Businesses Rely More Heavily on Contingent Workers, Complicating Compliance

As the gig economy continues to grow, businesses are relying more heavily on contingent workers. Here’s what to consider before turning to contractors.

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The contingent workforce could be one of the fastest growing categories of workers in the US today. Some estimates believe 20% of workers are contingent  – either contract, temporary, freelancers or consultants. One survey puts 50% of millennials as contingents. The numbers are only expected to grow as business and workers reap the benefits of this new working category. Contingent work has its benefits for both the business and the individual, but there are also drawbacks. Before you hire your next worker, consider the following.

The case for contingent workers

For business, the case for contingent workers is clear. Particularly in a tight talent market, these staff members help bridge skills gaps in a host of areas. No longer just tech workers, contingents are filling roles in marketing, customer care, and more. They can help business during rushed or unexpectedly busy times and they can bridge skill shortages as businesses try to achieve headcount. 

Tax benefits of contingent workers

Most companies enjoy significant cost savings associated with the use of contingent workers. Hourly wages can be on par with permanent staff (not at all companies) but the savings in taxes can be substantial. Many of these employees are considered independent contractors: they are responsible for their own federal, state, FICA taxes and are exempt from unemployment contributions.

Contingent worker productivity

Some companies find remote workers put in more hours and are more productive than their permanent counterparts. Because they are contracted to perform, and their contract can be pulled at any time, these workers often work harder to maintain their status. American Express found their contract workforce 43% more productive than their office staff.

Green savings with contingent workers –literally and figuratively

Experts estimate the cost savings in real estate space and office expenditures can reach $10,000.00 per year per full-time employee. IBM reported saving $50 million in real estate costs alone with contingent workers that didn’t occupy expensive desk space, often in pricey real estate markets. Another plus is the carbon footprint benefit: these workers are not clogging the highways and emitting greenhouse gasses because they don’t commute.

Benefits savings for contingent workers

The savings in benefits can also be great. These workers typically don’t add to the rolls on health and wellness plans. That translates to lower costs and reduced claims and experience. Unemployment insurance costs are also generally eliminated, as these workers are usually contracted with a pre-determined end date. Typically employers don’t offer other contingent staff benefits, like retirement plan contributions, education benefits, sick, vacation and personal time off.

Some contingent workers are temporary staffers – hired through an agency that contracts them to the business. These workers generally have access to more benefits, like wellness plans, PTO and other perks through the temp service.

Can you manage a contingent workforce?

In a recent study of about 500 HR professionals, 67% are confident contingent workers are performing their daily duties, and 42% report contingent workers are easier to manage than full-time staff. They may bring more to the table, as well. Often these workers are contracted to work with more than one company: that gives them the opportunity to learn more and bring more innovation and ideas.

HR software can also go a long way in helping you manage a contingent workforce. Now it can help you hire contingent workers, manage their payroll, include them in org charts to simplify their communication with full-time employees, document their time and attendance, and keep you compliant in the process.

Potential pitfalls of contingent workers

Misclassification of contingent workers

One of the most significant challenges for business and the riskiest may be correctly categorizing contingent workers. Reclassifying a full or part-time employee as a contingent worker can be fraught with legal pitfalls. Because of the tax implications, the IRS has specifically delineated who can be considered an independent contractor. To add complexity, the variation of an independent contractor or contingent worker can vary between states.

Shifting the tax burden from a W2 status employee to one who manages their own taxes through a 1099 filing is not as easy as just making a switch. IRS guidelines are clear that contingent workers must meet certain criteria in order to be correctly classified. The standards generally revolve around the control a business exerts over the worker and can be highly nuanced– again varying between states. If you’re considering hiring or converting over to 1099 workers, it’s always a good idea to check with your tax of legal counsel for advice.  The cost of misclassifying workers can include devastating penalties, fines, back payments and more.

Off book contingent workers

Another challenge for many businesses is the “off book” status of these workers. Department heads may take on temporary or contract workers through their own budgets, bypassing HR altogether. This can mean contingent workers aren’t screened, onboarded or off-boarded through normal processes. The impact on culture, consistency of messaging,  headcount projections and actual staffing costs can be significant.

Inclusion concerns

Following a company-wide walkout of full-time staffers at Google last year in protest of pay equity, arbitration policies and other employee issues, the company’s contract workers issued an open letter to the tech giant. Calling themselves Google’s “shadow workforce”, these TVC (temporary, vendor, contract) workers identified themselves as now the majority of the company’s staff.

Their letter demanded inclusion, better communication and compensation. “Invisible no more,” these staff members highlighted one of the pitfalls of a contingent workforce.  They complained they were routinely excluded from company communications, even those about discrimination, misconduct and safety. The Googler’s concerns highlighted a very real problem many companies face with a contingent workforce: inconsistent or even nonexistent communication.

Cultural divide

A positive corporate culture is key to attracting and retaining talent, but on- and off-site workers can feel disjointed. While they all may be working toward the same goal – company success, physical segregation can lead to fragmented culture.  A concerted effort must be made to continuously message and enforce the company’s mission and guiding principles, assuring everyone is on the aligned with the vision and reaping its benefits. Without cohesive core values, culture can easily be diminished.  

Physical divide

The challenge for business is to create a culture of inclusion for all workers, contingent or not. That can be difficult, as participation in the social fabric of a workplace is hard when workers are separated by geography and even time zones. Businesses that rely even in a small way on contingent workers will need to work more diligently to bridge the divide.

There are benefits and risks to a partial or complete contingent workforce. Management must weigh all their options as they determine how best to grow their company. With the proper classifications, and attention to culture and inclusion, even blended teams can be highly cohesive and productive. And finally, don’t go it alone! HR software can help you hire, pay, and manage contract workers while keeping your company compliant. 

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