There is no contest among employers of the benefits of the contingent workforce: subject matter expertise, ability to ramp up or down, cost-effective workforce and highly productive talent. However on the flip side, employers who are keen to these highly valuable benefits should thoroughly understand the relevant federal, state and local definitions — or hire someone who can. Recent legal changes in workforce classification and increased government scrutiny are raising the stakes, establishing a new imperative for employers to tread carefully.

A just released survey by Staffing Industry Analyst reveals that almost three-quarters of buyers plan on using more contingent workers in the next few years. How much more? A notable 26% more by 2014. Furthermore, an SIA news release issued last December stated that the majority of workers — over 70 million — will be independent by 2020, up from 16 million today.

While this shift in the employment landscape incurs a wealth of benefits for employers and consultants alike — from cost savings to work-life balance — it means other things for the IRS. Specifically, the federal government is estimating a $2.7 billion loss in federal taxes this year along with millions of dollars in state taxes — prompting the federal government to earmark an extra $200 million to audit companies this year. While at the state level, worker misclassification has been named a top enforcement item by the IRS.

To further give you an idea of how swiftly and decisively the government is moving on this issue, consider the following timeline:

• In September of last year, the IRS signed the Memorandum of Understanding (MOU) with the Department of Labor and several states to start sharing information for enforcement purposes. Since then, many more states have also signed on.
• The following month, the Employee Misclassification Prevention Act was reintroduced to Congress, which requires:
• Companies to maintain records of all “non-employees” providing labor or services to the business, including hours and wages
• Misclassification of workers as a federal offense
• Penalties from $1,100 to $5,000 per worker
• Triple damages for willful violations

The EMPA is currently under consideration with the Subcommittee on Workforce Protections, but is expected to pass sometime this year.

What Every Employer Should Know

So, where does this leave you as an employer? We know that the contingent workforce is some of the best talent available and the benefits are undisputable. However, if you aren’t playing by the rules, the consequences, including severe fines, penalties and litigation, will far outweigh those benefits. Just ask Microsoft, UPS, Hewlett-Packard or FedEx who recently settled cases for $97 million, $12.8 million, $300 million, and $1billion respectively.

To be clear, none of these acts or measures prohibits the use of appropriately classified contingent workers. But as simple as it sounds, the definition can get grey pretty quickly, and mistakes are easy to make.

Time to Bring in the Big Dogs

There is tremendous competitive advantage for companies that use correctly classified contingent workers. Secure that advantage even more firmly and eliminate the headaches associated with ensuring employee compliance by partnering with a reputable staffing company to whom you can leave the contingent worker compliance issues. Mitigate your risks through a reputable third party or at least consult the right resources to ensure you don’t become the next example of what NOT to do in this unfolding story. At iTech, alleviating our clients’ risk of employee misclassification is a priority. For example, our onboarding process was designed to comply with all government mandates, including employee documentation which in turn allows for proper employee classification.

Is misclassification of contingent workers a concern to you? Let us know what you think of this … and what you are doing about it…