.
Our series on IT People touches on topics specific to leading and managing People.
People working together is what makes work – WORK!
Last week we discussed flexible staffing models utilizing contract labor and touched on co-employment. Today we will focus on co-employment risk mitigation. Please review the case studies in last week’s discussion if you are unclear of the risks.
As a reminder, “Co-employment is the relationship between two or more employers in which each has actual or potential legal rights and duties with respect to the same employee.” Co-employment status comes into question when work is contracted to perform a job which would typically be performed by an internal employee.
Before we begin, trust that contract labor is a good and necessary employment status. It allows for flexibility in staffing models for an individual company. The key is to assure you know the differences between managing a contracted resource and managing a direct employee.
It can be confusing because, most of the time, a contractor is performing the same or similar role as a direct employee. The main difference between an employee and a contractor is that the employer has control over the activities of the employee, but the contractor does his or her work independently or under the management of a contract management firm. The employee has a specified salary or wage and is bound by an employment contract whether it is written or implied.
Typically, a contractor’s employment is managed by a contractor management firm that owns and manages the contractor’s insurance information, their health and safety information, training programs, and other specific documentation that pertains to the contractor and the owner client. It is best to look to HR to assure you are working with the employment laws for contract employees. At the same time, it is very helpful for IT leaders to understand the implications and risks of co-employment when contracting individuals in staff augmentation roles.
The first step in any risk mitigation strategy is simply to identify if there is a risk. As a self-check, the IRS and many states use the “20-factor” or the “common law” test, a checklist of 20 criteria, to identify the degree of control a company has over an individual and to determine employment status. If a contractor meets most of the criteria in the common law test and the client is found to be the primary employer, the contractor becomes their “common law employee” and the client will bear greater liability for that contractor, thus creating risk.
Here’s a summary of the 20 Factor Test questions:
20 Factors for Determining Worker Status
- Instructions. Who gives them, and must the worker obey them? A worker who must obey company instructions about how to perform the job is usually determined to be an employee of the company.
- Training. Who trains the employee? An independent contractor comes to a company fully trained.
- Integration. How integrated is the employee’s work with the operations of the company? The closer the relationship between the work of the company and the work of the worker, the more likely the worker is an employee.
- Services Rendered Personally. Does the job need to be performed by a specific worker? If the company demands that services be performed personally by the worker, this shows control by the company over the worker, which makes it more likely that the worker is an employee.
- Hiring, Supervising, and Paying Assistants. Who hires, supervises, and pays a worker’s assistants? If a company hires, supervises, and pays a worker’s assistants, this also shows company control, making the worker most likely an employee.
- Continuing Relationship. Does a continuing relationship exist between the worker and the company? A continuing relationship between worker and company tends to show an employer/ employee relationship.
- Set Hours of Work. Is the worker required to work set hours? Independent contractors have the freedom to plan their own work day.
- Full-time Work. Is the worker required to work full time? An independent contractor should be free to accept or reject a job offered by the company.
- Place of Business. Does work need to be done on the premises? An independent contractor should possess his or her own place of business separate from the company.
- Work Schedule. Does the worker need to follow certain established routines and schedules? An independent contractor will set his or her own work schedule.
- Reports. Is the worker required to submit reports, and if so, to whom? Employees are often required by employers to turn in reports, a practice that is viewed by the IRS as evidence of control.
- Method of Payment. Is the employee paid by the hour, week, month, or in a lump sum? Payment to independent contractors should be by the job, rather than by the day or by the hour
- Business/Travel Expenses. Who pays for any travel expenses? An independent contractor should pay for all of his or her own expenses.
- Furnishing Tools, Equipment, and Materials. Who covers the cost of a worker’s tools, materials, or equipment? If a company covers the cost of a worker’s tools, materials, or equipment, independent contractor status is weakened.
- Significant Investment. What degree of investment does the worker have in his or her own business? The larger the worker’s investment in his or her own business, the more likely the IRS will accept independent contractor status.
- Realization of Profit or Loss. Does the worker bear profit or loss responsibility? An independent contractor should be capable of either realizing a profit or suffering a loss.
- Working for More Than One Company. Does the worker have a diverse client base? Independent contractor status is strengthened when a worker has a diverse and significant client base. However, a worker can perform services for several companies and still be classified as an employee at one or all of them.
- Making Services Available to the General Public. Does the worker make himself or herself available for other jobs? An independent contractor’s name should be advertised or held out to the general public as being in business for himself or herself.
- Right to Discharge. Who holds this right, and is there a notice requirement? While an employer may discharge an employee, parties to an independent contractor agreement typically have an obligation to terminate their contract according to a notice requirement.
- Right to Quit. Can the worker terminate without incurring liability? If a worker can terminate employment with a company at any time without incurring liability, it suggests an employee-at- will relationship. An independent contractor, on the other hand, cannot simply walk away from a contractual relationship with a company.
Engage with your HR team in reviewing the 20 criteria and determine your risks. If after a joint review you are unable to determine your risks, the IRS is available to help you determine whether a worker is an employee. To ask for their help you need to file Form SS-8 Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS. http://www.irs.gov/pub/irs-pdf/fss8.pdf
A word of caution here. To avoid the risk of co-employment, some companies limit contract worker’s length of service to a specific period of time as the solution. Some of these policies are based on the belief that such workers are automatically eligible for benefit plan coverage under the company’s plan after a certain amount of time.
In my research, I have discovered that to always be true. In fact, assignment limits may even carry some risk of violating ERISA. If the limits or policies are construed as an unlawful effort to prevent workers from reaching the hours needed for plan participation. In addition, continual staff turnover is inefficient, disruptive, and not a good solution for companies with long-term temporary staffing needs.
What is an employer to do? While researching best practices for mitigating co-employment risks, I found this very informative website:
Let me share an excerpt from this page relative to avoiding co-employment.
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.
Matt Yoh, Director of Customer Solutions at Yoh.
This site is a rich source of compliance guidance.
The flexibility offered by contracting employees is a risk worth managing. There is guidance available to mitigate the risk. Engage your HR and sourcing teams to mitigate and manage the risks utilizing policy and management practices. Test their awareness of the risks and expect to share the burden of mitigation with your vendor partners. You will be surprised by how many of the vendor account executives are not informed of co-employment issues or risks. Don’t forget to provide training to your managers as they are your front-line face to the contracted employee.
Finally, create a culture of inclusion and welcoming without tipping into the risk zone. After all, the contracted resource is more than a flexible labor solution, they are a human being. Give me a call if you want to discuss techniques for managing teams with members from mixed sources.
Until next time, have a great week! To further this week’s conversation with me – Let’s Talk!
IT Executive Advisor and Leadership Coach
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