Many business owners need to hire temporary workers for all sorts of short-term projects, and these days there are more qualified workers available than ever. Some are retired, others prefer to be self-employed, still others come to you by way of temporary agencies – all of them have significant skills that can be used to complete a project, solve a problem with highly specialized skills, or fill gaps in your San Mateo business’ workforce

The hourly or daily rate depends on their skills and whether they come by way of agency or not. Typically their rates are a little higher in comparison to what a salaried worker earns in the same position, but this is to compensate for the lack of security and benefits. If the worker comes to you through an agency, you’ll pay a margin on top of what the worker earns as the overhead cost to the agency. Access to temporary workers means the flexibility to staff up or down very quickly without the associated costs of hiring and/or terminating employees.

Now that we’ve addressed the basics, let’s get down to what it takes to keep things legal when you hire temporary workers.

1. Get this Straight: Temporary Workers are Not Employees

This is the number one way companies get into trouble with temporary workers – they stray from the original intent and start treating them like employees. A temporary worker should not be subjected to the same scrutiny as an employee:

  • No background checks

  • No drug tests

  • No performance reviews

Some even caution against inviting temporary workers to company functions.

When the distinction between contract employee and employee gets blurry, the company is likely guilty of misclassifying the temporary worker and could expose themselves to penalties that can have damaging tax consequences. Gene Zaino, CEO of MyBizOffice, notes that the IRS find temporary workers are misclassified 95% of the time in cases it investigates and “the effects, especially on smaller businesses, can be devastating.”

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2. Stick to the Original Temporary Work Contract

Companies often grow dependent upon their temporary workers. The scope of the project grows and the temporary worker is the one with the knowledge of how it works, so they stay on longer than intended and begin to blend into the workplace. They are given employee status at company functions – even raises and bonuses.

Engage your temporary workers for a specific purpose and a time-limited period and end the project on time. You can always define a new project – after a brief break – and employ the same temporary worker with new terms. If a temporary worker is too valuable to lose, hire him or her as an employee instead.

3. Know What the IRS Sees as an Employee

If you hire through an agency, you have slightly less risk because the agency is seen as the employer – handling tax payments, raises, and benefits. If you hire a temporary worker directly, you have a slightly greater risk, but often less cost. In either case, it helps to understand what the IRS sees as an employee.

To determine whether the IRS would see your temporary worker as an employee, ask yourself these questions:

  • Does the temporary work full-time hours or flexible hours?

  • Is your company the temporary workers sole source of income?

  • Does your temporary work on-site or flexibly on- and off-site?

  • Do you provide equipment to your temporary worker?

  • Do you use the temporary worker’s equipment?

  • In general, how much control do you exert over the temporary worker?

These are the questions the IRS will consider when determining whether a temporary worker has been missclassified. If they decide against you, you may be liable for payments of taxes and benefits retroactively.

4. Consider the Risk of Lawsuits

It isn’t only the IRS a business owner has to worry about when it comes to the treatment of their temporary workers versus employees. It’s becoming ever more common for ex-temporary workers to sue previous employers for:

  • Denial of benefits

  • Access to stock options

  • Other compensation

Many of you will recall the $97 million settlement in favor of misclassified workers in the class action lawsuit involving 10,000 temporary workers and Microsoft. In this case, long-term contract workers worked with Microsoft employees who, in some cases, became millionaires based on the value of their stock options. The workers sued for equal benefits and won, retroactively.

Regardless, it’s important to actively distinguish between employees and temporary workers because misclassification has the potential to devastate your company.

About the author

Matt Faustman

Matt Faustman

Matt is the co-founder and CEO at UpCounsel. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform. Before founding UpCounsel, Matt practiced as a startup and business attorney.

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