We’ve written at considerable length on the subject of how the Employer of Record (payrollers and PEOs) model can be a legitimately useful practice, saving organizations significantly on the administration costs inherent in maintaining a contingent workforce. (See here and here.) For the most part, the EOR is another useful arrow in the workforce manager’s quiver full of cost saving and efficiency boosting strategies. Yet, like nearly everything else, there is the very real potential for failure. How can the prudent HR manager or contingent workforce manager ensure their organization gets the best of the EOR and not the other way around?
Organizations using third party services to handle employment taxes could be losing money according to a Treasury Inspector General for Tax Administration (TIGTA) report published this year. Worse, the report noted that the Internal Revenue Service doesn’t have a way of knowing if some of those services are even authorized to perform the tax payment duties expected of an EOR. With 40 percent of SMBs relying on third parties like Employers of Record to handle the Federal, Social Security, unemployment and Medicare tax reporting/withholding duties for the contractors they engage, there is plenty of potential for problems.
It is crucial for a contingent workforce management strategy to include significant due diligence when it comes to selecting an EOR to engage. Equally important is to develop and maintain strong contract agreements that stipulate what is required according to your organization’s business rules and requirements as opposed to simply assuming the third party provider will have strong reporting, audit and compliance controls in effect. TIGTA reports that while many providers are compliant and perform well, there have been cases where third-party payers collected withholding from the employers for payment of payroll taxes, but never turned over those funds to the IRS. “This causes significant problems for employers because the funds have been expended but taxes are still due,” says the report. Any economy gained by leveraging an EOR agreement would be quickly erased and probably significantly reversed by having to defend an IRS audit.
A second way to cross the fine line between savings and wasted time happens quite unexpectedly. Unlike the above concern regarding avoiding smaller EORs to minimize the potential for non-compliance, selecting a larger and potentially more reliable EOR may come with a different spate of unforeseen challenges. Often, governmental regulations designed for larger enterprises do not apply equally to smaller businesses. As such, a larger EOR firm, being the legal employer of a company’s workers, will enforce all required regulations on its co-employer subjecting the co-employer to costs they would have ordinarily been able to legally avoid.
The bottom line is, you should consult with an experienced contingent workforce management service provider before determining what strategies to employ as part of your workforce plan. As these types of quandaries are a part of their core competency, rendering the most effective decisions in this regard is much easier for the expert provider. Any extra time spent doing discovery and performing needs assessments can make the difference between good savings and disappointing waste.