Mitigating Co-Employment, Misclassification Risk for Independent Contractors

Hiring the right employee at the right time, a candidate who qualifies as the right fit for a role and within a company culture, is a challenge. Meeting that challenge again and again is a skill. As a hiring manager, though, it’s possible to identify and bring aboard the best independent contractors for your company and still miss one key final step.

The appropriate classification of newly hired independent contractors is a crucial action that sometimes gets taken for granted. Laws classifying employees with W-2 or 1099 designations are nuanced and highly-specific, and a failure to grasp those details could land a company in hot water. One of the best ways to mitigate that risk is for a company to enter into a co-employment relationship with a third-party contractor agency.

Consider that the IRS maintains a 20-point checklist providing guidelines on whether an independent contractor should be paid on a W-2 or a 1099, but it’s up to the employer to make the determination of how its new hires will be paid according to the tax code. A misclassified employee can file a complaint against their employer demanding to be compensated for paid time off (PTO), healthcare benefits, 401k contributions and other considerations.

The financial risks for a company that misclassifies a new hire as a 1099 employee include back-tax assessments and fines – even penalties amounting to as much as 100 percent of the back taxes due at both the federal and state levels. Those back taxes may include all federal income taxes, all social security taxes and all unemployment insurance taxes not withheld.

Those are no small considerations for a busy HR department responsible for maintaining a high-flow pipeline of contractor talent. Any company that relies on a regular influx of specialized or project labor should strongly consider the downside of  a classification error – and the risk mitigation provided by working with a hiring agency or a talent cloud such as PeopleCaddie.

In a co-employment relationship where an employer hires independent contractors through a third-party employer, misclassification risks are dramatically reduced. Not only is the third party often better equipped to assess new hires under the classification laws, but as the employer of record, they are also responsible for ensuring compliance with all federal, state and local employment laws. A hiring department that uses a service such as PeopleCaddie can focus on the quality and fit of contractor candidates rather than the red tape typically involved in the hiring process.

A co-employment relationship with a third-party hiring agency not only offers numerous advantages in terms of finding and evaluating freelance talent – it has the added benefit of mitigating the risk of contractor misclassification. With the right co-employment partner, you can make the hiring process simpler, sidestep any confusion about W-2 and 1099 designations and avoid putting your company’s financials – and your own reputation – on the line.

Interest to learn more about how PeopleCaddie can help mitigate misclassification risk? Contact us!

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