Mitigating Risks: Should We Hire New Employees, Contractors or ICs?


So, you’ve decided to engage some contract resources to achieve some business goals. Perhaps you’ve never relied on any contingent workforce elements before and you’ve heard about all kinds of regulations and the concurrent risks they represent. You’ve determined that contingent workers are going to be needed but you don’t want to open a can of legal worms that could cost your organization dearly. So what do you need to know about hiring the appropriate and compliant contingent labor? Let’s examine the basics of deciding between hiring ICs, Temps or W2 employees so you can make an informed decision.

Defining the Differences

Independent Contractors or ICs are in the news a lot lately with stories of large companies facing huge penalties for improper IC classification. You needn’t be wary of hiring ICs as long as you’re sure they’re the appropriate type of worker for your need. ICs are great for project work wherein there is a project that is not part of ongoing, regular business operations and for which it would be impractical to hire employees (because they’d not be needed once the project was completed). To make sure you’re engaging a compliant IC, look for the following defining characteristics:

  • The contracting firm operates under a business name
  • It has employees that can complete the work you need to accomplish
  • Maintains a demonstrable business structure as evidenced by office space, websites, advertising of their business, etc.

Temporary workers are better suited to roles that may be of indefinite length as opposed to the project-based nature best accomplished with an IC. Temps are sometimes referred to as contractors, and are more naturally suited to functions augmenting those handled by your internal employees. While these resources typically act at your direction, they are paid by their employer. The contractor’s employer – either a staffing supplier or EOR provider like nextSource – is responsible for providing benefits or insurance compliant to the Affordable Care Act. Their employer also provides training and payroll for these workers.

Employees are W2 wage earning workers and sometimes represent the best choice for staffing needs, particularly if the work is long-term/ongoing and not project-based. Hiring more W2 employees is the most costly because you’ll be liable for the full cost of their benefits, so only hire more employees when you’re reasonably certain your business can and will support them. To define the employee, determine that these resources operate completely under the direction/control of your organization; is paid by your organization either hourly or a salary; is provided training whenever applicable; works at your facilities, within your set business hours. As noted, employees must be provided with benefits or insurance compliant with the Affordable Care Act.

Why does it matter who an organization hires to get the work accomplished? As noted at the beginning, misclassification of workers engaged as independent contractors can have of costly legal consequences for your organization such as:

  • Forced reimbursement of wages you should’ve paid them under the Fair Labor Standards Act, including overtime and minimum wage
  • Compulsory re-payment of back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment
  • Payment of any misclassified injured employees workers’ compensation benefits
  • Retroactive payment of employee benefits, including health insurance, retirement, etc.
  • Liability for fines and other state penalties

IC misclassification may be the most costly negative consequence of improper worker type selection. However, hiring employees when temp labor would be better suited is also a costly mistake. Additionally, utilizing temp/contractors when the situation calls for full time employees can also have a negative effect on operations.

What can you do to mitigate the risk? The best answer is to associate yourself with a firm such as nextSource. Workforce management experts at these firms are skilled, experienced and able to assist not only with your worker classification ensuring workers are engaged correctly as Independent contractors or employees, but they can also provide additional valuable services. For example, they can deliver Employer of Record services if contractors are determined to be more cost effective in a particular role than an employee. EOR services allow your organization to engage these workers and more efficiently accomplish the work.

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