Nov 30, 2021
Contingent workers are outsourced, non-permanent workers that are commonly referred to as Independent Contractors, contract workers, freelancers, gig workers, consultants, temporary talent or remote workers. And while the language describing contingent workers may vary, their purpose remains the same: they are engaged by an employer on a short-term, long term or on a project-by-project basis.
A contingent worker can work on site or remote; however, when their 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 that worker on a permanent basis – they are not on staff. When engaging a contingent worker, it’s imperative for employers to understand proper contractor classification.
Unlike a traditional employer relationship, contingent workers operate as their own businesses and do not work directly for the organization that engaged them to perform the work. As such, they are not on a salary and are not entitled to benefits or other workers’ compensation afforded full-time, traditional employees.
However, depending on the method in which the contingent 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 contingent workers when it comes to payroll.
Contingent worker classification is important! A contingent worker is a highly specialized expert in their field who is typically engaged when an organization has a project or a contingent position that requires a niche skill or a high level of expertise.
When completing the project or contract, contingent workers also have more control over how and when they do their work than traditional employees do. If your organization is considering operating a contingent workforce, here are several key differences between a contingent worker and a traditional, full-time employee:
CW: Not on staff; contracted for a specific project or length of time.
CW: Can decide when and where the work is completed.
CW: Determines their own process, steps and tools needed to complete the work.
CW: Performs work that requires highly specialized skills, typically not the organization’s primary service.
CW: Negotiates his or her own pay rates, including fixed amounts.
CW: Must provide his or her own equipment and incur costs of completing the work.
FT: On staff; works on an ongoing basis and can be terminated at will.
FT: Has a required work schedule and location.
FT: Is given instruction on how to do the work, in what order and what tools must be used.
FT: Performs work that is of the organization’s primary service.
FT: Is paid on an hourly wage or salary governed by minimum wage and overtime laws.
FT: Must be reimbursed for any costs spent to complete work.
FT: Must perform the work on his or her own.
Technology, and the pandemic, has revolutionized the working world and the nature of employment is changing.
In response, organizations on a global scale are struggling to overcome workforce challenges created by these emerging technologies, shifting demographics and fluctuating demands for services by augmenting their traditional employment models with a more flexible and cost effective option: The contingent workforce.
In fact, organizations have dramatically increased their use of contingent workers over the past 10 years as they struggle with rising labor costs and the need for a workforce that can quickly adapt to market conditions.
It’s a global trend that stretches across industry sectors.
Building a strategic workforce that includes contingent workers is a risky but rewarding business. If employers don’t get onboarding and management right, contingent workers can add costs and introduce risk into the organization. However, for employers that understand the risks associated with contingent workers and manage them well, they will experience many advantages such as:
Employers do not pay temporary workers a yearly salary or wage, and are only responsible for paying for their services when needed. Furthermore, employers are also not responsible for worker benefits like vacation pay, sick days or other costs when it comes to onboarding, training and professional development.
It’s critical for organizations to be able to quickly respond, change, and adapt to market conditions. Temporary talent allows organizations to engage resources on an on-demand basis.
A strong contingent workforce program will have the processes and systems in place to manage and mitigate the risk of contingent worker onboarding and administration across the entire worker lifecycle.
A program that harnesses the power of best-in-class vendor management technology also enables hiring managers and procurement to make better data driven hiring decisions at the time of need.
Experienced contingent workers can often be engaged at short notice, and will bring an immediate, expert solution to an urgent project need.
Employers have access to a broad talent pool to choose top candidates from – whether the candidates are sourced and engaged by a staffing agency partner or through an organization’s own direct sourcing efforts. This is especially beneficial for short -term projects and projects or positions that require specific skill sets that internal employees may not possess.
Organizations also have greater access to expertise. Employers can find the skills and experience they need for a specific project or contract position that they cannot find internally. Organizations can access a growing pool of highly qualified talent to ensure that projects and work is completed properly and on time.
Organizations that partner with a staffing agency for their contingent worker needs will shift the hiring compliance burden to that agency. This puts the onus on the staffing agency partner to mitigate the risks associated with a contingent workforce and ensure compliance.
Oftentimes, management can be so close to day-to-day operations that it makes it hard to find new paths for business development. A subject matter expert in the industry, with no close ties to the organization, can bring a fresh perspective that can make a difference in driving the firm’s strategic direction.
Engaging contingent talent also brings risks associated with unintended co-employment and relationship misclassification. At the root of both contingent worker risks is the determination as to whether there is an employer-employee relationship between the company and the contingent worker.
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.
Criminal Behavior risks
The temporary nature and fast pace of a contingent workforce make 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.
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.
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.
If organizations don’t properly mitigate these risks, penalties come with a range of financial, brand, legal and tax penalties — and keeping up with compliance is essential to avoiding unforgiving fines, back payments to workers and damages to an organization’s employer brand. Employers must also be aware of things like contractor tenure.
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.
To learn more about contingent worker risk, download our free whitepaper: A Checklist for Contingent Worker Risk:
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