In 2017 there were nearly six million documented contingent workers in the USA1 , and in 2018 one in five U.S. workers was a contractor.2 Clearly, contingent workers and contract workers make up a significant portion of the U.S. workforce. Employers need to be cautious when hiring these types of workers, though, because a failure to follow the right regulations could open an organization up to legal scrutiny and hefty fines.
As their name suggests, a contract worker holds a contract with the employer and therefore fall under the employer’s direct supervision. This means that the employer is liable for handling the contractor’s workers’ compensation claims and employee benefits. (Any other benefits are determined by the job contract.) Businesses generally recognize contract workers as employees.
A contingent worker is often an independent contractor, freelancer, outsourced consultant, or temporary worker. Companies typically bring in contingent workers to fill capacity or skill needs. Businesses generally do not recognize contingent workers as employees.
U.S. hiring and employment laws are incredibly complex. An employer that makes a misstep in this minefield can face severe consequences. With the guidance of their HR and legal departments, organizations must carefully research and follow the appropriate regulations when hiring workers. Here are a few of the most important obligations to keep in mind:
- Fair Labor Standards Act (FLSA). The FLSA dictates that employers must pay their employees the federally established minimum wage as well as calculated overtime pay. Because this regulation applies only to employees, many businesses that want to avoid paying a living wage exploit a loophole by hiring contingent workers instead.
- Tax forms. Whereas contract employees must complete W-4 and W-2 forms, employers must request a W-9 form from independent contractors (contingent workers).
- The Equal Employment Opportunity Commission (EEOC) and antidiscrimination laws. When complying with many antidiscrimination laws, such as the Age Discrimination in Employment Act (ADEA), an organization must carefully assess the status of each of its workers. Because the management of antidiscrimination claims differs for contingent workers, organizations should refer to the EEOC’s “Covered Individuals” list3 to determine whether an individual is an employee.
- Internal Revenue Code. Tax obligations sit with either the employer or the worker, dependent on their employment status. Note, however, that under the Internal Revenue Code some independent contractors (such as “certain delivery truck drivers” and “full-time traveling salespeople”) count as employees.4
- Occupational Safety and Health Act (OSHA). Note that when temporary workers are involved, “both host employers and staffing agencies have roles in complying with workplace health and safety requirements and they share responsibility for ensuring worker safety and health.”5
- Family and Medical Leave Act (FMLA). The application of this law isn’t always clear. But one thing is certain: a temporary worker who meets the thresholds specified by the FMLA is eligible for family and medical leave.6
The most common compliance issue surrounding contingent workers is misclassification. An employer that misclassifies a worker for tax reasons or because of a misinformed judgment could face legal consequences, as Uber (UK) discovered earlier this year: after a grueling legal battle, the UK’s Supreme Court determined that Uber drivers are in fact employees, not independent contractors, and are therefore entitled to minimum wage pay, holiday pay, and rest breaks.7 Currently, Uber must calculate compensation only for the 25 drivers who participated in the suit. But considering that rulings establish precedents and there are about 1,000 more pending claims against the company, it’s likely this case will have far-reaching consequences for Uber.
Employment regulations can be incredibly confusing and complicated. This is particularly true of the laws surrounding contract workers and contingent workers. The regulations mentioned here are just the tip of the iceberg. The best way to ensure complete compliance is to seek the appropriate legal consultation.
1 Karen Kosanovich. 2018. “A Look at Contingent Workers.” U.S. Bureau of Labor Statistics website, September,www.bls.gov/spotlight/2018/contingent-workers/home.htm.
2The Marist Poll. 2018. “NPR/Marist Poll January 2018: Picture of Work.” The Marist Poll website, maristpoll.marist.edu/nprmarist-poll-results-january-2018-picture-of-work/.
3EEOC. 2000. “Who Is an “Employee”?” EEOC website, www.eeoc.gov/laws/guidance/section-2-threshold-issues#2-III-A-1.
4Goodwin Procter. 1997. Goodwin website, “Employing Contingent Workers.” September,www.goodwinlaw.com/~/media/25204AC03D934E9FB5D7BB9EA47DE5C1.ashx.
5OSHA. Undated. “Protecting Temporary Workers.” OSHA website, www.osha.gov/temporaryworkers.
6Todd Lebowitz. 2017. “Four FMLA Traps When Using Temp Workers and How to Avoid Them.” Who Is My Employee?, January 30, whoismyemployee.com/2017/01/30/four-fmla-traps-when-using-temp-workers-and-how-to-avoid-them/.
7Ryan Browne. 2021. “Uber Loses a Major Employment Rights Case as the UK’s Top Court Rules Its Drivers Are Workers.” CNBC website, February 19, www.cnbc.com/2021/02/19/uk-supreme-court-rules-uber-drivers-are-workers-not-contractors.html.