Temporary Worker Misclassification Crackdown Spreads Across the U.S: Feds Announce Misclassification Alliance

Government agencies have aggressively cracked down on worker misclassification in recent months; but took it an extra step further last week when they announced that the U.S. Department of Labor has entered into an agreement with the IRS and other agencies to crack down on employers that misclassify workers as independent contractors when they should be classified as employees.

The signatory states are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington with other states expected to follow suit. Numerous other states, including Pennsylvania and Wisconsin, have already passed worker misclassification laws that impose severe penalties on employers who misclassify their employees in an attempt to recover billions in lost revenue.

If a worker is an employee, the employer must pay the necessary federal and state unemployment taxes AND its share of Social Security and Medicare taxes, in addition to the withholdings of the employee's share of Social Security, Medicare and Income Taxes. The employer must also incur costs related to pensions, health insurance, vacation pay, sick pay, and workers' compensation insurance. In addition to all this, employers face federal and state regulations regarding working conditions and overtime.

With all of these burdensome obligations to handle, no wonder employers try to take a shortcut by classifying temps as independent contractors. However, with the likelihood of getting caught on the rise, the financial implications of incorrectly classifying workers could be financially crippling. If your company is found to be in breach of the rules, penalties include back taxes, PLUS interest AND a fine of up to 35% of the total owed. 

If you utilize or supply temporary workers on a 1099 basis, it’s worth talking to a company like Emergent (855 250 5000) who are able to handle employer obligations including payrolling, tax withholding, workers’ comp and risk management on your behalf.     

Unfortunately, the economic downturn has increased pressure on staffing firms and their clients to classifying temporary or contract workers as independent contractors to lower their costs and/or provide a better rate to their clients. Staffing firms tempted to do so are well-advised to first make sure they are complying with federal and state law as well as the IRS 20 Factor test. The majority of workers assigned through a staffing arrangement perform their work under the supervision and control of either the staffing firm or the client, and the assignment usually takes place at the client’s offices –a good indicator that the worker should be classified as an employee rather than a contractor.

Worker misclassification also can lead to other serious issues such as work authorization, overtime pay, benefits eligibility, workers' compensation insurance, state unemployment insurance taxes, and violation of state worker misclassification laws. The entire process can be costly and extremely onerous for businesses. To be safe rather than sorry, contact Emergent today on 855 250 5000 or info@emergent.com.

For additional information on proper classification of workers, see the new 12th edition of the ASA book Employment Law for Staffing Professionals.

The Basics of Staffing Markups

The total size of contingent workforce payroll in the U.S. is expected to rise to $164 billion by 2018. The opportunity for companies to capitalize on this trend, increasing the productivity and flexibility of their workforce, has become more widely known in recent years. Additionally, companies are using contingent workers in more highly skilled roles to augment internal staff and in these roles the bill rates - hourly rates including all costs and fees charged to the client company by the staffing supplier - increases as the pay rate does.

In many cases, the companies that supply contingent labor to clients on an hourly basis use a fee model that based on a percentage of the pay rate, often referred to as a markup. This 'markup' consists of several components, including:

• “Burden” (employer taxes, payroll costs, workers compensation insurance, etc.)
•  Recruiting personnel and expenses
•  Overhead (general and administrative costs)
•  Profit margin

The pay rate (aka hourly rate) of the worker plus the markup is called the bill rate. Markups can range from 30% to 60%+ with an average in the high thirtieth percentiles across all skill disciplines. Some staffing suppliers promote rates below 30% and, conversely, some services may charge 75% to 100%+ markups.


The Burden costs vary based upon the worker’s skill specialization, the risk of the job, the State in which the worker is employed, the total volume of payroll with a client, and the payment terms. Recruiting costs and pay rates may differ from assignment to assignment, as different factors such as the availability of talent, ‘going’ market pay rates and length of assignment come into play. 

For example, if a contingent worker is engaged on a three (3) month assignment (12 weeks at 40 hours or 480 total hours) the following total costs would apply relative to the pay rate of the worker and markup:

		Total Payroll + Staffing Markup ("Billings")
Pay Rate	Total Payroll	30%	35%	40%	45%	50%
$15	$7,200	$9,360	$9,720	$10,080	$10,440	$10,800
$25	$12,000	$15,600	$16,200	$16,800	$17,400	$18,000
$50	$24,000	$31,200	$32,400	$33,600	$34,800	$36,000
$100	$48,000	$62,400	$64,800	$67,200	$69,600	$72,000

There are other ways that contingent labor is delivered to clients including fixed markup costs, statement of work or milestone based pricing, per unit or task pricing, or fixed bill rates. For the most part however contingent labor in the is delivered with a markup on pay rate. If your company is using or supplying contingent labor then it is helpful to understand how the marketplace prices these services in order to maximize profits and productivity.