I have had a few questions like this: “I was wondering if there is a reason the vendor/broker/head hunter forces a contractor to go on W2?  As per many vendors, lots of big banks are insisting that contractors should be on vendors W2 and NOT have a sub-contracting relationship through an s-corp or 1099.”  To see the difference between W2 and 1099, check out Consultants: 1099 or W-2?.

So I asked my recruiter friend, and his reply:

I just landed a client a few months ago and per their MSA (Master Service Agreement), any candidate that I put on contract with them MUST be a W2’d employee of my staffing company.  It basically comes down to showing that the vendor (my staffing company) has control over the employee and that there aren’t a bunch of layers between the vendor and other sub-contractors.  By eliminating the potential for multiple sub-contracting layers it does two things: (1) reduces the margin between what the contractor “actually” costs and what that person is being billed to the client and (2) it shows that the vendor has control over the contractor (meaning that the vendor has a direct relationship with the candidate and the vendor isn’t getting the person from a sub of a sub of a sub).  I’m sure relative to the “banking” scenario listed in your question, there are also some federal regulations that have to be followed since dollars are involved in that industry.  It mostly comes down to ownership/accountability.  How well do you know a candidate if they come from a sub of a sub of a sub?  It is better for everyone involved there is a “direct” relationship between the vendor and their employee.