On the surface, the differences between an independent contractor (IC, or 1099) and a contract engineer supplied by a staffing firm may seem negligible. But employment status can impact the way you select, manage and interact with interim workers.
The main difference lies in the fact that contractors from staffing firms are usually W-2 employees who are assigned to work at various clients, while ICs are truly independent business people who prefer to work on their own. Misclassifying 1099 contractors can have serious legal ramifications.
Here’s a look at how the employment status of your contract engineers can impact your actions and liability across the employment continuum.
Recruiting and Administration
Adding ICs into the mix can increase the range of engineering skills and availability of talent in your short-term pool. However, you’ll have to do your own sourcing, screening and background checking, schedule the interviews and verify the IC’s insurance coverage and credentials.
It’s a good idea to draft, execute and retain a separate contract for each engagement or project. Again, experts recommend that you attempt to structure an agreementaround a test created by the Internal Revenue Service (IRS) to determine if a worker is legally considered an employee or an independent contractor.
Like any employer, staffing firms vet prospective engineering contractors, process payroll and withhold taxes, and provide insurance coverage, including worker’s comp, as well as other employee benefits. Their administrative staff also oversee compliance with regulations such as the Family and Medical Leave Act (FMLA), Affordable Care Act and so forth.
In addition, every contractor is bound by the terms in your master agreement and most staffing firms have employees sign individual agreements that state that they are not entitled to the client’s benefits. Staffing firms also simplify administration by providing consolidated billing, standardized pricing and performance guarantees.
Most importantly, staffing firms have a stable of trained recruiters who spend considerable time sourcing candidates and monitoring the performance, career development and availability of their engineering contractors. They are responsible for anticipating their clients’ needs and maintaining a sufficient pipeline of talent.
According to the IRS, when using an IC, you may only direct or control the end result – not how the work is performed. Moreover, an IC can challenge his or her status if he or she feels as if their relationship has been misclassified.
For instance, judges recently ruled that lawsuits regarding the classification of Uber and Lyft workers can proceed, because the ridesharing companies exercise control over the manner of work, specifically as it relates to collection of fares.
The government maintains that ICs should work offsite, set their own hours, use and maintain their own tools and perform services for multiple clients.
If you prefer to direct the engineer’s activities, provide training and oversight, have him or her report to your office and interact with your team, a contractor from a staffing firm will meet your needs and help you stay on the right side of the law.
Risk Mitigation and Tax Compliance
If the IC fails to pay his or her payroll or income taxes, the IRS can force the hiring company to pay all withholding taxes, plus interest.
Among other obligations, ICs are responsible for purchasing their own insurance, financing their accounts receivable, and they are ineligible to receive worker’s compensation or unemployment benefits. However, being independent doesn’t necessarily preclude an IC from filing a claim if they’re injured on the job. And host employers are obligated to provide a safe workplace for all workers, regardless of their status.
Additionally, an IC normally retains the rights to their own inventions or intellectual property they develop over the course of an engineering engagement. Again, non-disclosures and IP rights need to be spelled out in individual contracts.
In conclusion, having a defined employment relationship and W-2 status reduces confusion and gives you the confidence to make contractors an integral part of your engineering team.