What are the risks of keeping temps or contractors too long or misclassifying them?

Temp workers and contracted labor can be a necessary lifeline in this unsure economy, and the option to hire help can mean that businesses stay afloat. However, keeping temps too long or allowing contractors to stay without proper status can have bad consequences, leaving companies open to abuse and trouble. A temp who’s kept on too long is actually permanent staff. Here are four things to look out for.

A Permanent Underclass of Temps

First, is it fair? Temporary help as a rule has no benefits, although the agency may offer some, and generally has a lower rate of pay. Keeping people working this way forever, or long enough that it’s abuse, is unacceptable in any company. Just don’t leave the person hanging out to dry for months.

Second, a two-tier workforce. A permanent underclass of temps will create conflict, resentment and feelings that your business is not playing fair. Let a temp work past the end of their initial contract, and not only do they seem like a new fixture in the workplace, they also resent that their new status is not equal. The longer the situation continues, the more resentment builds. People who are treated unfairly are more likely to cause trouble, or to file claims with the EEOC (Equal Employment Opportunity Commission).

Joint Employer

Third, don’t assume you’re off the hook: in theory a temporary is not your full-time employee. Using agency temps also can make you a joint employer — with the agency — of the temp. Control over the work that a person does is one of the things that makes joint employment most likely. This means, in English, that if your company’s own foremen and supervisors are telling the agency person what to do every day, you are most likely what’s called a joint employer, and you can be liable along with the agency that hires them. You also can be liable for negligence of a misclassified contractor.

It’s a common myth that you can drop a temporary employee from your payroll for any reason or none at all. You can’t, but you can have stricter disciplinary rules, like two strikes instead of a progressive discipline process. But be aware that EEO laws and the National Labor Relations Act still apply to temps, and if contracted workers are legally “your employees,” you can still get in trouble.

For example: Two temps at a distribution center complained about overtime at a staff meeting. The company let them go. Where is the problem in that, you ask? An NLRB charge followed, saying that was protected concerted activity. It was. The employer was flat wrong in believing that the workers were not owed protection. The company settled. Even a temp is not just a temp.

A Big Bill Can Follow

Finally, it can cost a ton of money to get it wrong. Even Microsoft, that giant among giants, didn’t get this one right. That was in the 90’s, when it classified a bunch of programmers as contractors and had to give them employee benefits, including the value of their stock options.

Here’s another case: A business hired a full-time executive on as a contractor. She was paid a premium to cover her own payroll taxes, Social Security taxes and health insurance. Things went fine for about two years, then the business stopped the arrangement. Legally, she was an employee and, she argued, entitled to six figures in severance. The company paid. No defense. If you take a contractor and pay her a little extra so she can carry her own weight, that does not make her not your employee.

Misclassifying an employee can cost you overtime, back taxes, penalties for failing to withhold, your share of the Social Security tax, health, life and disability coverage, stock options, and severance.

Maybe you should put them on the payroll.