Independent Contractor Compliance Blog

Third-Party Payroll Vendors

If you are an employer, you can’t delegate certain responsibilities under the law to a third party. It doesn’t matter to the government (for payroll taxes, wage and hour laws, workman’s compensation coverage, and independent contractor compliance) that you pay and rely on a third party vendor to administer your contingent workforce and your independent contractors. If there is a problem, the government will hold whoever meets the test of employer responsible. It then becomes the client’s task to recover from the vendor.

However, there are provisions in many states’ statutes that allow the third party vendor to be defined as the employer of record, if certain specific tests are met.  The government will first look at its statutes to see if the worker is defined as someone’s employee before using common law. This is why it is important to choose a vendor that knows its business and a company that understands and follows the law precisely.

These statutes usually involve a checklist where all tests must be met to qualify the vendor as the employer. In California, for example, there are seven tests that must be addressed. If a single statutory test is not met, the question of who the employer is falls to common law (is there direction and control and who has that authority?), regardless of who actually pays the consultant.

Over the years, I’ve encountered some “bargain vendors” who claim to protect their client companies, but when a government challenge arises the protection melts away. The government finds the statutory tests are not met, or the workers do not meet the test for IC. Therefore, the client company becomes the employer of record and retroactively becomes liable for the employee’s and the employer’s share of payroll taxes, workman’s compensation, health care and other costs, plus penalties and interest. The client company is left on its own to recover from the vendor in a civil action. Even though the client company acted in good faith, the government still holds it responsible.

I’ve also encountered third party vendors who have properly classified the contingent workers as employees but make errors in the payroll reporting and paying. If they do not meet the test to be the employer of record, then the client company is still responsible for any errors and will be directly assessed any fines, penalties and interest. This is true even if the client paid the vendor correctly and on time. Again, it will be the client company’s task to recover from the vendor.

In all cases, it is important to engage a true expert who will properly qualify and administer your contingent workers and ICs.

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