My company uses a lot of contractors, and we treat them much like our employees. Is that a problem?
It is not a good idea to treat contractors the same as regular employees. By definition, a contractor is in a different relationship with the company and it is important to set boundaries so that the difference in the relationship is maintained.
Among other things, contractors do not receive employee benefits from the company, like health and disability insurance, and they pay their own taxes. Employers do not pay payroll taxes for contractors like they do for employees. If a contractor is reclassified as an employee by a government agency or court because the contractor was, in fact, treated like an employee and did not meet the contractor tests that different agencies use, it can be very costly for the employer. Employers can be held liable for overtime, employee benefits, various taxes, statutory penalties, etc. These are very expensive penalties, as Microsoft learned in the late 1990s when scores and scores of contractors and temporary workers were reclassified as employees.
The economic downside of reclassification of a contractor as an employee usually far outweighs concerns about whether contractors feel they are a part of the daily corporate culture. Contractors may be considered by the company as a regular part of the workforce but because of the penalties associated with misclassification, it is important to observe different treatment. This does not mean that contractors need to be treated like second-class citizens. Depending on how contractors are used, companies can find a myriad of ways to welcome them into the corporate culture while treating them differently from regular employees. But concern about a contractor being offended by being treated differently should not override the need to observe differences.
For the sake of liability, it is important to have a process for engaging contractors that considers the legal tests for contractor status that various government agencies use and to have protections in place to maintain that relationship while the contract is being performed. A well-written contracting process that includes the human resources and/or legal department can help a company meet its contract needs and lessen the risk of errors in classifications. The process usually includes a review mechanism for assessing whether the contemplated relationship would pass legal muster for contractor status. It also involves being sure that contracts include very specific terms about status, benefits issues, payment of taxes, consequences in the event of reclassification, length of assignment, etc. Contracts should be signed before the contractor begins providing services and the length and scope of the contract should be followed.
Importantly, even after a contract is signed, it is vital that managers understand their roles in maintaining the contractor’s status as a nonemployee. Unfortunately, many companies create contracting processes but do not follow through with best practices after the terms are agreed. And managers who work with the contractors on a daily basis may feel uncomfortable excluding contractors from various meetings, distribution lists, etc., because the contractor sits with and works with the other department employees on an ongoing basis.
Companies are wise to develop guidelines for managers so that the contractor’s expectations about treatment are set at the beginning of the relationship. If the contractor’s role is clearly understood and treatment is consistent with that role, a contractor is not reasonable in developing expectations that he/she will be treated the same as an employee.
Human resource departments and legal counsel can help companies create and implement a contracting process. And they can help train managers on how to handle the relationship once the contractor is brought on board.
Barrie Gross is former Vice President and Senior Corporate Counsel (Employment Law) for an international Fortune 1000 company and is a regular contributor to AllBusiness.com. She is the founder of Barrie Gross Consulting, a human resources training and consulting firm dedicated to assisting companies to manage and develop their human capital. Visit www.barriegrossconsulting.com to learn more about Barrie and the services BGC provides.
Note: The information here does not constitute legal advice and should not be relied upon as legal advice. If you have a legal issue or wish to obtain legal advice, you should consult an attorney in your area concerning your particular situation and facts. Nothing presented on this site or in this article establishes or should be construed as establishing an attorney-client or confidential relationship between you and Barrie Gross. This article is provided only as general information, which may or may not reflect the most current legal developments or be complete.