From Staffing Industry Analysts, George Reardon discusses the risks of classifying workers as independent contractors and whether the risks of classifying them as independent contractors is worth the risks. George writes:
Are the benefits of IC staffing worth the risks? The costs of work — pay, FICA, workplace injury benefits, unemployment compensation/savings, fringe benefits — must all be paid or reserved for by someone, either an employer or an independent contractor, and the resulting total bill rate to the customer should be about the same as the rate for employees. So where is the net benefit?
The risks are plentiful. Misclassification claims sometimes recover double damages and liability for the workers’ attorney’s fees, and these claims for retroactive recoveries are often made as class actions. Large court awards for misclassification by staffing firms are frequently reported in staffing publications.
IC misclassification risks can be avoided by requiring workers to accept W-2 status. Workers who could qualify as ICs can still be assigned as staffing firm employees while they maintain their IC businesses on the side.
Workers’ insistence on IC status is not as firm as customers and ICs try to make you believe. I have reviewed large existing IC populations for customers and found most, including so-called “corp-to-corp” LLCs, were probably misclassified. Those workers were offered two options: accept a W-2 positions with a staffing firm or fulfill certain administrative requirements to remain engaged as an IC. When the workers were shown the administrative requirements that would be imposed on them to remain ICs — for example, changes in the working relationship required to support the IC classification, such as insurance, audits, evidence of business presence, special contracts, indemnity, etc. — a high percentage, around 70%, agreed to become employees.
Moving workers from customer ICs to staffing firm W-2s also helps avoid the “red flag” when IRS sees a W-2 and a 1099 from the same source for the same person in a single year.
If you must assign workers as ICs, you should rigorously maintain and document a classification process that follows the relevant governmental criteria. Even if you get some of the classifications wrong, government authorities and plaintiff’s lawyers will likely leave you alone, preferring to use their limited resources to go after the plentiful “low-hanging fruit” of the many blatantly uncompliant employers.