Even before the COVID-19 pandemic, there has been a rise in the use of contingent workforces as a result of the gig economy. This is because small business owners are always looking for easier ways to work with resources instead of making them employees for their company.
On the Small Business Radio Show this week, Jaime Lizotte, Tax Compliance Solutions Manager at efile4Biz discusses the differences between a contingent workforce, independent contractors and employees and the mistakes that small business owners make in classifying each type.
Jaime Lizotte Interview on Employment Statuses
Jaime says that a “contingent workforce are resources needed on a temporary basis and hired through a staffing agency without adding the expenses of an employee. The individual hired may be doing the same work as an employee which an independent contractor is not legally able to do.” For example, contingent workforces are hired many times as sales reps or independent administrator. Jamie reminds us that the worker is an employee of the staffing agency and that they pay, as a result, the employee’s compensation, benefits and taxes.
Using a staffing agency takes “the gray area out” as to whether a resource is an employee or an independent contractor. Jamie emphasizes that a small business is not legally able to hire independent contractors to do the “core” work of their company according to federal regulations.
However, there are downsides to using a contingent workforce. Jamie says you are only hiring them for temporary timeframe and they may not be available when you need that person again or want to hire them permanently as an employee. As a result, contingent workforces are not good for any positions that need alot of training or development. The cost of a staffing agency is also typically higher than an employee for a short term since they add fees to what they pay their employee.
Jamie adds there are common mistakes that employers make in classifying these types of workers. When you hire someone for project based work as a freelancer, make sure they are not doing “core” work for the company (i.e. anything that your company needs to run on a daily basis). It is also helpful to ensure their independent contractor status if they have additional clients and have their own employee identification number(EIN). If you don’t do these classification of your worker resources right, Jamie says that the contractor can make a claim to the Department of Labor and you could end up paying back taxes not only for this person, but any other worker in a similar category.
Jamie recommends consulting an employment attorney if you have any concerns or questions.
Listen to the entire interview on the Small Business Radio Show.
Image: Jaime Lizotte