The difference between temps and contractors and other labels that matter!

While the traditional W2 relationship between employee and employer is the “go to” model for how employers get work done, during extended periods of economic uncertainty (like we’ve had for the last few years) new, more FLEXIBLE ways to get work done start to re emerge.? ?

In the big picture and according to the 2022 US Government Accountability Report, 40% of the current US workforce is made up of what they call contingent workers – workers whose jobs are never intended to be permanent – and that number is scheduled to increase over the next decade.? ? ? ??

This blog is written to address how we describe the employees who we bring into our companies on a short term, contingent basis. How do we differentiate these employees from regular employees? When might we want to call a temporary employee a contractor? What qualifies a worker to be considered an “independent contractor”???

But first, let’s talk a bit about WHY the FLEXIBLE workforce exists and the scenarios that tend to bring flexible workers into our staffing mix…? ? ? ? ?

Does the shift to a flexible workforce happen by plan or by accident?? ?

In most small to medium sized companies the shift to more flexible workers often happens casually. When revenues get short, companies hunker down. Budgets are frozen. Hiring becomes a “last resort”. And if there’s a short term blip in business activity, companies staff up with any worker they can find who they can put to work on a short term basis. The number of people in the workforce considered to be working in a temporary or interim role just organically increases the longer the company stays in hunker down mode.

Reasons to Get FLEXIBLE

For companies who take a more planned or strategic approach to workforce strategy, there’s a long list of reasons for putting more emphasis on STAFFING FLEXIBILITY. It all comes down to three primary drivers…

• For financial reasons, contingent workers are used to streamline operations.?With a goal to reduce fixed cost commitments across the board, companies want fewer long term staffing agreements – 1) the ability to flex their employee costs up or down depending on business need; 2) to pursue opportunities to outsource any internal work functions that aren’t part of their core; 3) to explore ways to re configure their talent base and cut out unnecessary fat.? ? ??
• Operationally, they start to prioritize their ability to MOVE FAST!?When they need specialized talent to develop a new product, explore a new market, or master a new technology, rather than taking the time and resources needed to develop new skills from within, they turn to people from outside the organization who have the professional or technology based skills to kick start new implementations, explore new markets.
• From a marketing or PR perspective they don’t want to damage morale or their public image that comes from hiring and then laying off without a lot of room in between.? ? ?

Who should you consider part of your flexible workforce and what should you call them?? ? ? ? ?

The names given to the flexible workers are as many and as varied as the companies who use them. Temporary staff, contingent workers, interim professionals,1099s or contract workers, gig workers, part-time employees or consultants – all are names we’ve heard to describe workers who fall into the “flexible staffing” bucket. Some of these labels are driven by the vendors who provide these flexible workers. Some labels are developed internally, often without a lot of pre planning or thought.? ? ? ? ?

The Bureau of Labor Statistics calls members of the flexible workforce “contingent workers” and defines them as “people who do not expect their jobs to last”.? That’s definitely a definition with a large swath and makes me wonder if they think we’re all temps – working on a contingent basis, doing what we do, working for our current employers – until we don’t.

While it is possible for companies to employ their flexible workers directly, most companies enter into “flexible staffing arrangements” to avoid the costs, responsibilities and liabilities associated with being the employer. This means they find ways for flexible workers to get attached to them indirectly via a third party employer (ie. a staffing agency like PACE) who arranges for their worker to be assigned to do work on an interim basis. As a way to avoid the complexity of having self employed workers in their midst, many companies require their staffing vendor to only assign workers who are their W2 employees.? ? ?

A very small percentage of “flexible workers”, are not W2 employees and are categorized as “independent contractors”.? The IRS has very specific rules they use to determine who is “legitimately” able to be considered an independent contractor involving the notion that they operate independently of a company’s policies and resources – setting their own hours of work, providing their own tools and equipment to do their work, establishing their own terms of how they will be paid for what. At stake for the IRS are the payroll taxes that all “employers of record” collect and pay and that are calculated quite differently from how an “independent contractor” calculates and pays their own self employment taxes.?

While many flexible workers are attached to a workforce “on demand” or “at will” with no guarantees of ongoing employment, some work that is otherwise considered temporary is performed using structured contracts or agreements with built in stipulations of performance and payment guarantees.

What’s the difference between a temporary and contract worker?? ?

That’s a question often muddied by both the employers who use third party staffing services and the agencies who provide temporary staffing and/or contract staffing services. When terms such as “temporary workers” “contractors” and “independent contractors” get used interchangeably its easy to overlook important differences between the different types of flexible workers. These differences have both legal and operational impact.

Who are Contractors?

Let’s answer that question starting with what we believe are the reasons why the “contractor” label came into existence and how it is evolved to be used in today’s work environment. The truth is that when recruiters first started looking for interim workers to fill higher level technical or professional roles, they began to use a vocabulary they was attractive to the people they needed to fill these roles. Let’s face it, most technical and professional workers do not want to be viewed as “temps” which generated the need to create a new label for the growing number of professionals willing to play in the interim staffing marketplace. The label that came up most often was “contractor”. Staffing firms also used the term “consultant” or in the technical engineering or IT space, the term “resource.”? ??

From a legal perspective, the term contractor is typically reserved for scenarios where there is a specific and documented relationship between the worker and the client. In the world of staffing, that isn’t always the case.??

• Most staffing agencies work under some type of agreement with their clients to provide them with interim staff. Many staffing companies do not require specific contracts for specific individuals or projects.??
• Most staffing agencies do not create contracts with their employees so it is only when client contracts are needed to cover a specific worker or a project involving a team of workers, that a contract with an employee comes into play.?
• It is only when there is a contract relationship between a worker and their employer that the contractor language make sense.

In other words third party staffing agencies can provide all forms of temporary workers, but not all temporary jobs are specifically covered by a contract, nor should all temporary employees be considered contractors.? ??

In fact, contract staffing is a particular type of temporary staffing where specific contracts (we call them Statements of Work or SOWs) dictate the terms of the worker’s engagement with the agency’s client. SOWs typically spell out the results that need to be achieved, by when, and often provide some sort of penalty if the contract is cancelled for reasons other than non performance. For a “contracted” employee working in accordance with a SOW, there are often some built in guarantees for such things as length of employment or rate of pay that typically aren’t provided to a traditional temporary employee who works by the hour and exclusively at the will of the client. A contract worker may even get paid for a cancelled project depending on the terms of their agreement while for a “temp” an interim work assignment can end at any time and for any reason without penalty.

?At PACE we use the term “contracted temporary employee” to reference the working arrangement where there is a specific contract to describe how our worker will be engaged – to do a specific job, produce a particular result, or participate in a specific project. If we use a ‘statement of work” to lay out what results our client expects, how and when the work is considered billable, and in our case might contain a provision that would require a client to provide payments to employees if the project is cancelled, we believe there is a basis for referring to our employees as a contracted employee. Otherwise, they are temporary employees who fall under a general agreement to provide staffing services to our clients.? ? ? ? ?

What about “Independent Contractors”?

One of the problems with the term contractor is that is often confused with the term, “independent contractor” which is a very different type of worker. An independent contractor is defined by the IRS and reserved for workers who are legitimately self employed, acting as their own “employer of record”, paying themselves, calculating and paying their “self employment” taxes.? Again, the IRS has very specific rules to identify and limit the number of workers who are considered “true” independent contractors.?If you’d like to review their rules, check out our recent blog on this topic that discusses the changes in rules that went into play earlier this year.

Employers who misclassify workers as independent contractors while treating them as employees, are subject to fines, and the unpaid payroll taxes that were owed but not paid during the period of time when the worker was considered an independent contractor.? ?

And rest assured the IRS doesn’t mess around when it comes to unpaid payroll taxes, which has prompted many employers to eliminate their use of independent contractors altogether. They have either decided to employ these workers directly (i.e. requiring them to become their own W2 employee) or refer them to a third party employer of record provider who functions as their W2 employer – which is a step up from pay agent.

Some employers will refer to these workers being paid by a third party employer of record provider as “contractors” which may make sense internally, but should not be confused with the term “independent contractor” which is legally reserved only for self employed workers.?

How are temporary employees different?

To make things easy, the term temporary employee is almost always used in the context of some employer’s W2 employees.? Legally, they can be employed directly by a company and categorized in their HRIS as a “temporary” worker, or, as is more commonly the case, they are the W2 employees of a staffing agency who hires them on their client’s behalf and refers them back to their client for work intended to be short term – an absence of core staff, a placeholder employee when recruiting for a new hire, etc.

Traditional staffing agency arrangements pay their temporary workers for every hour they work and facilitate the terms of their short term work assignment (rate of pay, intended assignment length etc). Assignments for temporary workers can typically end without penalty. The client is required to provide a work space, equipment and supplies needed to do the work. The temporary staffing company is responsible to provide the employee with pay and benefits in accordance with their own policies, not their client’s.??

Agreements to provide temporary staff on open interim roles are typically covered in ongoing and/or renewable contracts that spell out the service requirements, how temporary staff will be requested and delivered, how hours of work will be tracked and billed to the client, etc.??

What are some best practices for using temps?? contractors? independent contractors??

1.? Whenever possible use a third party to handle all components of the staffing process involving temporary or contingent staff.?It’s simply not worth your time to recruit and absorb the administrative costs of becoming the employer of record for employees who will only be with you for a short period. If you find someone on your own that you’d like to add to your “flexible” workforce, consider using an “employer of record” provider to act as their employer during the time they work for you. Employer of record services includes all pay agent services and is typically offered by your staffing partner at a significantly reduced bill rate as compared to their bill rates for more traditional temporary staffing services.

2. Pick your staffing partner, the vendor who will be supplying you with interim workers, carefully.?How they do their work, how they perform their role as a W2 employer or act as a contracting agent for their employees, matters. Make sure you work with a staffing partner who has been around long enough to know their way around the different types of flexible workers and can help you select the type of flexible worker that makes the most sense for your needs.? ? ? ?

3. Don’t walk into work arrangements with people who call themselves independent contractors casually…even if they call themselves consultants.?The IRS holds you accountable to ensure any worker you bring in an independent contractor role can pass all the tests necessary to be considered an independent contractor. The fines and penalties for misclassification are not cheap. In fact, you might consider hiring a third party to verify their “independent” status just so you have back up for your intent to be compliant.?

4. Have your attorney look at any contract you intend to use for temporary staffing services carefully. There are areas of the employment arrangement where you and your staffing partner are actually co employers – where your responsibilities as employers overlap. Your contract needs to clearly spell out who does what.?

In summary….

While the roots of temporary staffing and the temporary staffing industry dates back to a time when “Kelly Girls” helped employers cope with unexpected absences, today how companies use flexible workers is much more strategic. Just in time workers represent the mainstream staffing model for most manufacturing, distribution and logistics companies. Project work,? staffed by high level “contracted” employees are common place. Part-time or interim CMOs, CFOs even CEOS are not that uncommon.? ? ?

Whatever we choose to call the members of a flexible workforce, they represent one of the most creative and powerful ways for employers to “get work done” quickly and cost effectively. This is particularly true for small to mid sized employers who can’t always afford the costs of having specialized employees on staff. They need access to this specialized talent on an ad hoc or flexible basis.?

Companies who have mastered the nuances of workforce flexibility know first hand that the benefits they’ve gained are anything but temporary (pun intended:)).

How can PACE help?

As one of the oldest and best known staffing and recruiting agencies in the Pacific Northwest, the PACE team is here to help you use all the best parts of flexible staffing models while avoiding legal pitfalls. Our services are designed to help employers integrate their flexible staffing models into the best practices attached to the core workforce. Because we uniquely do both direct hire recruiting, temporary and contract staffing, plus provide dedicated employer of record services whenever needed, we are in an ideal position to offer unbiased recommendations about what solution will work the best for you in any specific situation.