Contractor or Temp? Getting Worker Classifications Right from the Start

Ready to fill a talent gap for a short-term need or project? I’m glad that your business is growing! First things first: Make sure you understand worker classification before you publish that job posting.

Puzzle Pieces reading Permanent and Temporary
Admin
June 14th, 2020
No Comments

Ready to fill a talent gap for a short-term need or project? I’m glad that your business is growing! First things first: Make sure you understand worker classification before you publish that job posting.

Terms like independent contractor, contract employee, and temp often get used interchangeably, but in fact, there are differences. These differences center on legal and tax responsibilities—a tricky task that needs to be managed correctly to avoid problems down the line.

Independent Contractors

Just like the name implies, they provide their services—usually highly-skilled ones—to several kinds of businesses (or individuals) and work under a contract. They can come into your place of business to work. They determine how and when they work and they provide their own equipment.

In tax terms, we’re talking about someone who would be classified as 1099. You, the employer, are generally not obligated for payroll taxes, minimum wage and overtime requirements, benefits, workers’ compensation, and unemployment costs for that individual.

Guidelines for Independent Contractor Status

You may think this sounds like the ideal arrangement because it can cost less. Before you go forward, you should review the requirements.

The degree of control vs. independence in the worker-company relationship governs how the worker gets classified. On their website, the IRS outlines these three “Common Law Tests.

  1. Behavioral:Whether the company has the authority to direct and control the work of the service provider and whether the worker receives training and instruction.
  2. Financial:Whether the worker realizes a profit or loss, makes investments in tools and facilities, and has unreimbursed expenses.
  3. Type of relationship: Is there a written contract between the parties? Is the relationship permanent? Is the worker entitled to employee-type benefits?

Contract Employees and Temps

The more control the business has over the individual, the more likely he or she will be considered an employee and not an independent contractor. Technically, contract employees are the temps you hire through a staffing agency. These are W-2 employees who work on a contract basis. They are usually hired to work on a specific project or for a specific amount of time. They often perform back-office support, blue-collar or entry-level work. They become an employee of the staffing agency. The agency covers the payroll, workers’ comp, new hire process, and benefits during their temporary period.

Caution Before Your Proceed

A worker is often presumed to be an employee (and entitled to all the rights and benefits provided to employees) unless they meet the criteria established by federal and state tests. If you classify as 1099 and the classification is challenged, it will be up to you to demonstrate the worker is meeting the criteria for an independent contractor.

The bottom line: Using temporary workers and/or independent contractors can be cost-effective. It is your job to understand and comply with all rules regarding classification before you a. Still unsure? That’s why we’re here to help! Let’s set up a time to chat today.

Additional sources

Temps & Contractors: What’s the Difference & Why Does It Matter?

Leave a Reply

Your email address will not be published. Required fields are marked *