When you're running a manufacturing company and looking to hire a staffing firm, it's essential to pick a partner who does things the right way. Some staffing firms might try to cut corners by classifying workers incorrectly as 1099 contractors instead of W-2 employees. They do this to avoid paying certain taxes, which might seem like a good way to save money in the short run. But this move can backfire badly.
Why some staffing companies misclassify the worker
At first glance, misclassifying employees as 1099 contractors seems like a savvy business move. After all, businesses are required to pay a 7.65% Federal Insurance Contributions Act (FICA) tax for every W-2 employee, covering Social Security and Medicare. Some staffing agencies avoid paying 7.65% FICAby designating their workers as 1099 contractors. However, the IRS has stringent guidelines to determine worker status, and deviations can attract hefty penalties.
Transfer liability to the client company
Misclassification can lead to audits and fines from the IRS, but that's not the only concern. There are also implications for workers' compensation insurance and unemployment insurance. W-2 employees are covered under the employer's policy, but 1099 contractors must fend for themselves. In the event of a workplace injury, a misclassification could transfer liability to the manufacturing company, leading to potential legal disputes and financial losses.
Employee Benefits and Morale
The distinction between a 1099 contractor and a W-2 employee also affects the morale and security of the workforce. W-2 employees are eligible for unemployment benefits, workers' compensation, and often, company-provided health insurance. This safety net not only protects the workers but also fosters a more committed and stable workforce. In contrast, 1099 contractors, lacking these benefits, may have less loyalty to the company, potentially leading to higher turnover and a less reliable workforce.
Strategic Benefits for Your Manufacturing Operations
Choosing a staffing partner that values proper classification demonstrates foresight. It shows a commitment to sustainable business practices and establishes a reputation for integrity. This approach can lead to smoother operations, as well-managed staff tend to be more productive and engaged. For HR directors, operations directors, plant managers, and CEOs, the peace of mind that comes with compliance cannot be overstated.
Real-World Consequences: A Cautionary Tale
The dangers of misclassifying employees are not just theoretical. Consider the case of a staffing agency in the Midwest that faced legal action after an audit by the Department of Labor (DOL). The agency had classified a significant portion of its workforce as 1099 contractors to circumvent payroll taxes and reduce costs. However, the DOL's investigation revealed that these workers were performing tasks indistinguishable from those carried out by regular employees, under the direct supervision of the staffing agency's clients.
The fallout was immediate and severe. The staffing agency was found in violation of the Fair Labor Standards Act (FLSA) and faced penalties that included back payment of wages, overtime, and an additional equal amount in liquidated damages. This case became a public relations nightmare, casting a shadow over the agency's reputation and serving as a stark reminder to the industry of the importance of compliance.
Protecting Your Company from Similar Risks
When considering a staffing partner, it’s crucial to assess their track record in employee classification. The legal repercussions for your company can be just as severe as for the staffing firm itself. Partnering with a non-compliant agency not only risks financial penalties but can also disrupt your operations and damage your brand reputation. By choosing a staffing partner that strictly adheres to classification laws, you safeguard your company against such risks.
Our Promise to You
We make sure all our staffing employees are classified as W-2 workers. This means we're following the law and our workers are protected. We believe it's the right thing to do, and it shows that we're a company that cares about doing business the right way.
In short, the wrong staffing partner could save you a little now but cost you a lot later. Working with us means you're choosing a staffing firm that values doing the right thing and looks out for everyone's best interests. That's the kind of foundation you want for a strong and successful business relationship.
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Malpractice Area
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Mark up difference
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Risk
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Timpl way
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Categorize Staffing employee as 1099 instead of w2
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7.65%
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Subject to Internal Revenue Service audit – Subject to fines imposed. In the event of a safety accident, industrial accident insurance is not applicable to individual businesses (a lawsuit can be filed against the customer). Staffing employees cannot receive unemployment benefits
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All employees w2
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When registering for the workers compensation Insurance, to lower the premium rate, provide false information to insurance company
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3-10%
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In the event of a safety accident, the industrial accident insurance company rejects the claim due to false information (a lawsuit can be filed against the customer). Customer information is entered incorrectly in the industrial accident insurance company’s system, which will have a negative impact on the customer’s future industrial accident insurance.
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We share the client’s business model with the insurance company before submitting a quote. We only submit bids to clients when clients approved by insurance company. In order to minimize customer risks, the work comp rate limit is raised above the legal limit (1 million) We also subscribe to separate special insurance
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Systematic paperless Management of legal HR documents
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2-3%
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employees can file lawsuits due to document mismanagement including i9, tax related documents, also during an OSHA audit on workplace, client company is exposed to risk due to inadequacy safety training materials. Staffing staff may fail to submit appropriate or correct safety training materials. Since staffing company and client is dual employer, risk is carried over to the client also.
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We implement top tier paperless document management system. Safety training materials can be submitted within 4 hours upon OSHA request. Every year, we invest $300,000 to strengthen compliance.
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