Coemployment vs Misclassification Risk: What’s the Difference?
I am often requested to speak on coemployment risks that are presented when using Independent Contractors. Coemployment risk is a label that is often improperly slapped on to the risk presented when engaging with independent contractors. It is a different type of risk altogether presented by using other types of contingent workers. What are these two very different types of risks presented by using non-employee workers, and how do they compare?
Misclassification Risk: An IC Phenomenon
Independent Contractors are self employed individuals or small businesses who provide services to multiple clients, under minimal direction and work “independently” or free from excessive control. When companies use Independent Contractors, it is critical that the client-business respects their independence, and engages with them in a proper manner–as not to cause any question on their independent status. Most often, troubles arise when a former Independent Contractor comes upon hard times and files for unemployment after their services were terminated. The state receiving this unemployment claim will begin an investigation, and the client company will be subject to costly fines and penalties if it is determined that the worker should have been classified as an employee. Typically, when a misclassified worker is found to be an employee for workers’ compensation purposes, the client company will then be audited to determine if other alleged Independent Contractors were also misclassified. This audit window will likely encompass three tax years (or more if fraud is suspected). If widespread misclassification is found during the employment audit, you can see how substantial fines, penalties and interest can add up… all resulting from just the initial worker. An unemployment claim by a worker is only one of many triggers that may cause a company to find an auditor knocking at their door.
Coemployment: Multiple Employers to One Employee
Coemployment involves the sharing of employer responsibilities between a client and a professional employment organization (PEO). The payrolled worker is the employee of the PEO, but is actually providing direct services to the client of the PEO. This service offering is helpful to the client because it provides the opportunity to utilize temporary labor without having to hire-on permanent employees. This relationship is mutually beneficial, with the PEO company receiving a small mark-up on the worker’s pay and the client having a flexible and salable workforce at their fingertips without having to take on the burden of benefits and paperwork for these temporary workers.
It is essential for both parties that all performance related issues and/or Human Resources issues are handled by the actual employer of the worker. Especially when temporary workers reside onsite and often use equipment provided by the client, remembering to differentiate between employees and temporary workers becomes important.
When temporary workers are used indefinitely, and treated much the same as other permanent employees (invited to staff meetings and events, given awards or incentives, included on all-employee emails) by the client, coemployment risks are heightened. The worker may feel slighted for not being included in the same benefits packages, or may resent some practices of their employer.
So What’s Worse?
Coemployment and IC Misclassification pose unique risks to companies that improperly engage workers. While either practice possesses a unique type of risk, it’s hard to dispute that IC Misclassification provides more headaches to companies nationwide. Until Coemployment garners the attention that IC Misclassification has received in recent years, companies would be well advised to focus primarily on their 1099 workforce, while also ensuring they have selected a worthy payroll provider to mitigate coemployment issues.
