Personnel e.bulletin – March 2012
Prepared for the PHCC Educational Foundation by TPO, Inc.
Many companies are starting to see business pick up, finally! One question that quickly comes to any employer’s mind is how can we build our capacity in a responsible way? Many of you experienced the economic downturn and felt the pain of having to let employees go. You may be wondering how you can get the help that you need without having the burden of being responsible for the complete package of a full time employee.
During an unpredictable economy, businesses in all industries and sizes often turn to contingent employees including temporary or contract employees to fill a gap without having a long-term commitment. There are some good options; however, it’s important to understand the pros and cons of short term help.
Benefits of Temporary Employees
As an employer, temporary employment allows you to hire the resources you need for specific jobs or times – for example when you need to ramp up for a particular project or backfill for someone on leave. Temporary employees can work part time or full time, work directly for the employer or through an agency and may even work for more than one agency or employer at a time. Once the project is completed or the leave is over, the temporary employment is finished. The agreement is established up front and there is no firing or lay off.
Starting people in a temporary status can be a good opportunity for you to evaluate an employee without the commitment of full time employment. You have time to see if the temporary employee has the skills you need and would be a good fit for the company. This arrangement is often called temp to perm. Temporary help can also be a good way to continue to get work done while you are searching for the perfect candidate for a role.
Typically employers can find temporary employees though a temp agency or staffing company. The advantage to working with an agency is that they bear the burden of recruiting, screening, conducting background checks, and hiring employees. In addition, they take care of the hassle of paperwork such as payroll, tax forms, I-9 verifications, workers compensation insurance and in some cases they even offer benefits. Temp agencies are responsible for withholding employment taxes and the employer’s portion of the Federal Insurance Contributions Act (FICA). The trade off is the fee you pay compensates the agency for handling the burden.
A real benefit of working with an agency is if you are unsatisfied with the work that the temporary employee is doing, you simply call the agency. The agency deals with communicating the change in assignment to the current temporary employee and for providing a new staff person. It is valuable to build a strong relationship with the temp agency so they become familiar with your business needs and the types of employees that work well for your company. In return they can find reliable workers for you.
If you hire a temporary employee directly, you typically pay a lower rate than if you use an agency. As the employer you assume the burden for all of the employment related obligations noted above. In most cases, you do not have to offer benefits such as paid time off, medical insurance or retirement plans, to a temporary employee. Factors such as whether you have distinct employee categories for temporary and regular employees, the length of time the temporary works for you and the specific benefit plan agreements determine what if any benefits have to be offered. Consult your HR professional or benefits broker for assistance in establishing a temporary employment category.
Considerations for Temporary Employees
When you use temporary employees, you may spend a lot of time bringing them up to speed and training them for only a short employment period. Temporary employees have less commitment to you as an employer; some even fashion themselves free agents ready to jump ship for a slightly higher wage somewhere else. As a result, you may have higher training costs because you don’t benefit from long term employment to get a return on your investment. Similarly, other costs to hire the temporary employee like posting jobs or coordinating with an agency and your time to interview may be incurred more often when relying on temporary employees.
You might also find productivity or customer service issues. If you have regular and temporary employees working side by side doing the exact same job except the temporary employee is not getting the same benefits as the regular employee can lead to morale problems. The regular employee might not want to be bothered with helping the temporary coworker or working out routines as it’s only a short term situation. And without the security or commitment of regular employment, the temporary employee doesn’t have the same sense of loyalty and might not bother with meeting your customer service standards.
Independent Contract Employee
Independent contractors are also an option to fill short term needs. Similar to temporary employees, there are fewer obligations to keep the person employed. However, temporary employees are not the same as independent contractors. Like temporary employees, independent contractors may also work on specific projects for specific periods of time, but they also must meet specific criteria, including the following:
• The contractor supplies his or her own equipment, materials and tools; all necessary materials are not supplied by the employer.
• The contractor may work for more than one company.
• The contractor controls how the work gets done.
Please see the accompanying chart for additional details.
The benefits of independent contractors include building your capacity without raising operating costs. Although a contractor’s hourly rates can be higher than regular employees, they are typically less expensive because you do not pay employer taxes or provide statutory benefits such as worker’s compensation or voluntary benefits. Independent contractors are responsible for their own withholdings and taxes. You should collect a W9 at the start of the arrangement and issue the independent contractors a 1099 form at the end of the year to show their compensation.
Some companies on the threshold of labor laws such as COBRA for continuation of benefits or the Family and Medical Leave Act (FMLA), bring on contractors in order to not have to immediately comply with those laws. For example, you have to offer COBRA once you have 20 employees counting both full time and part time positions. But if you later drop below 20 employees, you still have to comply with COBRA if you had more than 20 employees on more than 50 % of your typical business days in the previous calendar year. Using contractors allows you to have capacity of more than 20 workers until you are sure your business will sustain that many staff long term.
Risks of Independent Contractors
If a contractor is really an employee and is misclassified, you might face significant penalties. A key distinction with an independent contractor is you can direct the outcome of a contractor’s work, however, you cannot direct how the the work is done. For example, if you provide training on how you want the work done or provide the method and tools to do the work, you are treating the contractor like an employee. If it is found that an employer has misclassified an employee as an independent contractor, the employer is liable for all employment taxes, withholdings, and employer’s portion of FICA taxes, in addition to interest and other fines.
Some companies inadvertently imply the contractor is an employee by asking the contractor to agree to or sign the employee handbook, participate in company events and attend employee meetings. To help reinforce the contractor relationship, make a clear distinction between employee requirements and events and do not include the contractor.
In addition, with an independent contractor you may be giving up some protections you have as an employer. While you do not pay workers compensation insurance for contractors, if a contractor is injured on your job, the contractor can pursue legal action to cover medical expenses and lost wages. If you are held liable, you do not have the insurance to protect your business. Additionally, employees have common law obligations to their employees on matters such as confidentiality and duty; contractors do not.
Another option you should think about is part-time employees. Part-time employees are considered regular employees with the expectations that employment will continue for an indefinite period of time rather than a fixed or temporary period. Because of the part-time status, you can realize savings on benefits, vacation or paid holidays. Even under the new healthcare reform regulations, you do not have to extend your group health plan to part time employees if they regularly work less than 25 hours a week.
With part-time employees you can be creative with schedules and build your capabilities to match peak workflow hours. Unlike independent contractors, you can dictate the number of hours, time periods when work will be performed and where and how the work is done. For example, unless state law or collective bargaining agreements prohibit, you can have a part time employee work 10 or more hours only on your two busiest days of the week. Or you can use part time employees to eliminate the need for a full time regular employee to work a sixth day and incur overtime.
Part-time employees are typically paid hourly and must comply with company practices and policies just as full-time employees do. They have to follow performance guidelines, safety rules and other company rules. Part-time employees are treated the same as full-time employees when it comes to the Fair Labor Standards Act (FLSA) which covers minimum wage, overtime pay, recordkeeping and child labor. In addition, part-time employees are covered under Occupational Safety and Hazard Administration (OSHA) for work related injuries and Employee Retirement Income Security Act (ERISA) policies for retirement benefits.
Risks of Part-Time Employees
It is a misconception that someone can only be an employee of one company; many part time employees piece together multiple jobs to meet their overall financial needs. However if the part-time employee has another part-time or full-time job, there might be a conflict if both employers need the employee at the same time. To build part-time employee loyalty, you can offer prorated benefits like paid holidays. For example, an employee who regularly works 20 hours a week might get paid half a day for the holidays your company observes. You can also include them in company events to build their perception of you as their primary employer.
You can’t prohibit employees from seeking other employment. What you can do is be clear on your performance expectations, have policies that prohibit conflicts of interest, and clearly state the need for confidentiality, and in some cases, a non-solicitation agreement might be appropriate. Remember, as regular employees, part-time staff is subject to your policies.
As your business changes, you may increase the part-time employees hours. It is important to track eligibility for benefits based on hours worked per week or even in a year for your different benefit plans. For example, eligibility for ERISA plans like a 401(k) is frequently based on working 1000 hours a year which equates to 20 hours a week. Your life insurance or disability plans often have eligibility thresholds that are less than your medical insurance plan. Besides the risk of violating a law like ERISA, you do not want to be ethically or financially responsible if an employee has an acute need for a benefit like disability and meets eligibility requirements, but was never enrolled.
Until economic indicators show an ongoing recovery and you have confidence that an increase in your business can be sustained, the flexibility that temporary help, independent contractors and part-time employees provide is worthy of consideration. The right approach depends on your business and what will serve you and your customers best given the advantages and disadvantages of the different models. Factors such as costs you incur, regardless of employment status like training, the importance of reliability and staff loyalty that you need to meet your business objectives, and the expense savings of not having to offer benefits should all be considered. And let’s all hope that in short order the need for contingent workers is to keep up with rapid growth!
This content was developed for the PHCC Educational Foundation by TPO, Inc. (www.tpo-inc.com). Please consult your HR professional or attorney for further advice, as laws may differ in each state. Laws continue to evolve; the information presented is as of February 2012. Any omission or inclusion of incorrect data is unintentional.
The PHCC Educational Foundation, a partnership of contractors, manufacturers and wholesalers was founded in 1987 to serve the plumbing-heating-cooling industry by preparing contractors and their employees to meet the challenges of a constantly changing marketplace. If you found this article helpful, please consider supporting the Foundation by making a gift at http://www.phccfoundation.org.
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