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The Truth About Co-Employment

April 10, 2012
The Truth About Co-Employment

The case of Vizcaino v. Microsoft Corp. fueled concerns over co-employment in the 1990s, when the technology giant employed independent contractors to perform the same work as permanent employees. The independent contractors, however, were not eligible for benefits, while their permanent counterparts received full coverage.


Microsoft settled the case in 2000, but the concept of co-employment still left many companies with questions about using temporary workers provided by staffing firms. Fortunately, fears of a wave of similar outcomes failed to emerge, says SAM! Farrell, Chief Sales Officer at Kforce Inc.  In hindsight, the outcome in Microsoft was something of an anomaly, caused in large part by Microsoft’s missteps in responding to an IRS audit.



The Microsoft outcome largely surfaced due to the company’s admission to the IRS that all of their independent contractors were employees. Microsoft did this to settle an IRS tax dispute, apparently without the regard to non-tax consequences in the area of benefits, leading to the infamous benefits lawsuit.


Since then, a number of courts have rejected similar claims, finding that staffing company clients had no obligation to supply benefits to their temporary employees. An important factor in these favorable rulings was appropriately drafted benefit plans that clearly exclude employees of staffing firms. In this regard, companies should work with their legal counsel to review benefit plans to ensure they are properly worded.



Some employers, relying on the Employee Retirement Income Security Act (ERISA) or so-called “year of service” rule, terminate staffing firm employees before they reach 1,000 hours in the mistaken belief that all individuals who work at least 1,000 hours in a year are entitled to participate in the employer’s retirement plan. However, the rule does not apply to non-employees or to employees who have been expressly excluded from the plan under a proper exclusion provision.


Other employer assignment limit policies are based on the federal IRS tax code provisions dealing with “leased employees” Leased employees are individuals who are not common-law employees of an employer but who have worked under the employer’s direction on a substantially full-time basis (generally 1,500 hours) for at least one year.


The IRS rules do not require employers to provide benefits to leased employees—in fact, leased employees can and should be excluded from the employer’s benefit plans. The rules only require in such case that leased employees be included in the employer’s head count for discrimination testing purposes. This is not a problem unless the employer has so many leased employees (and other excluded employees) that they exceed the “slack” in the employer’s plan, which could affect the plan’s tax qualification. 



In addition to appropriate exclusions in their benefits plans, Farrell says, “One of the most important things employers can do to address co-employment concerns is to recognize that temporary personnel are employees of the staffing firm, and conduct business accordingly.”


This means delegating discipline, benefits, compensation and other related matters to the staffing firm. Additionally, employers should review benefit plans to ensure they exclude temporary employees.



One of the best ways to reduce co-employment concerns is to do business with a well-established, reputable staffing firm that is known for respecting their personnel and which has the resources to address their needs.


Finally, Farrell says, “Developing appropriate policies on benefits, retirement plans and assignment limits can add value to the relationship between your organization and its staffing firm, as well as reduce your co-employment concerns.” Consult your own benefits advisors, of course, to ensure that your plans and polices are compliant and meet your needs. ”

About the author

Sam FarrellSAM! Farrell serves as Chief Sales Officer and is responsible for the development and implementation of strategic and tactical sales initiatives and leadership of the national accounts group. SAM! previously served as group president of Kforce’s Health Information Management division. She graduated from Oglethorpe University with a B.A. in education.

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Kforce is a professional staffing and solutions firm providing flexible and permanent placement solutions in the skill areas of technology, finance & accounting and healthcare. Kforce operates in more than 60 offices located throughout the United States and one office in the Philippines.
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Knowledge Employed is a career advice blog and job tips resource center, created and managed by Kforce’s staffing specialists. Whether you are a professional needing career advice or a hiring authority seeking business guidance, our goal is to provide you with the knowledge and tools.