When the economy fell apart in 2008, the market for temporary workers spiraled with it. But according to the data crunched by ESMI, a CareerBuilder company, the number of temporary workers in the United States hasn’t just recovered – it’s booming.
Almost every major metropolitan area has seen substantial growth in the temporary help sectors, with Raleigh, NC; Kansas City, MO; and Indianapolis, IN rounding out the top three.
According to ESMI, a healthy temporary help market is a strong indicator of fulltime hiring trends. That’s good news. But before small-business owners decide to hire a temporary worker, they need to understand the risks.
What Small-Business Owners Need to Know about Temporary Workers
Temporary workers, as the name suggests, are workers that a business hires for non-permanent work. Sometimes, these workers are referred to as “independent contractors.” Generally speaking, a small-business owner hires a contractor for…
- A specific project with a definite end date.
- Sporadic freelance work.
It’s important to realize that a temporary worker is not the same thing as a part-time employee (though they may work only a few hours a week for your business). In fact, some contractors work 40 hours a week. Why does this matter? Because the IRS cares about the classification of your workers. It determines your tax obligations, among other employer requirements. If you accidentally classify an employee as a temporary worker (or vice versa), your business could be fined.
What’s the Difference between an Employee and an Independent Contractor?
One of the perks of hiring independent contractors is that employers can potentially cut some costs. When you hire a permanent employee, you must…
- Pay a portion of their Social Security and Medicare taxes.
- Contribute to other benefits, such as disability and healthcare (if applicable).
- Follow fair wage and overtime laws.
- Insure them with Workers’ Comp coverage (depending on your state’s laws).
Because independent contractors are not permanent employees, employers don’t have to worry about benefits or other tax obligations. However, it’s not always easy to tell whether a worker should be classified as an employee or as an independent contractor. The IRS doesn’t have a cut and dry definition, either. Instead, it looks at several factors of the job, including…
- How the worker does their job (behavioral).
- How the worker is compensated by the employer (financial).
- What type of employer-worker relationship has been established (type of relationship).
(For a more detailed explanation, visit the IRS’s Independent Contractor or Employee? page.)
The Consequences of Misclassifying an Employee as an Independent Contractor
The cost of misclassifying an employee – intentionally or unintentionally – can be expensive. Take a look:
- Fines and penalties. If the IRS determines that you’ve misclassified an employee, you may be fined. You’ll also have to pay the back employment taxes that have accrued while the employee was misclassified.
- Lawsuits. If a worker believes they’ve been misclassified as an independent contractor, they can sue your business. (Check out “$2 Million Fine for Misclassifying Employees” for a real-world example.)
- Workers’ Compensation Insurance fines. There’s a good chance that if you’ve misclassified temporary workers on your payroll, you’ve misclassified them on your Workers’ Compensation Insurance as well. In most states, independent contractors don’t have to be covered with Workers’ Compensation Insurance. But misclassifying employees can result in hefty fines – and criminal charges.
In order to avoid these consequences, be sure to carefully classify your employees. But even preventative measures can’t prevent all employment lawsuits. That’s where Employment Practices Liability Insurance (EPLI) comes in. This policy covers the cost of employment lawsuits – from your lawyer fees to judgment and settlement costs.