The UK is suffering from a significant labor shortage despite...
In November of 2020, we spoke about a similar post entitled What is an EOR and Who Needs One? Today’s post provides the same high-level definition of and insight into agency of record (AOR), which, although similar to an employer of record (EOR), differs significantly. In the interest of understanding more about the AOR meaning and how you can effectively leverage an agency of record as part of a diversified contingent workforce strategy, we recommend you read the earlier piece on EOR along with this post.
Let’s start with the AOR definition: According to Staffing Industry Analysts, an agent of record is “A term used in the US to describe a service whereby the provider acts as a third-party intermediary between a staffing firm or client and one or more independent contractors, administering the back-office functions related to engaging independent contractors, including payroll and government reporting requirements.”
What is an AOR? In essence, the AOR does for independent contractors, also known as 1099 workers, what an EOR does for contingent labor and other supplemental or temporary W-2 wage earners.
What is an independent contractor (IC), then? An independent contractor is one of the seven employee classification types in the US. Generally, an independent contractor (or 1099 worker) is someone who works on a contract basis. This is in contrast to an employee on payroll. ICs are self-employed, either as individuals or as companies, and pay their own taxes.
However, determining whether a worker is an employee or an independent contractor can be complex. The IRS has a strict definition that determines IC status and considers a number of factors, including the use of control and direction of the work being done. Workers are typically classified as independent contractors if the payer only has control of the result of the work being done. In this case, the worker maintains control of what will be done and how it will be done. To maintain IC status, there also cannot be an employer-employee relationship.
Businesses can use the ABC test to determine whether a worker is an IC or an employee in many states. IC compliance varies on the state level, however, complicating matters. Some states only use the ABC test in certain industries, while others only use part of the test. Others still use the IRS’s common law rules to provide evidence of IC status, rather than the ABC test. The common law rules measure the degree of behavioral and financial control and independence and the type of relationship between payer and worker.
Companies must check with the state’s employment authorities to determine how to effectively classify their workers to avoid fines and penalties.
While a hiring organization can drive value by utilizing independent contractors, significant compliance risks are involved. Unlike the tax laws and other regulations governing wage-earning workers, those governing ICs are different and potentially far more complex. Further, there are serious penalties associated with improper IC classification. As the utilization of ICs is a more recently developed trend in the history of workforce management, the laws and regulations governing their use are less well-established and more prone to change than those applied to W-2 wage earners.
This is why, for many organizations, it is a prudent step to seek expert help in sourcing ICs and administering the appropriate tax and benefits structures involved.
An AOR can assume responsibility in the following areas:
The ongoing value of an AOR is that these services maintain the relationship with the ICs they place within a hiring organization as opposed to leaving the client to address the process. The AOR controls the dynamic, which can help ensure the client does not inadvertently change the nature of the relationship or take other actions that could potentially push the arrangement with an IC out of compliance with IRS regulations. In short, the AOR provides an additional layer of protection for the client to utilize 1099 contractors, secure in the knowledge that IC experts are ensuring compliance on an ongoing basis.
AORs can also provide value by educating independent contractors and helping them understand their IC status requirements. This can ensure ICs feel more comfortable and effective in their work with active management in effect to ensure mutual protection for both the contractor and the client. By providing guidance and expertise to the IC community, an AOR can protect the contractors’ classification as a business and may help ensure they are not misclassified as employees. Providing compliance and oversight to the client, the AOR can also help ensure the client is protected from creeping changes to the engagement that might jeopardize the veracity of their IC classification. Working with an AOR is advantageous for hiring organizations as well as the communities of independent contractor resources they develop for clients.
Staffing agencies with multi-location hiring strategies can benefit significantly from the expertise of an AOR. When your organization hires in different states or countries, the risks of misclassification increase. This is because compliance varies per location. In the US, employee classification is determined by the Fair Labor Standards Act (FLSA) at the Federal level. However, it’s also decided at the State level. Internationally, different countries also use different IC definitions. The regulations are further subject to change at any time.
Uber offers an excellent example of the risks involved in engaging ICs in multiple states. The ridesharing company is now in over 900 cities worldwide and has more than 3.5 million active drivers. At first glance, these drivers appear to be independent contractors. They utilize their own cars and have autonomy in determining when, if, and where they work or take breaks. They’re also paid by customers, not Uber, and they can work with other organizations, including other ridesharing companies. On closer examination, however, IC status isn’t so clear. In fact, Uber has a considerable amount of control over the drivers. Uber has strict requirements on the types of cars that can be used, the average rating drivers must maintain, and the fares charged to customers. It also requires drivers to take a six-hour break for every 12 hours of driving to prevent fatigue. The courts have been divided on the IC status issue in varying states due to the varying compliance requirements to maintain independent contractor status. In 2015, California held that Uber drivers were employees under the law, while in Florida, a state judge held that the drivers were not employees.
Another case in which hiring organizations would be wise to invest in AOR services is when they are seeking to scale. As an organization begins to scale, an AOR can significantly improve efficiency and provide a cost-effective solution to a complex and time-consuming business task. It can eliminate the risk of non-revenue-generating activities pulling from the bottom line.
Our global agent of record services support your clients and their independent contractors from start to finish. Contact us today to learn more.
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