Human Resources

Alternatives to W-2 and 1099

In several recent posts, we’ve been discussing the distinctions between two worker classifications: independent contractors who are issued 1099s by the companies they work for; and traditional employees who are issued W-2s.

employee

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We started out with a reference to Lyft, which listed its classification of Lyft drivers as a business risk in its Initial Public Offering (IPO) prospectus, and continued with a look at what factors go into classifying a worker as a contractor or employee as well as the benefits of each classification.

But there are also some alternatives to the contractor and employee models, as Billie Anne Grigg explains in an article for Fundera.

Temp Agencies

“Seasonal businesses or businesses that want to ‘test drive’ or lease an employee before hiring them on a full-time basis might consider using the services of a temp agency,” says Grigg.

Temp agencies generally handle the process of interviewing, payroll, and tax payments and background checks. The temp agency is the official employer of the employee in most cases. The trade-off is mostly time saved for additional administrative cost paid to the temp agency.

Professional Employer Organizations (PEOs)

PEOs are a longer-term solution than temp agencies. They let businesses outsource HR tasks such as payroll, workers’ compensation, and benefits, while the employer gets to retain control of the employee’s day-to-day activities.

Outsourcing Functions

Grigg doesn’t mention this option, but another possibility to consider is to outsource the job function entirely. This is generally not recommended for core business functions but may be useful for ancillary functions that aren’t part of your business’s core competencies.

For the most part, it’s very straightforward whether someone working for you is an employee or an independent contractor. But there are plenty of less-than-typical working arrangements in an economy as diverse as the U.S. economy, and many employment relationships fall into a bit of a gray area.

Over several posts we’ve discussed the factors the government uses to classify workers, the pros and cons of an employee and an independent contractor classification, as well as some alternatives to these two common designations.