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The Why, When, Where and How of Adding Administrative Help Part 1 of 2         Personnelly Speaking by Robert Palow, Contributing Editor Is your operational workload growing to the point that you have little free time available for yourself? Are you receiving calls from prospective clients and having to tell them that you are so busy you can't take any on additional clients at this point? Then you have arrived at the crossroads of whether to grow your business. We all have had this problem at some point in time in our business. But the question that comes to our mind is this: If we turn away prospective clients today, what will happen if we lose some of our existing clients tomorrow? The expenses go on. And our network of potential clients has been diminished. Should we hire a part-time employee to help with our additional workload? What about the costs? Hiring additional employees has additional built-in costs that we all try to avoid. The areas of additional responsibility with your own employees are workers compensation, federal taxes, state taxes (where applicable), unemployment insurance, Fair Labor Standards Act, and the inevitable employment conflict issues. In this two-part discussion we will address some of the options that should be considered before we make the commitment to hire our own employee. As small business employers gear up for growth in the new millennium, options for flexible workforce staffing arrangements proliferate. In addition to the population of workers desiring a "regular" employment relationship, the labor pool now includes independent contractors, temporary employees, leased employees, and employees provided by professional employer organizations (PEOs). Such alternative staffing arrangements often work well for small companies seeking specialized expertise, extra "troops" for special projects, or outsourcing administrative functions or information services. Alternative staffing arrangements have allowed many employers to staff their workplaces more efficiently and cost effectively. There is, however, much confusion about whether and to what extent companies have employment-related responsibilities for workers operating under such arrangements. Before entering into any alternative staffing arrangement, we should understand the nature of the relationship in order to weigh the corresponding benefits and risks. The primary issue is whether the company will be viewed as the "employer" of the worker in question. Under the law, the entity deemed the legal employer ("common law employer") will be responsible for compliance with employment law obligations, such as tax withholding and wage and hour compliance, and will bear liability for employment-related claims. Determining whether an entity is the common law employer in the context of alternative staffing arrangements is often the subject of significant governmental inquiry or litigation. While courts will consider the contractual arrangement between the alternative staffing agency and the client company, a contract is not the sole determinant of the employment relationship. The determination will focus instead on whether one or both of the entities have the right to control and direct the worker who performs the services. A company that controls the work will be expected to assume many, if not all, of the employment liabilities associated with the worker. Under certain staffing arrangements, the client of the alternative staffing company and the staffing company itself will be deemed "joint employers" under the law, subjecting them both to responsibility for most employment liabilities. In the following sections, I will describe the indicia of "control" over workers in determining the legal nature of the relationship in the most common alternative staffing arrangements: (1) contractors; (2) employees; (3) provided through a PEO; and (4) I will also offer some practical suggestions for minimizing the risks associated with such arrangements. Independent Contractors/Consultants An independent contractor, consultant, or "freelancer" is a worker who contractually agrees to provide services to a client company for a specified period of time but is not considered an employee of the client company. The worker generally is paid directly by the client company on an invoice basis. A true independent contractor must, in large measure, be his or her own boss. Although the client company may dictate the desired result or end product of the contract, the worker should generally be able to set his or her own hours, direct and control the way the work is performed, and work for other companies at the same time. Independent contractors provide companies with significant flexibility. By using independent contractors, a company can hire workers with specialized expertise on a project-by-project basis. Unlike many other alternative staffing arrangements, the use of independent contractors allows a company to avoid employment-related liabilities and expenses because properly classified independent contractors are not considered employees. Federal and state laws and regulations to protect employees, such as the Fair Labor Standards Act and workers compensation, do not cover independent contractors. The benefits of using independent contractors are entirely lost if the worker is misclassified. A classic example of the extent and severity of the consequences of misclassification is the recent case of Microsoft Corp. Microsoft entered into contracts that specifically stated that the workers at issue were independent contractors, that they would not be provided with employee benefits, and that the workers were responsible for all federal and state taxes, withholding and social security. Despite the contractual arrangement, they shared the same supervisors, worked the same hours and performed the same functions, among other things. Consequently, the court held that the workers were in fact employees of Microsoft and that they could not waive their rights as employees simply by signing a contract. Microsoft was required to pay millions of dollars in back taxes, penalties, and overtime pay to the misclassified workers. Given the potential consequences of guessing incorrectly, employers using independent contractors need to make a careful determination of each worker's status at the outset of the relationship. Although different governmental agencies use their own tests, the following criteria, which include some of the common law factors used by the Internal Revenue Service, are helpful for determining whether a hired worker is in fact a common law employee or an independent contractor: Does the company control or have the right to control and direct the work? If so, the worker is probably an employee. What is the level of skill required to perform the work? Highly skilled workers are more likely to be deemed independent contractors. Does the company provide training and supervision? The more company-provided training and supervision, the greater the appearance that the company is controlling the work, which indicates employee status. Does the company have the right to terminate the relationship without notice and opportunity to cure? At-will termination is one indication of an employer-employee relationship. Does the individual maintain an independent business? Companies should collect evidence of a contractor's independent status such as business cards, certification of incorporation, insurance coverage information, evidence that the contractor has employees or subcontractors, and copies of advertisements for contracting services. Does the company provide the tools, equipment and place of work? Providing a valuable piece of equipment to the worker tends to indicate that the company is directing the worker's use of equipment and thereby exercising control over the means of accomplishing the task. What is the expected duration of the relationship? An independent contractor is more likely to work for a specified period of time or for the time required to accomplish a specified task, rather than for an indefinite period. What is the method of payment? Payment by the job or on a straight commission basis tends to indicate independent contractor status. Is the individual integrated into the company's regular business? The more integrated a worker is in the company's day-to-day operations, the more likely it is to be considered an employee relationship. Does the worker undertake financial risk? Unlike employees, independent contractors generally assume the risk of profit or loss on their projects. What was the express intent of the parties? If other factors tend to support an independent contractor classification, the parties' intent will be considered. In applying this test, remember that all factors must be analyzed and no one factor is determinative. However, by far the most significant factor is the first: the right to control the way work is performed. To guard against the risk of misclassification, a company is well advised to document the nature of the relationship with a written agreement, re-evaluate extended relationships, and work with counsel to draft benefit plans that minimize the effects of any reclassifications. Note: In November's Industry Focus, watch for Part 2 of "Temporary Workers, Professional Employer Organizations, and Outsourcing." About the author Robert Palow is president of RP Consultants, a Placentia, CA based company that specializes in labor and employment practices. He has more than 30 years of management and legal experience in the human resource field. ABSSI / Industry Focus / September1999      Copyright © 1999 RP Consultants All rights reserved [ Home | Company Info | Published Articles | Services | Feedback ]