Legal Considerations for Hiring a Temp Agency

A business owner hiring a temp agency.

There are many benefits to hiring a temp agency. When you bring on an independent contractor or temp worker, you often don’t have to pay for benefits, pay an hourly rate instead of a salary, can typically hire faster because there are lower stakes, and you can get a short-term project done if you don’t have enough work for a full-time employee. However, the main downside is that you can be penalized for misclassifying an employee as a temp worker. Here’s what you need to know.

When Hiring a Temp Agency, Avoid Misclassifying Employees

The difference between an employee and an independent contractor or temp has been a big issue for many companies. So-called “gig economy” businesses, as well as small businesses and some large ones, have thrived on treating their workers as temps.

This trend continued after the passage of the Affordable Care Act (ACA), which required certain health insurance benefits for companies that met a threshold number of employees. Many businesses sought to avoid the threshold (and requirements) by classifying workers as temps.

The Internal Revenue Service (IRS) has taken notice of the growing trend toward the use of temps, cracking down on companies—including temp agencies—that wrongly classify employees as temps. State governments have been following suit. A 2019 California law prohibited companies from classifying certain types of workers in the gig economy as independent contractors. Although it focused on Lyft and Uber drivers, a 2020 ballot initiative exempted those workers (in addition to those working in food delivery) from these requirements.

Use Strategies for Avoiding Misclassification and Audits

Take steps to avoid being audited at all, whether you’re hiring a temp agency or you work at one. According to Jill Stoppard, a staffing and human resources researcher for, some common scenarios that can trigger IRS scrutiny include:

  • A temp applying for unemployment or workers’ compensation benefits
  • A temp failing to properly report income taxes
  • A temp reporting the misclassification to the IRS

To reduce the chance of facing an audit or being found liable for misclassification penalties, business owners should take the following steps:

  • Learn applicable regulations: Staffing agencies and clients should know the IRS regulations about worker classification and make sure they are enforced.
  • Make contractors “W2” workers: When you’re hiring a staffing agency, it’s helpful to choose one that will be the employer of record.
  • Utilize tracking mechanisms: Choose an agency that tracks and manage every step in the staffing process. They should track the temp’s hours, pay, and schedule because that information is important for proving compliance.

Be Aware of All Applicable State and Federal Laws

The staffing company should make sure they follow federal, state, and local laws where they operate. Here’s a brief rundown of some of the more relevant legal topics to know when hiring a temp agency or managing one:

  • Wage and hour: As an employer, the staffing company should ensure its placements are paid at or above minimum wage for all the hours they work, including overtime. Failure to maintain proper records or pay the right amount can result in major penalties.
  • Non-discrimination: Not only do the staffing company’s hiring and placement policies need to be non-discriminatory, but if a client discriminates against a worker on the job, Equal Employment Opportunity Commission (EEOC) guidance holds that both the client and the staffing company could be liable.
  • State law requirements:  Workers’ compensation laws differ from state to state and the staffing firm should understand how and when a client may be held jointly liable for a worker’s on-the-job injury. Unemployment insurance, for example, is governed by state law and is a source of potential conflict.
  • Locality-specific laws: When you’re hiring a temp agency, be mindful of unique state or city regulations that may affect workers only on certain job sites.

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Legal Disclaimer: This article is not intended as a substitute for professional legal advice. Always seek the professional advice of an attorney regarding any legal questions you may have.