When recruiting needs to be ramped up, companies will often add contract recruiters to the talent acquisition team. However, if businesses don’t take the proper steps, or don’t ask the contract recruiter or company they’re working with the right questions, they can open themselves to worker misclassification risk and/or co-employment risk.
Worker misclassification risk occurs when a company pays a contract recruiter as a 1099. In other words, they do not pay the contract recruiter through payroll, as they do with their full-time employees. There is a strict set of IRS guidelines on what constitutes a true 1099 entity, and it is extremely rare that a contract recruiter would pass that test. Here are the important criteria that relegates almost all contract recruiters to non-1099 status:
- They don’t have multiple clients
- They don’t have offices
- They don’t have employees
- Their work hours are dictated by an employer
- They are given the tools and resources to do their job by an employer
- They are supervised by an employer
There are other tests, but these are the most obvious reasons why a contract recruiter would not be a true 1099. The reality is that they are classified by the Department of Labor as an employee, and therefore not paying them as a W2, through payroll, constitutes worker misclassification.
Penalities of Worker Misclassification
If the Department of Labor rules that you misclassified a contract recruiter, the penalties can be substantial. If they rule that it was not intentional, an employer may be subject to:
- A $50 fee for each W-2 not filed
- 1.5% of the employee’s wages, plus interest
- 40% of the employee’s FICA (Social Security and Medicare) contributions
- 100% of the employer’s matching FICA contributions
And if the DOL finds that the misclassification was intentional, then this what an employer may face:
- 20% of all employee wages paid
- 100% of FICA contributions for both employee and employer
- Up to $1,000 in criminal penalties per misclassified employee
- Up to 1 year in prison
Regardless of whether the misclassification was intentional or not, a misclassified contract recruiter who files a complaint may be eligible for benefits owed to them, including, but not limited to:
- 401(k) contributions
- Health plan coverage
- Stock options
- Paid Time Off
So then how can you hire a contract recruiter neither as a 1099 nor an employee? That’s a tricky question, but fortunately comes with an easy answer: hire them through a staffing agency. However, it is imperative that the staffing agency pays the contract recruiter as a W2 employee. Why you ask? Let’s discuss the risk that goes hand-in-hand with worker misclassification; it’s called Co-Employment Risk.
Recruiting and Co-Employment Risk
What is co-employment risk? It happens when a contract recruiter has employment relationships with two or more employers for one work situation. In this case, when a contract recruiter is assigned to a client through a staffing firm. If there is uncertainty as to whether the staffing firm or the client company should take responsibility for the contract recruiters employment, that’s where a co-employment claim could occur. These are some benefits to hiring a freelancer for some projects, but you should know the difference between a co-employment situation and an independent contractor, especially when contract recruiters are almost always treated as employees.
Understanding the basic principles of the law, and what type of processes any staffing firm you’re considering working with should have to avoid these risks is a great place to start.
Microsoft learned the hard way that co-employment disputes can be costly. A lost co-employment lawsuit resulted in the software giant paying a $97 million settlement related to unpaid benefits during a 13-year period. This raised the profile of co-employment issues nationally.
Here's how "shared legal responsibility" typically works in co-employment. The staffing agency:
- Oversees and executes recruitment, hiring, onboarding and exit protocols
- Establishes pay rates
- Ensures compliance with employment laws
- Handles any work authorization requirements, such as collecting I-9 forms, verifying employment and education history, and outsourcing drug testing
- Pays the contractor, and withholds payroll taxes contributions to state workers' compensation funds
- Oversees contractor benefits programs
- Responds to contractor complaints, including civil-rights-related and workplace-related
- Chooses the length of the contract
- Supervises daily work
- Ensures the contractor's safety and manages worksite conditions
Co-Employment Issues and Best Practices
The result for clients is that they must cover their legal bases when engaging a staffing agency in the recruitment and hiring of a temporary worker like a contract recruiter. Best practices include:
- Thoroughly reviewing staffing agency and temporary worker contracts. Do not assume everything is covered or will be fine. Instead, engage an attorney who specializes in employment contract law
- Clearly defining your responsibilities as co-employer in your temporary worker contracts
- Excluding temporary workers from your benefits plan
- Ensuring the staffing agency manages all payroll-related tasks, including distributing paychecks, paying employment taxes, withholding income tax payments and filing necessary IRS forms
- Ensuring the staffing agency complies with required insurances such as workers' compensation and unemployment
- Ensuring the staffing agency manages and pays for benefits collected by temporary workers
How to Manage Co-Employment Successfully
It's true that legal issues can arise from co-employment disputes, but it's also important to understand that the vast majority of staffing agencies, clients and contract recruiters work together harmoniously. The best strategy for managing misclassification and co-employment successfully is to partner with a recruiting firm that understands employment law and the responsibilities that come with it.
ContractRecruiter takes the time to find the highest quality contract recruiters for our team, and provides benefits and pays them as W2 classified employees so that there is no risk of misclassification or co-employment claims.
For more information on misclassification and co-employment or to schedule a consultation, please contact ContractRecruiter today.
Andrew Greenberg’s roots in recruiting date back to 1996. He has experience both on the agency-side and corporate-side of the staffing business, with a focus in the financial services space at companies like Bloomberg and UBS. He also has core experience with information technology staffing, and has worked for major software companies such as SAP Business Objects and IBM/Informix Software. To get in touch with Andrew, you can reach him by email or by phone at (800) 797-6160.