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Are you thinking about moving forward with adding contract staffing to your business model? If so, step one is figuring out how you will handle the “back-office” tasks – the legal, financial, and administrative issues involved in being the contractors’ legal W-2 Employer of Record. This involves more than your traditional recruiting, or “front-office,” tasks. For the back-office tasks, there are two options:

  1. In-house: Run your own back-office and employ the contractors on a W-2 basis.
  2. Outsource: Have a contract staffing back-office take on the W-2 employment and tasks.

Before you decide, it is important to know what is involved in running the back-office. Here are some critical considerations:

  1. Financial Risk. If you run your own back-office, you must have cash on hand or a line of credit so you can float the payroll for 30, 60, or even 90 days until your end client pays. You must pay the candidate consistently whether or not your clients pay you on a regular basis. For clients that are slow to pay or fail to pay their invoices, you need to have an invoicing and collections process in place.
  2. Payroll Process. Payroll must be run at least every two weeks, if not weekly. You have to decide how you will collect, verify, and track timesheets, including making sure that each timesheet has an authorized signature from the client company agreeing to the man-hours worked. The actual mechanics of running payroll involve handling state and federal taxes and following the specific payroll laws of each applicable state.
  3. Legal Liability. The legal W-2 Employer of Record must handle a variety of responsibilities, including:
    • Federal Compliance. Equal Employment Opportunity Commission (EEOC), Fair Labor Standards Act (FLSA), Immigration (I-9 and E-Verify), IRS, COBRA, etc.
    • State and Local Laws. These are becoming increasingly complex, and the ongoing changes can be difficult to track. For example, you must stay current with which cities and states have enacted mandatory paid sick leave laws.
    • Contracts. The contractor should sign an employment agreement with the back-office defining the terms of his/her employment. There should also be a master agreement between the employer of record and the end client defining the terms of the assignment and the relationship between the parties. This helps protect the client from potential co-employment liability.
    • Certificate of Insurance. Most clients require the employer of record to have general liability limits as high as $6-8 million, with special situations sometimes requiring up to $10 million.
    • Human Resources. This includes on-boarding procedures (background screenings are particularly important), employment paperwork, terminations, employee matters, etc.
  4. Workers’ Compensation. You need to set up Workers’ Compensation and find out which jobs/industries your Workers’ Comp insurance carrier will allow you to place. For example, anyone can place contractors in an office environment (Workers’ Comp code 8810), but if you want to place engineers, you must find out if your Workers’ Comp carrier will allow that and if they restrict any environments or industries. Remember, rates vary by Workers’ Comp code (job description), so you need to make sure you will earn a high enough profit to justify a steep rate.
  5. Unemployment. In each state where you are going to have contractors, you must set up unemployment insurance. Keep in mind that the cost varies per state; it is critical to make sure that the total cost of employing a contractor in a specific location does not erode your income from the placement.
  6. Contractor Benefits. Benefits are important to attract and retain candidates in the professional and technical sector, especially now that Obamacare (also known as the Affordable Care Act) requires most Americans to have health insurance. In addition to health insurance, a good benefits package typically includes dental, vision, and life insurance and a 401(k) plan.  The final decision about a contract assignment could hinge on the benefits and the employer contribution.

If you choose to outsource the back-office, the provider you select should take on all of these tasks and liability, letting you spend your time on the front-office tasks. These are basically the same as direct hire:  matching the CANDIDATE and JOB ORDER.

Whichever choice you make, be sure all the employment tasks are handled with precision and accuracy. Your reputation as a recruiter depends on it.

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