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How to manage contingent workforce risk

Organizations that engage contingent workers as part of their workforce strategy will achieve many cost saving benefits; however, contingent workers also open employers up to a range of financial, brand, legal and tax risks. These Contingent Workforce risks will arise when an organization is flagged for non-compliance and is assessed based on its failure to comply with employment standards.

The contingent workforce is once again on the rise with research firm Gartner finding 32 per cent  of organizations plan to replace full time employees with contingent workers as a cost saving measure – making contingent workforce management a critical component to achieving business goals.

What do you mean by a contingent workforce?

A contingent workforce is comprised of outsourced temporary workers who are commonly referred to as Independent Contractors, freelancers, contract workers, consultants, temporary workers or remote workers. Typically, these workers are engaged on a short term, long term or on a project by project basis.

A contingent worker can work on site or remote; however, when contingent worker’s contract is at an end or the project for which the contingent worker was hired for is complete, the employer has no responsibility to provide continuous work to contingent workers on a permanent basis – contingent workers are not on staff. And contingent workers, of course, also must be managed by a separate set of best practices. 

Why do companies use contingent workers?

Even before the pandemic forced the world to augment workforces, organizations on a global scale were struggling to overcome challenges created by emerging technologies, skills gaps and shifting demographics. As such, Hiring Managers and Procurement professionals turned to engaging highly skilled, non-permanent workers as a more flexible and cost effective option.

Now, organizations are investing more and more in contingent workforce programs in order to not only fill skills gaps but to also quickly adapt to market conditions.

The gig economy is a global trend that stretches across industry sectors. Yet, a contingent workforce program must have proper contingent workforce management.

Identifying Contingent Workforce risk

Keeping up with compliance and business risks associated with engaging contingent workers is essential to avoiding unforgiving fines, penalties and damages to an organization’s employer brand.

Engaging contingent workers is a complex workforce management set up that has the potential to create confusion when risk issues arise, yet the chaos– and the costly mistakes they result in, can be avoided by taking seven categories into consideration when designing, managing and evaluating your contingent worker program.

Here are the business risk categories hiring managers and procurement professionals must be aware of when engaging and operating a contingent workforce in the United States:

Worker Misclassification risks

Misclassification happens when a business incorrectly identifies the relationship that exists between them and the contingent worker. This serious mistake can result in hefty penalties for the company and back payments to contingent workers. Most organizations focus exclusively on 1099 or independent contractors classification; however, there are other important classification influencers such as overtime eligibility (Fair Labor Standards Act (FLSA) classification) and position classification for workers’ compensation coverage.

• 1099 classification
• Overtime/FLSA classification
• Workers’ compensation classification

Re-checking Classification:

While classification is primarily an onboarding activity, organizations must be vigilant to ensure the status of the relationship does not change over time and invalidate the original classification. To ignore this may result in future reassessments and penalties for the business.

Criminal Behavior risks

The temporary nature and fast pace of a contingent workforce makes it vulnerable to abuses and unethical behavior. Typical attacks center on frauds or kickbacks that compromise the integrity of the candidate selection process, and/or financial frauds that target the company’s invoice payment process.

• Resume fraud
• Reference fraud
• Financial fraud
• Identity fraud
• Bribery/kickbacks

Counterparty risk

Procom defines counterparty risk as: Solvency risk, inherited liability from weak operational controls, and vicarious liability from poor compliance with labor laws. An organization’s overall strategy for contingent workers often includes a network of direct and indirect suppliers. This can result in 2nd and 3rd level counterparty risks that are unseen in traditional employee/employer relationships.

Counterparty risk can be difficult to identify. It’s often viewed as an extension of all of the other risk categories, except the company is vulnerable to the actions and governance habits of its counterparties. As a result, the company is indirectly responsible when the counterparty’s safeguards break down.

• Liability for unpaid/improperly paid wages or payroll taxes
• Risks due to financial solvency of supplier
• Vicarious liability for prohibited employer practices and/or, improperly executed HR processes (improper termination, discrimination, etc.)
• Shoddy operational practices (unenforceable contract agreement templates, incomplete records,    unlawful background checks, etc.)
• Improper management of mandatory workplace certifications (expired/revoked professional licenses, safety certificates, etc.)
• Expired or invalid insurance requirements (workers’ compensation, liability, etc.)

Employment Standards Compliance risk

This risk arises when an organization is assessed based on its failure to comply with employment standards obligations. If the organization is deemed to be the employer of record for its worker(s), fines and other penalties can and often do apply.

Specific risks and liability vary based on applicable state and federal legislation, but payroll tax compliance, overtime compliance and liability for termination pay are all hot button issues that require special attention. This is especially true following a recent trend for ‘joint employer’ obligations between clients and their vendor firms. It’s important to note that many of these items overlap with the obligations an organization already manages with its own employee workforce. This specifically applies to issues arising through vicarious liability to its contractor workforce, or problematic interactions between its employee and contractor workforces.

• Wage and hour claims (Fair Labor Standards Act)
• Workplace discrimination or harassment (Equal Employment Opportunity Commission, Americans with Disabilities Act, Equal Pay Act, etc.)
• Protected leaves (Family and Medical Leave Act, etc.)
• Workplace safety (Occupational Health & Safety Act, etc.)
• Improper background checks
• Wrongful discharge/termination (typically state labor legislation)
• Reclassification liability (1099/Independent Contractor status reversal, etc.)
• I-9 form/employment eligibility compliance, H-1B foreign worker program visa compliance

Code of Conduct risk

On-assignment conduct refers to damages arising from the conduct of internal managers, or the conduct of the contingent workers themselves while on assignment. Code of conduct issues are especially sensitive, as the incorrect actions of business managers could expose the organization to risks that fall under other topics, such as misclassification or employer of record obligations.

Given this dynamic, it is critical for organizations to have clear training, operational processes and escalation methods to address these types of issues when they arise (or engage a vendor with sound practices to do so on their behalf).

• Workplace injuries: Who is responsible? Who pays? Were health and safety policies followed?
• Workplace accidents/damages: Who is responsible? Who pays? What are the insurance considerations?
• Contractor performance problems: What’s the best way to address incidents of poor performance by contractors?
• Assignment disputes: Who resolves assignment disputes, including scoping, resourcing and deliverables issues? 

Financial Irregularities risk

The repetitive, high transaction volume of most contingent labor relationships makes it vulnerable to many financial irregularities. These can include accidental double invoicing mistakes or more calculated invoice inflation or over-billing schemes. An organization’s regular financial controls play an important role in risk management. When it comes to contingent labor, monitoring the many influences can be challenging and requires specialized skills for effective management.

• Duplicate invoicing
• Timesheet/invoice inflation
• Early deliverables billing
• Expense claim inflation
• Rate card compliance/job description inflation
• Purchase order/end date enforcement

Co-employment risk

Co-employment risk is the term used to refer to situations where two or more organizations exert some level of control over a contingent worker, and are both considered to have employer obligations toward the worker. Co-employment risk can often exist when organizations use staff that are provided by third parties.

This concept is captured under the legal term of ‘Joint Employer’ and can arise under of variety of situations including misclassification or reclassification of the legal relationship to a contingent worker, as well situations involving the assigned personnel (employees) of a temporary help or staffing agency where the client controls significant aspects of their work.

Potential obligations that arise under a co-employment situation could include statutory remittances (such as income tax), responsibility for workplace safety obligations, payment of employee entitlements (such as sick pay, vacation pay and/or overtime), as well as termination compensation and other items. Specific risk drivers of incurring co-employment liability depend on the facts of a given worker relationship and the practices of your supplier, evaluated in the context of applicable state and/or federal legislation (FLSA, NLRB, EEOC, FMLA and OFCCP all potentially apply).

What are the advantages and disadvantages of hiring contingent workers from a business perspective?

The two biggest advantages of using contingent workers or contingent labor are flexibility and cost savings. However, there are additional motivators for why strategic organizations are including temporary talent as part of their workforces.

Identifying Independent Contractor risk  is an important but tricky issue in contingent workforce programs. Effectively managing contingent program risk requires a collaborative approach between client stakeholders, ranging from procurement, legal, HR and business managers.

Get deeper insights into managing risk in your program by downloading our whitepaper: Checklist for Contingent Worker Risk.

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