What You Need to Know About Your Staffing Agency’s Compliance

What You Need to Know About Your Staffing Agency’s Compliance

by Jeanne Knutzen | June 26, 2018

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PACE Staffing StandardsAs employers integrate an increasing number of temporary employees into their staffing strategies, one of the value added benefits of that trend has been to “outsource” much of the employer’s legal risks, administrative costs, and compliance requirements to their third party staffing partners – a really important cost saving benefit.

Unfortunately, many employers have handed over this responsibility  assuming that all staffing agencies have the processes in place to  protect them from unforeseen employer liabilities.   Unfortunately, that assumption isn’t always well placed as there are many staffing agencies out there who have either intentionally or inadvertently left their employer clients  unprotected in areas where their clients might never expect.

In any area where your employer responsibilities overlap with your staffing agency’s employer responsibilities (i.e. where you and your staffing agency are co-employers) your staffing agency’s compliance processes matter!

Here is a short list of things we recommend you check out when assessing your staffing agency’s compliance practices along with a brief statement as to why – where you might be vulnerable to regulatory blow back…

Misclassification of Employees as Independent Contractors.

The IRS has been tapping down down on this issue since 2010, and has promised to do so going forward.  Their famous 20 point employee test makes it very difficult for most employers to justify a typical temporary employee as a 1099, and yet some agencies persist in presenting 1099 employees for a temporary or contract role. When caught, the back taxes and penalties charged against the staffing agency who does that can be costly, in some cases putting the staffing agency out of business.

You’re likely to get wind that your  agency is misclassifying its employees by their lower than normal bill rates – rates so low that the employees being referred are likely not W2 employees with the regular tax liabilities attached.

Your risk management remedy?  Make sure that your staffing agency agreement requires your staffing agency to refer only W2 employees, specifically prohibiting the referral of 1099 employees.

(On a more positive note, one of the ways your staffing agency can actually protect you from your own mis-classification issues, is to help you convert your questionable  1099 workers  to W2 status using a low cost Employer of Record service model.  PACE Staffing Network does that type of work regularly….check out our Employer of Record service option HERE

Outdated Time-Tracking or Out of Compliance Payroll Processes 

According to the Department of Labor (DOL), staffing agencies often  make errors in several areas that impact the employee’s pay…in some cases illegally.   While your agency’s payroll processes don’t impact you directly, the disruption that comes when dealing with employees who have issues with their pay or working with cumbersome timekeeping systems, can be problematic.   Frequent issues have to do with how they classify employees as exempt or non exempt, how they track their employee’s eligibility for overtime, or their failure to file required tax reports on a timely basis.

Keep in mind that if a staffing agency is purposefully underpaying their employees so they can offer you a lower bill rate, you may, in fact, be part of the problem.

Short cutting I-9 Employment Verifications and Eligibility to Work Processes

Your staffing agency is required to complete an I-9 on every hire, verifying the employee’s eligibility to work in the US.    You can be impacted when that process isn’t done consistently or methodically.  We’ve heard stories of ICE agents raiding large light industrial workforces and taking away known illegals in mass, leaving the employer without a way to get product out the door.  Even in the very high paying IT areas of staffing,  we‘ve seen employees unexpectedly end their assignment in the middle of a project because their work visas expired


  • For employers working with light industrial staffing agencies, inquire up front if they use e Verify.  If they don’t, dig deeper to find out what they are doing to find their employees and verify their eligibilty to work.
  • When working with a staffing agency providing employees working on time boundaried work visas, require them to disclose expiration dates up front.

Affordable Care Act Compliance – Healthcare Insurance 

For traditional temporary staffing services, your staffing agency has full responsibility to administrate their healthcare benefit programs on their own behalf, not ours.

If you are an employer using a staffing agency for Employer of Record services, where you, not your staffing agency, has sourced an employee and have asked your staffing agency to employee and dispatch them to your workplace on your behalf,  it is critically important to know exactly what your staffing agency is doing to stay compliant with the ACA employer mandates.

Federal regulators do not look favorably on employers who outsource their employer responsibility to a third party as a way to circumvent their responsibilities under the ACA.    What your staffing agency offers in healthcare benefits (on your behalf) must meet your own ACA mandates or run the risk of penalties for non-compliance and they will want to see evidence that you have agreed to pay for that benefit by an increase in your bill rate.

Washington State’s Mandatory Paid Sick Time Benefits

New to Washington State in 2018 is the mandate for all employers to accrue a specified number of hours each pay period to compensate an employee for hours of work lost when they attend to a personal or family health issues.   All Washington employers, including staffing agencies, are required to generate and track this benefit along with other administrative and communication requirements.

While using a staffing agency relieves an employer of these administrative and usage costs, employers are very impacted by how frequently this benefit is used and how it is managed by their staffing agency partner.

Remedy?  Find out how your staffing agency manages this benefit and how much (or how little) you will be involved.  Ask about the trends they are seeing in who is and is not using the benefit and how they manage the potential benefit abuser.

Background Checks  – Managing to FCRA standards    

When and how your staffing agency initiates a background check has the potential to expose you and your company to charges of a discriminatory hiring practice.  FCRA (Fair Credit Reporting) requirements have recently surfaced to put certain restrictions on how the hiring process must take place.

Employers in general, are not allowed to initiate a background check until a candidate has completed the screening process and an offer to begin work has been extended and accepted.  Initiating a background check prior to an offer is considered a discriminatory practice because it potentially eliminates candidates from consideration without due process – a violation in how the FCRA process is entitled to work.

Additionally, before a background check can be initiated, the employee must consent to the investigation and be made aware of their rights to contest its findings.   If a background check comes back with information that results in a negative outcome (ex. the potential of rescinding an offer) there has to be a period for the candidate to challenge the validity of the information collected before your offer can be rescinded.

Remedy?  Make sure you know how your agency administrates FCRA requriements.  Agencies who either don’t know about or are side stepping FCRA  requirements can put you at risk of being considered a participant in a very costly FCRA violation.  (Just ask Amazon).

Other Co-Employment Issues

There are three areas where a co-employment – the shared employer responsibility –has been found to exist and will have impact on you and your staffing agency partner (always) :

  • Discrimination in Hiring Standards and Practices
  • Hostile Work Environments
  • Safety

If an issue comes up in your workplace that touches one of these three areas, you and your staffing agency must work together to collaboratively address and resolve the problem. Examples might be… a candidate who believes they were not selected for an assignment because of their age; an employee  who claimed discrimination when removed form an assignment because they wouldn’t work on a religious holiday;  an employee who felt threatened or intimidated by a fellow co-worker;  or a employee who raised issues about a safety hazard that went unaddressed.

When fielding complaints on these issues, a misstep by either the staffing agency or their client can easily turn a situation from “easily resolved” to a formal complaint against both parties.

Remedy?  We recommend that employers take the time to ensure their staffing agency partners  are using  discrimination free candidate screening processes , and that their employees,  once assigned,  are managed in ways that allows workplace issues to be surfaced and dealt with quickly and professionally.  Find out who, on their staff, routinely handles these types of issues.

This article was written by Jeanne Knutzen, owner and founder of PACE Staffing Network, an award winning recruiting and staffing agency headquartered in Bellevue Washington,  ranked by independent surveyors as being in the top 2% of staffing agencies nationwide. PACE provides a wide range of direct hire, temp to hire, temporary staffing and Employer of Record services to employers in Bellevue, Seattle and other parts of the Puget Sound.   For more information on these and other staffing issues, contact Jeanne at jeannke@pacestaffing.com

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