Many businesses suffer occasional staffing issues when employees call in sick or go on vacation. Some industries require the flexibility to staff up to accommodate specific occasions, such as when a caterer must support a really big event or a sports bar needs extra staff members during the big game. Maintaining required staffing levels to meet worst-case scenarios with full-time employees will either require paying for idle resources or overtime and risk burning employees out. But what if there was a better way to maintain the necessary staffing levels? There is, and they are called per diem employees.
The other day I found myself advising a business client who said that due to the high turnover of some positions such as waitstaff, and Covid quarantine and isolation requirements, they were constantly operating short-handed. They were concerned that the extra pressure they were placed on employees to cover extra shifts and work overtime would burn their employees out. Michael Walters calls this the Big Backfire after the Big Quit. Unfortunately, this business client is not alone.
If you have a business that employs labor in industries such as hospitality, construction, healthcare, or education, you may benefit from having a pool of per diem employees that you can call on a moment’s notice. But what is a per diem employee?
Per diem employees work on an as-needed basis. Per diem means “for each day” and applies to someone who may be needed one day but not the next. Substitute teachers are a great example of per diem employees. Substitute teachers are often retired teachers or individuals that understand what is required to teach a class but no longer want a full-time job.
Per diem workers choose the days of the week they can make themselves available and employers can select a worker from a list of available workers when they need additional staff. Per diem employees don’t have a guaranteed set number of hours and aren’t eligible for benefits. They’re paid per diem rates for the days they work, rather than hourly wages or salaries.
Businesses tend to use per diem workers when primary staff members are sick or on vacation, or when the company needs extra help during peak workdays.
The primary feature of a per diem employee is that the business can pay for help only when they need it, without committing to long-term employment or a fixed number of hours each week.
So, what is the difference between a per diem employee and a 1099 subcontractor?
Per diem employees are actual employees. This makes it very easy for the employee. Per diem workers receive W-2 income, and their taxes are automatically withheld from their paychecks by the employer just like a regular employee.
Per diem employees are subject to minimum wage rules and entitled to overtime pay but the employer is not required to provide per diem employees with benefits afforded to full-time employees.
As their employer, you can tell per diem employees how to do their jobs and provide them the necessary tools to perform their work, which you technically can’t do for a 1099 subcontractor or risk misclassifying contractors as employees.
1099 subcontractors, on the other hand, are not employees. The business sends them a 1099 at the end of the year, which is the IRS document that accounts for non-employee compensation. 1099 subcontractors are responsible for making quarterly federal and state income tax deposits and pay self-employment tax (15.3%) on all earnings, which represents the employee and employer part of FICA (Social Security and Medicare) taxes. Additionally, 1099 subcontractors are not entitled to the same worker benefits and protections as employees.
Periodic income tax deposits and the full burden of FICA contributions represent significant headwinds for a casual worker who is used to simply getting a paycheck from their employer and a W-2 at the end of the year. Being technically an employee with no withholding or reporting obligations makes individuals much more willing to sign up to become a per diem employee vs a 1099 subcontractor if they only want to (or have to) work a few days a week or a month.
During the pandemic, many people lost their jobs and decided to take early retirement. Even before the pandemic, many older employees were targeted during downsizing, as the business can often hire a younger worker for a much lower salary than the employee that has received salary increases over a long career with the company.
If a person elects to take social security early, there is a limit to what they can earn before their social security benefits are reduced. To be more specific, for the tax year 2022, that limit is $19,560. For every $2.00 earned above the annual limit, their benefit is reduced by $1.00. Therefore, individuals that have elected to receive early retirement and have yet to reach full retirement age make ideal per diem employee candidates. They get to use their job skills a day or two a week and earn extra income without negatively affecting their social security benefits.
How can you use per diem employees in your business to level out your staffing needs?
