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Overview of Independent Contractor payroll models and services

Payroll refers to the tasks an employer must perform in order to pay traditional employees. Contingent workers, such as an Independent Contractor, is not an employee, and therefore, must be paid  through a separate payroll model. These contractor services can also be outsourced to a third party.

If your organization operates, or is thinking of operating, a blended workforce, it’s important to know the legal and tax obligations you have to your workers when it comes to contingent worker payroll.

Can Independent Contractors be on payroll?

Contingent workers can go by many different names – temporary workers, gig workers, contingent labor, Independent Contractors, freelancers, temporary talent, contractors or pre-identified contractors; yet they all refer to the same type of non-traditional worker.  

However, depending on the method in which the worker is engaged to perform the work – whether directly sourced through the company itself or by way of a third party, there exists separate obligations to workers when it comes to payroll.  

Types of Independent Contractor payroll services

Which payroll model is the best option for bringing talent quickly and cost effectively into your contingent workforce? Depending on your organization’s acquisition needs, for instance – do you also require rate negotiation services? – below is a list of payroll models and risk factors to consider:

Direct/No Payroll Services

Risk level: High

Some organizations choose to run their contingent worker contracting and payroll functions internally, with responsibility spread out over a variety of departments– from HR, to procurement to accounting/AP, but that isn’t always the most efficient approach.

This payroll model involves the organization directly handling all aspects of their contingent worker engagements. This includes onboarding and payment duties, with coordination responsibilities often placed on the individual hiring manager that is engaging the Independent contractor.

How does the process work?

The organization is responsible for managing all aspects of the Independent Contractor payroll process, including:

• The administration of payroll taxes and benefits forms.
• Payroll deductions.
• Submission to government agencies. 

Why would organizations use a Direct/No Payroll services?

The organization may prefer to manage the payroll process internally due to perceived cost savings over hiring an outsourced provider.

There is a higher level of risk with this payroll model since employees and Independent Contractors  have regulations and categorizations that may experience frequent changes.

There is no structure in place to help manage contingent workforce costs or address compliance or risk management issues specific to these types of workers. It can be difficult for busy HR professionals to stay up-to-date with current laws, particularly for organizations with operations in multiple jurisdictions or those who employ exempt/non-exempt, seasonal, contract or part-time workers.

Informal/Semi-structured Payroll Referral Program
Risk Level: Moderate (Costly)

This payroll service model is often not an ‘official’ company mandate – instead, it usually involves individual hiring managers referring the contingent worker to an existing approved staffing vendor. This process unburdens the hiring manager from having to manage the contracting and payroll onboarding tasks internally.

How does the process work?

Hiring managers typically select organizations they have an existing working relationship with, resulting in simplified onboarding that accelerates the hiring process.

Why would an organization use an Informal/Semi-structured Payroll Referral Program?

The trusted vendor has also likely been engaged through the organization’s procurement process, and already has all necessary legal agreements in place and meets jurisdiction-specific compliance requirements. These include things like, valid business licenses, tax remittance capabilities, payroll schedules, employee categories or a particular aspect of payroll calculations (insurance, workers’ compensation, etc.).

Though this payroll service model is generally faster and easier for hiring managers, it’s difficult for organizations to track and manage its corporate spending of directly-sourced contingent labor.

Furthermore, in this scenario, the organization typically doesn’t use structured pricing models or pay rates. Using multiple vendors results in difficulty negotiating high-volume flat and/or preferred fees for the hiring process, resulting in the potential for abusive vendor pricing.

Single, Dedicated Payroller
Risk Level: Low 

This payroll model involves a single outsourced service provider responsible for managing an organization’s entire payroll record, keeping process across all jurisdictions where that company employs workers.

How does the process work?

Using a payroll company represents the company’s decision to treat contingent labor hiring and management as a corporate priority, and offers benefits around:

• Streamlining operations.
• Enforcement of established spend approval processes.
• Consistency in record keeping through a single vendor.
• Securing the lowest possible price for the service. 

Why would an organization use a Single, Dedicated Payroller? 

This payroll model can be especially advantageous for employers who may operate in multiple domestic or international jurisdictions.

Payroll companies lower an organization’s risk by incorporating a single point of accountability and audit for all of the compliance activities related to contingent worker onboarding and management. This decreases the likelihood of overlooked short-term, contract or seasonal workforce records and worker misclassification.

Checklist for selecting a trusted contractor  payroll vendor

  • Independent Contractor payroll is a complex, time consuming process, which is  why many organizations choose to outsource this employer responsibility to a third party. If you’re considering choosing a payroll vendor, below is  a checklist to review: Adequate size, capacity, and access to funding to handle the increase in account receivables to consistent payment to contractors (i.e. do not choose a vendor who may miss payroll or go bankrupt if they don’t get paid by a major client for 4 months).

Track record of implementing and managing similar size engagements with clients.

Assigned vendor team is experienced in managing similar programs, with strong ability to negotiate contract terms and pay rates.

Physical presence in the locations that require support in order to build relationship with key stakeholders and handle contractor issues face-to-face.

Adequate insurance coverage for E&O and Liability ($10 million minimum).

Expert knowledge of various contractor classifications related to tax, burden, policy, etc.

Expert knowledge of legislation related to contractors.

Document management system for audit/compliance (SOX, etc.)

Industry rate analytics that assist in defining current market rates.

Back-Office systems that enable online timesheet entry, expense management and approvals.

 Robust Reporting Capabilities:
1. Reporting on spend (by division, department, project, manager) and rate management.
2. Customized reporting based on client needs.
3. Ability to generate custom reports for different groups within an organization (HR, Procurement, Managers, etc).

When choosing a contingent worker payroll model, There is no scenario that is completely risk free; whichever model your organization chooses to go with, it’s crucial to know the benefits and risks associated with each.

RFP Checklist for pre-identified contractor payroll vendor selection

Are you getting the most out of your contractor payroll program? Every organization’s needs are different, but there are several crucial elements to keep in mind when evaluating a contractor payroll program. These include:

  • Infrastructure and expertise
  • Worker management
  • Onboarding
  • Rate management

However, there are other, less obvious criteria that still make a big difference in cost, compliance and satisfaction. 

If you’re evaluating a new contractor payroll provider or would like a tool for assessing whether you’re getting the most out of your current program, download your detailed RFP Checklist for pre-identified payroll vendor selection below:

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Overview of Independent Contractor payroll models and services

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