If you’re short-staffed, swamped with a big project or have a key employee out on leave, temporary employees can be a lifesaver, helping fill the gaps during a busy time without overworking the rest of your team or hiring someone new. But how long can workers be considered temporary? When this arrangement lasts for more than a few months, it may be time to set some limits on your use of temp workers—or risk getting sideways with Uncle Sam.
Employers will often hire a temporary employee because it’s faster and more cost-effective than bringing on a permanent employee and paying for benefits as well as a salary. But when temporary employees work the same hours as regular employees without a set end date, denying them benefits based on their temporary status can put employers in violation of the Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for retirement and welfare benefit plans in private industry to protect workers participating in them.
Known as the 1000-hour rule for temporary employees, the regulation makes part-time workers eligible to participate in employer-sponsored benefits, such as health insurance or retirement plans, if they have worked at least 1,000 hours or approximately 20 hours per week within a year’s time.
Complying with the 1000-Hour Rule for Temporary Employees
Violating this rule can result in hefty fines for companies and possible lawsuits. What can you do to make sure your business stays in compliance? Follow these best practices to make sure you are classifying employees fairly and compensating them properly under ERISA.
Set clear time limits for temporary assignments.
Hire temporary workers for a fixed amount of time or the duration of a specific project instead of an ongoing period with no limits. Provide them with an end date for their assignment, whether it coincides with the conclusion of a project, the return of an employee from maternity leave or the end of a busy season for your company. If you’re concerned they might exceed 20 hours a week, track their hours or create a work schedule for them.
Clarify your policies on the status of temporary employees.
Be clear in your written policies and employee handbook about how your company intends to use temporary workers and for how long. For extra protection, you may want to ensure the length of time a temporary employee works does not exceed typical waiting periods for benefits. In many companies, employees are eligible to enroll in company-sponsored healthcare plans after three consecutive months of service. So you may want to revisit your existing policies on employee benefits to make sure you aren’t unwittingly opening them up to temp workers.
Train managers on the appropriate use of temporary workers.
Hiring temp workers can be a great solution if you need seasonal help to staff for peak times, extra manpower for a fast turnaround on a project, or someone to fill in for an employee who is out of commission for a month or two. But make sure your managers understand the boundaries of temporary employees so they don’t overwork them. If you need temp workers on more of a flexible or continuous basis, it may be better to hire them through a staffing agency. The hourly rate is more expensive for these workers, but the agency serves as the employer, reducing some of your liability. And some agencies even provide healthcare and other benefits to workers. If you need extra help on a freelance or case-by-case basis, it might be smarter to hire a contractor. That way you’re not responsible at all for providing benefits, just reporting compensation of $600 or more to the IRS for tax purposes.