Referral Bonuses - Good or Bad?

The battle for talent is heating up. Unemployment rates have been steadily declining over the past few years and we've reached that point where I'm hearing, "we're having a hard time finding people" even from my clients who hire low skill workers.

One temptation during times like these is to add a referral bonus incentive or increase the one already in place. I've heard of companies offering as much as $4,000 for an employee referral!

Here are some things to think about when considering an employee referral bonus program:

1. If you have a healthy culture, you don't need one. Employees will refer people they want to work with for no referral at all if they consider your place to be a good place to work. If your culture is lousy, they won't refer people they like, but they may refer people they don't care about if the bonus is tempting enough.

2. The higher the bonus, the weaker the referrals get. Good employees will refer "A" players whenever they get the chance. However, they'll also screen out people they don't think would be a good fit or whom they'd be embarrassed to be linked to. However, the higher the bonus, the easier it is for them to convince themselves that "Bob" who they know is lazy and has never been able to hold down a job, might just work out this time. I remember one of our supervisors took a bunch of application forms, wrote his name in the "referred by" space, and went down to the local mall and handed them out like fliers. Not exactly what we had in mind.

3. Referral bonuses can weaken your employment brand.  Research recently published by Applied Psychology suggests that candidates, upon learning that the company has a referral bonus, may question the motives of the referring employee and change their perception of the hiring organization.

4. Too much dependence on employee referrals can increase discrimination risk. People tend to refer people like them (same race, age, gender, etc.). So bragging that 100% of your vacancies are filled by employee referrals could result in a discrimination claim by someone who doesn't look like the rest of your employees. 

This is not to say that you should trash your employee referral bonus altogether. There are some benefits. Positions filled by referral tend to be filled more quickly and those referred tend to last longer and perform better (on average). But make sure your bonus is a token of gratitude, not an incentive to refer every bum they know or distribute applications like a ticker-tape parade. When the candidate finds out the employee referring them is getting something, it shouldn't be large enough to bring into question the referring employee's motives nor make it look like your organization is desperate and willing to settle for just about anybody.

NC Cracking Down on 1099 Workers

Last month, North Carolina governor Roy Cooper signed legislation that creates an office within the North Carolina Industrial Commission to investigate companies who might be misclassifying employees as contractors and to discourage the practice.

This legislation doesn't change the rules regarding how to go about evaluating whether your workers are legitimate contractors or are really employees that you've misclassified as contractors. What's different is that a separate office is now funded with the sole purpose of ferreting-out those the government considers to be abusers of this practice.

Some of my workers prefer to be paid by 1099.  Why does the state care? 

It's all about the money! When you pay your employees on a Friday, you immediately send a check to the government for income taxes withheld and other obligations like social security and unemployment tax. An employee who makes $10 per hour may gross $400, but they actually take home less because you withheld taxes. When you pay your 1099 worker the same $400, there is a contractual obligation, or at least an implicit understanding, that the 1099 worker will file his or her own taxes. But even if they do file quarterly, the government would prefer to have its money every pay day. The reality is, most laborers paid via 1099 file at year-end, at best. Many never file at all. 

I save a lot of money by paying workers via 1099 rather than W-2.

While employers who either mistakenly or intentionally pay workers by 1099 do gain some short-term cost advantage over their compliant competitors, it is generally not as much as they think. For instance, the company's workers comp carrier will often roll those 1099 workers for whom the company can't produce a workers comp insurance certificate right into the company's premium during their annual or semi-annual audit. They've paid out the employee-paid portion of the income taxes to the worker in the form of gross wages, so there's no savings there. They have saved on some of the matching taxes like FICA, SUTA and FUTA, as well the company-paid portion of employee benefits the worker might have been eligible for. But the potential costs associated with being found to be out of compliance are quite high - steep fines, back taxes (even if they worker paid them), and jail time in extreme cases. Seems like a bad risk-reward scenario to me.

What should I do?

Make sure any legitimate subcontractors you use to help during periods of peak demand have an executed subcontract agreement with your company and you have their certificates of insurance on file. Note: many one-person operators will tell you the state doesn't require workers comp on business owners, but if that "business owner" is in the field performing work on your behalf and your work comp carrier sees them as a risk, you're perfectly in your rights to say, the state might not require it but we do...

Second, identify any workers that don't really meet the IRS definition of a contractor and either find a temp agency partner to run them through or hire them as employees.

If you need assistance determining who meets the definition and who doesn't, contact The Davidson Group and we'll be happy to consult with you.