The marketing agency or brand represents a more lucrative target when suits or claims are filed. If the talent agency does not have the resources to satisfy the fines and penalties, the marketing agency or brand may be left with responsibility.
When hiring a staffing agency, most companies put cost, customer service and talent quality at the forefront. What most companies do not consider is the potential to be named as a co-employer in the case of staff member claim or lawsuit. According to employment law, brands and agencies who partner with event staffing agencies are often times just as responsible for the staff as the company that hired them, from tax liability to worker’s compensation claims. This exposes companies to tremendous risk- risk that is often overlooked and could potentially cost hundreds of thousands of dollars.
In 2008, EventPro Strategies began classifying all of our event staff as W-2 variable hour employees rather than 1099 independent contractors (which has been the industry norm). Since then, many clients have asked about co-employer liability and the potential consequences, large and small, to both their agency as well as their brand clients as it relates to a staffing agency’s hiring practices.
What is Co-Employment?
When determining whether a brand or agency is a “co-employer”, the IRS uses the “common-law employee” test. This test states that “under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.” In event marketing, the co-employment risk is considerably high, especially because many times there is a representative on-site from the agency, brand or both, who is explicitly directing the work that is being done by each and every staff member.
“When staffing agencies hire people as independent contractors to work marketing events, the IRS, the Department of Labor, the EEOC, state unemployment agencies, state workers’ compensation enforcement agencies and others may determine that these people should have been hired as employees,” said Joshua Woodard, partner at Snell & Wilmer, L.L.P. “If so, the governmental agency will analyze who should be deemed to be the employer by determining whether there was control, or the right to control, the talent. Unfortunately, “control” is not difficult to establish. In certain circumstances, just giving direction to the talent while at an event may be enough.”
Another significant factor lies in the fact that, in most cases, the marketing agency or brand represents a more lucrative target when suits or claims are filed. If the talent agency does not have the resources to satisfy the fines and penalties, the marketing agency or brand may be left with responsibility.
Worker Misclassification Risks
If a staffing agency hires event staff as independent contractors, there can be significant risks and adverse consequences that are associated with worker misclassification. As the client, if just one of the contractors hired to work your event fails to pay taxes, the IRS could initiate an audit. “If the staff member claims that he/she should have been hired as a W-2 employee all along and that you exercised “control” over him/her, the IRS may come knocking at your door asking you why you, as the employer, did not withhold taxes,” said Woodard. The IRS could determine that your company, along with the staffing agency, is responsible for paying all back taxes (many times both the employer's and the employee's portions), penalties, interest and failure-to-file fees. There could also be personal liability assessed for certain agency or brand managers, as well as additional employee audits.
In the case of an audit, it is also important to understand that, in terms of employee misclassification, many times liability is not limited to the specific state in which it occurred. The year the state of California entered into a 'memorandum of understanding' with the US Labor Department regarding the improper classification of employees as independent contractors, it joined 11 other states who signed a similar pledge. These 11 states are Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington.
“Independent contractor versus employee classification issues have been increasingly focused upon by many governmental agencies in the last several years,” said Woodard. He advised that “companies who engage talent would be wise to carefully evaluate their risks when selecting a staffing agency. If a company has controlled, or would like to control, staff at an event, the best manner in which to reduce employment-related risks and possible governmental audits would be to take proactive steps to ensure that all applicable taxes, worker’s compensation insurance, payroll requirements, and other employer requirements are being met. Failure to do so can result in serious consequences.”
W-2 Hiring Helps to Prevent Co-Employment Liability
“Many staffing companies in the event marketing and promotional industry may be living on the brink if the personnel they send to their clients are paid on a 1099 basis,” says Richard J. Reibstein, partner at law firm PepperHamilton, which has handled many misclassification cases. Reibstein was quoted on the misclassification issue as it pertains to the experiential marketing industry in the article “A Brewing Storm” in the February/March 2013 issue of Event Marketer Magazine. In the article, Reibstein goes on to say “There’s nothing wrong with sending 1099ers who are genuine independent contractors—but many of the folks sent to corporate clients may not qualify for I.C. status under federal or state laws.” Hiring staff as W-2 employees, and partnering with staffing agencies that do, helps to mitigate this risk.
When considering the potential impact of co-employment, choosing a staffing partner is more than simply evaluating the quality of their talent, the costs and the level of service that they provide. Hiring practices, how staff members are taxed, workers compensation and other insurance, and human resources policies are also critical to ensure both that your program is successful and your company is protected.