Chances are there is a contingent workforce in your organization. In fact, these non-employees are estimated to make up almost a third of the total workforce in the United States and are a significant portion of the workforce at most Fortune 500 companies. Today’s leading organizations view their contingent workforce as a strategic asset because it allows them to add specialized, experienced, and independent talent to their organization on a flexible basis. This means greater productivity and creativity for as long as you need them (months or even years).
With all the positives that a contingent workforce adds, there is something else that can come with it: co-employment risk. Co-employment is when two parties share the legal responsibilities as an employer to a worker or group of workers. After landmark co-employment litigation in the 1990s, many organizations began imposing term limits that restrict a contingent talent’s tenure at a company to a set duration, typically 12 or 18 months. It was believed that such limits would reduce the company’s co-employment risk under various laws that govern the relationships between businesses and their workers.
But term limits completely ignore one of the most important drivers of co-employment litigation — benefits.
The majority of contingent talent are employed through staffing companies or employer of record services. The staffing industry is notorious for its lack of employee benefits, offering the bare minimum required by the Affordable Care Act, which usually amounts to a preventative-care-only plan, limited (if any) paid sick leave, and sparse retirement savings options. This creates a gaping chasm of benefits inequality between the contingent and employee workforces.
It is this inequality that leads to lawsuits where contingent workers feel entitled to the benefits their employee peers receive. It’s time to debunk the term limits myth.
Why term limits aren’t really protecting you at all.
Term limits are a popular co-employment strategy for a few reasons. They arose from the belief that after working for a certain length of time, contingent workers are legally eligible for benefits offered by a client company. However, the length of service rules under ERISA are largely misunderstood. Most companies will opt to end a talent’s tenure before they reach 1,000 hours (the threshold in the tax law at which they’d be entitled to benefits) in order to mitigate their risk. However, this does not apply “to nonemployees or to employees who have been expressly excluded from the plan under a proper exclusion provision.”¹
Not to mention, length of service is only one factor among many which determine whether a company is a joint or co-employer. The multitude of other factors includes the client’s right to control how the work is done, assigning work or projects, day-to-day supervision, and setting employment conditions to name a few. There are a multitude of factors at play when determining the manner of a relationship between a worker and a possible employer. The length of service is relatively minute among them all.
Tax codes and classifications aside, term limits create more work (and more money spent) for clients. There are additional hiring costs, more onboarding time, disruption to the existing workflow, loss of institutional or project knowledge, and low morale. The hidden costs that come from term limits are reason enough to abandon them as a co-employment risk mitigation strategy, especially when there is a more effective one.
Better benefits mean happier workers. Happier workers are less likely to sue.
Look back at the litigation that started the co-employment concerns decades ago. What did it start over? Benefits.
A more effective way to mitigate co-employment risk is to ensure that your contingent workers feel they are being treated fairly. They are a key part of your team, working alongside your employees every day and contributing to the success of projects, teams, business units, and the company as a whole.
The benefits and perks many employees receive are extensive. They include major medical insurance options, ample paid time off, paid leave options, retirement savings with employer matching, and much more. The benefits offered by staffing agencies to their talent rarely amount to major medical insurance (opting instead for minimum essential coverage plans that only cover preventative care). Paid time off or retirement benefits are even rarer.
This massive disparity between the benefits internal employees receive and those offered to contingent talent is a source of ill will which can lead to litigation. When that disparity in benefits is decreased, the ill will and actual harm are lessened; ergo, the co-employment risk is lessened. But it is not only the co-employment risk that is lessened. There is even a chance to improve your contingent workforce. For example, by offering better benefits to contingent talent, turnover decreases significantly, saving you in hiring and training costs.
Perhaps the most effective way to mitigate co-employment risk is to work with a staffing partner that offers the same caliber of benefits that you’d offer your own employees. But it is also a way to show that you truly value the members of your contingent workforce as much as your own employees. No matter if they are permanent employees or contingent workers, everyone wants to feel like the organization they work for cares for them.
¹ Edward A. Lenz and Alden J. Bianchi, Assignment Limits: Client Concerns Regarding Benefits Liability. Issue Paper. (Alexandria: American Staffing Association, 2018), https://americanstaffing.net/feeds/articles-issue-papers/