There have been multiple articles in Contingent Workforce Strategies 3.0 on co-employment risks and mitigation strategies to proactively address them. But designing risk mitigation strategies for contingent workers (CW) supplied by staffing providers is distinct and separate from creating those strategies for independent contractor (IC) engagements. Some contingent workforce managers I’ve spoken with have confused the two issues.

Basically, contingent workers supplied by staffing providers do create co-employment situations (in 99 percent of cases), whereas using independent contractors can bring employment risks due to poor worker classification screening/policies. Sometimes, companies group staffing firm and IC talent together in their risk mitigation strategies. Doing so ultimately reduces their strategies’ effectiveness because they are primarily focused on two different worker relationship risks. Further confusing this issue are similar government rules and regulations used to discern the existence of either risk that needs to be mitigated.

Co-employment. For many, contingent workforce risk is synonymous with co-employment, which is the relationship among two or more organizations that exert some level of control over the same worker or group of workers. (In the legal arena, the term joint-employment is sometimes used, but both terms refer to the same concept.) Co-employers often share some degree of liability and responsibility for shared employees. Because of the many overlapping state, federal and other laws dealing with co-employment, it can be hard to pin down a single definition.

In a case known as Darden, the US Supreme Court set forth 13 factors to be considered in determining employee status under the common law agency test, among them:

  1. the engaging party’s right to control the manner and means by which the work product is accomplished;
  2. skill required;
  3. the source of the instruments and tools; and
  4. the location of the work

 While no single Darden factor is dispositive, lower courts have emphasized the importance of certain Darden factors more than others. In particular, the courts have focused on the “manner and means” language of the first factor as a key consideration.

Independent contractor classification. Whereas co-employment is whether multiple companies share employer responsibilities, independent contractor classification is about whether there is an employer relationship at all. And being found to have improperly classified a worker as an IC can lead to agency action.

In order to navigate through the IC classification storm, you need to know how to properly classify your workers. This can be difficult because different laws have different tests for IC status; it is possible for a worker to be an IC for purposes of some laws, but an employee for purposes of other laws. This is especially true for state unemployment compensation and workers’ compensation laws, which often have much tougher tests for IC status than the IRS test.

Some of the laws and factors that affect classification are:

  • Internal Revenue Service
  • Wage and hour laws
  • Title VII/ADA/ADEA
  • Workers’ compensation
  • Unemployment insurance
  • Benefit plans

The IRS has a three-factor test to determine IC status:

  1. Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial Control: Are the business aspects of the worker’s job controlled by the payer (e.g., how worker is paid, whether expenses are reimbursed, who provides tools/supplies)?
  3. Type of Relationship: Are there written contracts or employee type benefits (e.g., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

You must weigh all these factors when determining whether a worker is an employee or IC. Some factors may indicate that the worker is an employee, while other factors may indicate that the worker is an IC. There is no “magic” or set number of factors that “makes” the worker an employee or an IC, and as with Darden, no one factor stands alone in making this determination. Also, factors that are relevant in one situation may not be relevant in another. The key is to look at the entire relationship, and consider the degree or extent of the right to direct.

There are many potential consequences of improperly misclassifying a worker as an IC that range for tax penalties to disqualification of otherwise qualified benefit plans.

The key understanding here is that true ICs are not co-employees. Individuals properly classified as ICs are not anyone’s employees. However, if ICs are misclassified they might actually be employees of the client organization, or employees of a contingent labor supplier, or both, or of some other entity.

Co-employment and IC worker classification are just a few of the CW risks programs face, so be sure you understand the difference when establishing your mitigation efforts. One tool available to CW managers is Staffing Industry Analysts’ CCWP certification program, which helps managers learn to identify and manage risk. It provides an overview of the risks and best practices that will help CW program managers mitigate risk in order to protect themselves, their clients and their contingent workers. It also includes several hands-on activities that enable the CCWP certification candidates to actively analyze potential risks and suggest steps to mitigate them.