Schedule an appointment with an employment law attorney. You should also consult with a CPA.
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Unless you have another project for them when they are done, they probably are entitled to unemployment benefits, whether or not you label them as W-2. I agreethat every small business needs a good CPA. If your CPA is not fmiliar with this area, you need to sit down with an employment attorney.
Yes, you are apt to be responsible for unemployment benefits (and a whole host of other obligations) if you characterize the candidate as W-2 since it creates the presumption of an employer-employee relationship. To avoid being responsible for unemployment and other employee benefits you should categorize all candidates, whether individual or corporate, as 1099 independent contractors. You should have independent contractor agreements with all candidates that spell out that you are not their employer, they are independent contractors, that the assignment is temporary, and you do not control the manner and method by which they provide the services to the client. The agreement should also contain an indemnification clause whereby if the government comes after you for unemployment or other employee benefits, the cost of the same, and any attorney's fees you incur as a result, are shifted to the candidate. All this is fairly customary. If necessary, you can have a global agreement which can cover various assignments. I have never heard of any compliance issues being implicated by categorizing workers as 1099 independent contractors as long as they are, in fact, independent contractors, which is determined by how much control you have over them.
Workers should be classified as independent contractors or employees based on various factors, including how much control the employer has over the work, whether the worker simultaneously works for other companies, and whether the worker has his or her own business. What the candidate desires may be one factor, but should not be the deciding factor. This is often a nuanced analysis that requires legal advice specific to your situation.
Whether those whom you have classified as W-2 employees are eligible for unemployment when the contract ends depends on whether they worked the requisite number of hours for you or for another company as a W-2 employee during the look-back period (typically the last 12 months). If the employee has not worked for you for very long and yet is eligible for unemployment based on his or her previous employment, the benefits will likely be charged against the previous employer's experience rating, not yours.
The information provided above is for general purposes only. It does not constitute legal advice or create an attorney-client relationship. Seek competent legal representation, because the facts of each case are different.