Creative leaders who employ a mixed staffing strategy (full-time employees, W2 temporaries and 1099 independent consultants) have designed a smart staffing solution to support demand peaks and valleys, reduce layoff risks and bring on specific skill sets on demand (e.g., a mobile developer on call but not on payroll). Often companies employ "term limits" on non-FTE employees to mitigate co-employment and worker misclassification concerns. But these term limits are often to the detriment of the creative team as great talent who now knows your business has to leave every six months, year or two years (every company has different limits set in a seemingly arbitrary manner, otherwise wouldn't they all have the same term limit?).

Creative leaders and their procurement partners can partner to mitigate against co-employment and worker misclassification by just being aware of the bigger picture and focusing on the things that really matter, such as behavioral and financial control of the contingent workers. Term limits are not the end all, be all and sometimes are just put in place because an organization does not have a larger strategy to address the real issues and pitfalls of co-employment risks. Common hazards that exist when utilizing a mix of full-time employees, W2 temporary workers and independent contractors include:

  • Allowing the classification decision to be based on the needs/wants of the contingent worker
  • An independent contractor (IC) becomes injured on the job
  • An IC becomes envious of the benefits being offered to your full-time employees or the W2 temporaries through their staffing firm
  • An IC starts to feel like they are not being treated fairly
  • An IC is terminated from a project because they did not meet expectations
  • Having all three of these classes of workers sitting next to one another and probably even doing similar work in a lot of cases

I have found that when classifying a contingent worker being aware of the above pitfalls and the basic Three Categories of Evidence(formerly the IRS "20 Factors Test"[1]) below makes it possible for you to engage individuals with the critical skills you need without all of the frustration and confusion that can sometimes accompany these decisions.

Behavioral Control: facts that surround the tools, instruction, and training of the worker. In terms of instruction the contingent worker is given, it is most simply looked at in terms of whether the business has retained the right to control the details of HOW a worker goes about a project and his/her performance around that instruction or instead, has the company given up that right?

Financial Control: facts that surround how business expenses are handled, the extent of a workers' investment, the extent to which the worker makes their services available to the relevant marketplace, and how the worker is paid. Simply put, it's about whether or not the worker can make a profit or loss. An employee or W2 temporary does not have an opportunity to do so, but an IC can make a profit or loss.

Type of Relationship: facts that show the parties' type of relationships including any contracts, "employee type" benefits, permanency of the relationships, and whether or not the services performed by the worker are a key aspect of the regular business of the company.

I have seen too many hiring managers make worker classification decisions based upon the wishes of the parties, what seems financially sound, and what seems practical for a particular project to get done. However, this is not how the courts, the IRS or state enforcement agencies determine who is an Employee and who is an Independent Contractor.

As an organization that uses a contingent workforce strategy, it's important to have a classification strategy to go along with it. You have several options, all with the associated pros and cons that accompany most liability decisions. Some of these options include:

  • Utilizing a reputable staffing firm and asking them what their strategy is for classifying their contingent workforce. Make sure you are comfortable that they are taking the appropriate steps you would expect from a co-employment partner.
  • Utilizing a combination of a staffing firm for your W2 temporary workers and also engaging the services of a third party vendor that provides IC compliance's, risk assessment and oversight.
  • Hiring a full-time, in-house employee whose primary role is to stay on top of co-employment, worker classification and compliance issues. This person generally sits in your human resources, procurement, contracts or legal departments.
  • Have an outside law firm, specializing in labor law, on retainer that you can utilize when making these decisions.

  • The first two are within your control--in short, while it may be cost-effective, it no longer makes good business sense to hire freelancers directly, doing so could put your company at risk. Similarly your clients should not contract with freelancers directly--this is a great reason for them to use their services.

    And even when employing the first two options, creative leaders (and other department leaders) are struggling with term limits that hurt their business by causing unnecessary turnover, which can be costly and an inefficient use of resources (all that extra time interviewing and training).

    According to the report "Term Limits for Contingent Workers: Urban Legend or Necessary Fix," by George Reardon, William Hays Weissman and Neil Alexander of Littler Mendelson, "Certainly, working engagements lasting many years will be scrutinized by courts and by federal and state agencies. However, for most employment claims, it is the level of control exercised over the worker that is determinative of liability, not length of relationship."

    By no means am I trying to present that changing a company's term limit policy is easy, because the facts are clear, the IRS reports that they lose over $35 billion per year due to misclassification of employees and lost income and employment taxes. They have a clear initiative to go after these funds and to target companies that fit the bill. Seeking good legal advice is advised when addressing these issues.

    I am, however, encouraging creative leaders who are facing challenges with term limits to become educated, ask questions and not accept the status quo[2]. Term limits may not be necessary for your organization if you employ a greater strategy that addresses the actual issues of control. It's hurting your team's effectiveness and efficiency and may not be necessary. How can you partner with Procurement or other stakeholders to review your current policy?


    [1] You can find a detailed excerpt of the IRS 20 Factors Test at pages 4-7. And always be sure to have the benefit of good counsel when it comes to this topic.

    [2] The information and opinions expressed in this blog are intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion.