As anyone who has been in the staffing industry for any length of time knows, the rules and regulations surrounding the industry are complex and change frequently. As well as federal laws, each State has unique employment rules and regulations that make it challenging for staffing companies with limited resources to work across multiple states. Staffing companies that operate in California, New York and Massachusetts in particular, can have their work cut out trying to accommodate the unique rules and regulations of those States.

Some staffing companies provide solid, compliant solutions for Clients companies where reducing co-employments risks are important, However, the level of employer compliance when employing temporary workers, varies widely from company to company.

Some smaller to mid-sized staffing companies and independent recruiters engage the services of companies like Emergent (www.emergent.com) to serve as the employer of the workers they recruit helping them provide  cost-effective, compliant and lower risk staffing solutions for the temporary workers they supply to Clients.

Some small to medium size staffing companies attempt to manage back office functions, insurance, payroll funding, and risk management with limited resourcse. Others, often unbenownced to their clients straddle potential misclassification issues by delivering workers on 1099s even though the Client is directing their work on a day-to-day basis.  With these scenarios in mind, here are just some of the key issues that staffing companies need to look out for. 

Discrimination and Background Checks

Discrimination complaints filed with the Equal Employment Opportunity Commission can lead to expensive litigation and costly settlements for a staffing company. In some cases, staffing companies are leveraged by clients as a way to outsource tests or screening functions that may create EEOC issues for them. However, staffing companies must resist pressure from their clients to apply any potentially unlawful or high-risk methodologies which may include screening.

Becoming more popular is the use of publically available social networks and websites to screen candidates, however that can land staffing companies in trouble. Employers may be accused of overlooking the online profiles of people based on prohibited criteria such as race, creed, color, nationality, sex, religious affiliation, marital status, or their medical condition.

Immigration Issues

If your staffing company is placing a foreign national, the staffing firm must address government immigration requirements carefully, because even unintentional violations can have costly repercussions. When starting a job, employees AND contractors are required to prove that they are legally entitled to work in the United States and the staffing company must only accept original documents. Employers must verify the identity and eligibility to work for all new employees. An I-9 form must be completed and kept on file by the employer.

SUTA Dumping

SUTA dumping is a practice sometimes used by companies doing business in the U.S. to circumvent paying unemployment insurance taxes that may have been increased because of previous experience employing workers with a large number of unemployment claims. If an employer’s payroll is subject to a high unemployment insurance tax rate, the employer sometimes tries to reduce that rate by shifting its payroll to an entity with a lower unemployment insurance tax rate. Some companies get multiple account numbers with a state unemployment insurance agency, and shuffle employees around to the account number with the lowest unemployment insurance rate each year.

Another tactic is to buy a business with a lower unemployment insurance rate and shuffle employees to that other business to pay the lower tax rate. The federal government addressed the issue in 2004, but the practice still occurs – even though it’s highly scrutinized. 

Worker Misclassification

State unemployment insurance reserves have fallen due to the recession which is one reason worker misclassification has become a high priority for government agencies. The IRS has clamped down on Independent Contractor Misclassification, allocating $25 million dollars to indentify misclassified employees.

Many staffing companies engage temporary workers on a 1099 basis because it’s the easiest and ‘cheapest’ way to engage temporary and project-based contingent staff. However, 46% of temporary workers classified as 1099 contractors are found by the IRS to be misclassified. Also, as many as one in three companies fail their worker classification audits.

Staffing companies sometimes face complex compliance issues related to worker classification, and the risks associated with misclassification have increased dramatically – when a  company is found to be in breach of the rules, penalties include back taxes, PLUS interest AND a fine of up to 35% of the total. These penalties can easily stretch into millions of dollars. Defending these cases can take years and also absorb thousands of dollars and a hours.

No hard and fast definition of what differentiates an independent contractor from an employee exists but the IRS 20 point test is a good barometer, included on our article on 1099 misclassification. If independent contractors do not meet one or more of these criteria, they may be more appropriately classified as W-2 employees.

Worker classification audits can be triggered in many ways. An independent contractor might file an application for unemployment benefits or fail to properly report income taxes. Workers might also challenge their own classification if other employees in similar positions received higher compensation or better benefits. The IRS has provided the SS-8 form for workers to submit directly to the agency who are not sure if they are classified properly. Staffing companies and independent recruiters must classify workers correctly to protect themselves and their clients from the risk – although many staffing companies feel pricing pressure the urge to deliver 1099 workers who should be properly classified as W-2 workers should be resisted.

Wage and Hour Regulations

Companies may pressure staffing firms to classify workers as exempt from overtime pay. Staffing firms must resist this pressure as the staffing company – as well as the client - may be liable for the violations.

Jill Stoppard is a Staffing and Human Resources industry researcher and blogger for emergent.com. Emergent helps companies that use and supply contingent labor (temporary, contract, consulting and project-based workers) reduce cost and risk by employing the contingent workers they recruit. 

The Emergent family of companies is one of North America’s largest employers of contingent labor and is one of California’s largest employers by number of W-2s with over 475,000 sent in 2011. Check out Jill’s Contingent Workforce Industry News and Trends Blog at www.emergent.com/blogs or e-mail her directly for help and advice regarding reducing the cost and improving compliance of your contingent workforce at jstoppard@emergent.com

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