Co-Employment RiskWhat is co-employment risk and why should I care?
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Co-employment risk is the legal and financial risk associated with misclassifying a non-employee worker (a consultant) as an independent contractor when the worker is actually being treated like an employee. Legally, a company cannot pay someone as an independent contractor if the company is directing the person’s work like telling them when to work (9 to 5), what to wear (a uniform), and how to do their job. FedEx settled a lawsuit like this for $228 million.
It’s because of lawsuits and penalties that corporations are afraid to hire independent contractors.
It’s because of lawsuits and penalties that corporations are afraid to hire independent contractors.
Nearly all large corporations have implemented vendor compliance programs and/or outsourced the handling of non-employee workers (“contingent workers”) to third party firms like PRO Unlimited, MBO Partners, ICon Professional Services, Agile 1 and ZeroChaos among others.
This situation is costly for both the client company and the consultant.
This situation is costly for both the client company and the consultant.
For Client CompaniesMost HR departments are over-compensating and over-paying to mitigate co-employment risk. They have been persuaded by their compliance partners to set ridiculously high hurdles to qualify as an independent business. For example, requiring a business to be incorporated or have 3 or more employees. There’s no case law to support these arbitrary hurdles yet they exist. When a consultant can’t satisfy the high requirements, they’re asked to be paid on a W-2 basis through the staffing or compliance firm. This usually adds a 15-20% admin fee to the consultant’s rate.
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For ConsultantsBeing paid on a W-2 tax basis jeopardizes their business owner tax deductions and retirement plans. Our 70-second video explains why.
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Mini Case Study: ProKo handled 20 contracts for a Fortune 500 tech company over 12 months.
Staffing Firm / W-2 Consultant Tax Basis |
ProKo / 1099 Consultant Tax Basis |
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Consulting spend for 20 contracts* |
$1,764,000 |
$1,632,000 |
Savings with PrōKo model |
$132,000 |
* With ProKo, consulting spend counts toward diversity spend since we’re certified by WBENC.
Note: Many independent consultants will turn down work if they have to be paid on a W-2 basis!
More information on co-employment and vendor compliance
Common Law Guidelines for Contractor vs Employee
The U.S. government has common law guidelines related to worker status. (Naturally, the government is particularly interested in how and when taxes are paid. For federal tax purposes, three common law guidelines help to determine whether a worker is an independent contractor or an employee: Behavioral Control, Financial Control, and the Type of Relationship of the parties. Read more...
20 Questions for Correctly Classifying a Worker
Often independent consultants are screened using a 20-point checklist established by the IRS as a guideline in determining whether or not a contractor can legally be paid on a 1099 instead of a W-2. Most vendor compliance processes are based on this. Read more...
For Clients: Consequences of Misclassifying a Worker
If a company misclassifies a worker as an independent contractor, the financial consequences can be huge. Penalties and interest costs can be imposed by the federal government, state government(s), and by the workers, often in class action lawsuits. There can be public relations consequences as well. Read more...
For Consultants: The Typical Compliance Process
Prospective consultants are usually screened to determine if they qualify as an independent contractor. This process is intended to mitigate co-employment risk for the client, and it determines how the consultant will be hired and paid. Read more...
The U.S. government has common law guidelines related to worker status. (Naturally, the government is particularly interested in how and when taxes are paid. For federal tax purposes, three common law guidelines help to determine whether a worker is an independent contractor or an employee: Behavioral Control, Financial Control, and the Type of Relationship of the parties. Read more...
20 Questions for Correctly Classifying a Worker
Often independent consultants are screened using a 20-point checklist established by the IRS as a guideline in determining whether or not a contractor can legally be paid on a 1099 instead of a W-2. Most vendor compliance processes are based on this. Read more...
For Clients: Consequences of Misclassifying a Worker
If a company misclassifies a worker as an independent contractor, the financial consequences can be huge. Penalties and interest costs can be imposed by the federal government, state government(s), and by the workers, often in class action lawsuits. There can be public relations consequences as well. Read more...
For Consultants: The Typical Compliance Process
Prospective consultants are usually screened to determine if they qualify as an independent contractor. This process is intended to mitigate co-employment risk for the client, and it determines how the consultant will be hired and paid. Read more...
