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One of my friends recently interviewed directly with a large company and they extended him an offer to be a contractor. They will not hire him directly as an individual and he must instead be contracted through an agency. They do not care which agency he is contracted through. From my understanding, if he were to work through an agency they would take a 10-20% cut off the contract for doing absolutely nothing on their end.

  1. Why won't the company contract with my friend directly? It seems like a direct contract with my friend would avoid going through a middleman.
  2. Would it be worthwhile for my friend to setup an LLC to "contract" himself out to the hiring company?

Curious to hear if any FWFers have gone through a situation similar to this.

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I'm not a lawyer. But I believe it's because for the company to protect itself from having CA claim that your friend is an employee.

There are many tests for who qualifies as an independent contractor vs an employee on the Federal level. On top of that, CA is a very pro employee state. Recently, CA ruled the UBER drivers are employees and not IC. For an employer, hiring someone as an IC is beneficial. Not only do they not have to pay 1/2 of SS/Medicare tax, they do not have to do all the things that are required of employees, like withholding tax, workman's comp insurance, disability claims, work hours/labor laws, etc.

If the company contracts with your friend directly, then that may set up an employer-employee relationship regardless of what any contracts state. However, if they go through a 3rd party agency, then there is without a doubt no employer-employee relationship.

They do not plan to keep him for more than 12 months and do not plan to offer him any of the extended benefits (insurance, 401k, attendance of office parties) offered to full-time employees. Previous employment-related lawsuits in California have forced employers to treat certain contractors as employees and pay out retroactively accrued benefits, so employers tread this area akin to attempting a fart while suffering from diarrhea symptoms - very carefully.

My guess is that your friend's self-setup LLC will not pass the snuff test if the push comes to shove and he hypothetically decides to sue them later on for retroactively accrued benefits. While the agency fee might seem steep, some offer small'ish benefits such as handling payroll, California and federal tax deductions, providing some basic medical insurance and 401k with no matching. It also gives you a central point of contact if at any point those things are messed up.

Moreover, most large companies (Google, Salesforce, Facebook) have their preferred agencies, and won't just incorporate any new LLC into their processes.

The issue with a self-LLC is insurance coverage. Your, er your friends, company has to meet whatever requirements they have for their contract agencies. The main one is usually a specific type and amount of insurance to cover whatever you do. Its certainly POSSIBLE, but they are not likely to be willing to certify quickly enough.

The best bet is to get a list from them of their approved vendors and make them bid against each other for the contract. Its a low enough cost if you get a good offer -- you will likely get insurance (make sure to compare benefits as well as pay) as well as W2 payroll which is easier at tax time as long as you are not trying to write off a lot of business expenses. (you should not be in this kind of work)

He/she is lucky they found the work themselves without having to give a RTR (Right to Represent) to an agency. My current job I am getting a few dollars less, and also not getting free insurance compared to colleagues. (I get a few other minor benefits they don't, but not equal to what the other agency had) Since I had to give a RTR to get interviewed I didn't have any leverage to get more than a few dollars more than their original offer.  

With a list of approved companies you have a TON of leverage to get a good offer. Just remember that the agency DOES have to pay about 8% in payroll/UI/SS taxes minimum. More in CA.

RTR doesn't necessarily mean that you have to work through that hiring agency. The RTRs that I've given merely restricted me from applying for the same position via a different agency or directly. Worst case scenario they restricted applying for any position with the specific employer for 2-3 months. In the latter case I have always asked the employer's name upfront, claiming that I can't sign RTR until I determine that I hadn't already signed an RTR for the specific employer.

Working through another agency doesn't mean you have to be a W2 employee with them. You can still form an LLC and enjoy the benefits and subcontract though a bigger vendor. One of my employers required a specific agency they run all contractors through. The agency charged extra $3/hr on top of non-W2 contractor's rate so I told the hiring manager I'd cost them $3/hr more. The agency took their cut and paid my LLC the exact rate the employer and I agreed upon.

Misclassifying employees as contractors means huge $$$ for anyone smart enough to get a lawyer after the contracting is done.

It also means your friend will be paying DOUBLE TAXES as the employer will not be paying their half of FICA and the EMPLOYEE is on the hook for the self-employment tax.

Also, recently law from the Department of Labor is going to start trickling down soon, meaning that you can't use an employment agency to dodge liability for ANYTHING.  It has been abused too much.

Crazytree said:   Misclassifying employees as contractors means huge $$$ for anyone smart enough to get a lawyer after the contracting is done.

It also means your friend will be paying DOUBLE TAXES as the employer will not be paying their half of FICA and the EMPLOYEE is on the hook for the self-employment tax.

Also, recently law from the Department of Labor is going to start trickling down soon, meaning that you can't use an employment agency to dodge liability for ANYTHING.  It has been abused too much.

Double FICA taxes is a part of contractor's life. Also in IT it's nowhere close to double because with decent hourly rate you phase out of the SS part relatively quickly. 

Can you explain what DOL law you're talking about? I've always been under impression that LLC is very efficient in shielding personal liability.

Yoksel said:   RTR doesn't necessarily mean that you have to work through that hiring agency. The RTRs that I've given merely restricted me from applying for the same position via a different agency or directly. Worst case scenario they restricted applying for any position with the specific employer for 2-3 months. In the latter case I have always asked the employer's name upfront, claiming that I can't sign RTR until I determine that I hadn't already signed an RTR for the specific employer.

Working through another agency doesn't mean you have to be a W2 employee with them. You can still form an LLC and enjoy the benefits and subcontract though a bigger vendor. One of my employers required a specific agency they run all contractors through. The agency charged extra $3/hr on top of non-W2 contractor's rate so I told the hiring manager I'd cost them $3/hr more. The agency took their cut and paid my LLC the exact rate the employer and I agreed upon.

  
Yes, RTR is for a specific position only.  But if you get that specific position you are stuck.  RTRs always have to specify what the client is.

I have had companies I gave a blanket RTR for specific clients -- who were major sources of work.  That way my rep doesn't have to call me for every open position.  If I get a random confirm email from the clients system for that agency I automatically approved it.  

More and more the clients have a system that you have to verify (usually with personal info from the app) that you are providing RTR to an agency.  I currently am working for one of the really large agencies, but I doubt I stay with them.  The smaller ones don't have as much overhead and are more competitive.



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