The growth in the contingent portion of your workforce has spawned its own breed of provider, Contingent Workforce Outsourcing, or CWO.
Among the more startling developments at 2005s NY HR Week/HRO World Conferenceother than the huge 3,700-person crowdwas the advent of a new species of provider. This new life form calls itself several names. Often these names tout some special competitive advantage or differentiator. But for the sake of verbal economyplus the fact that we are completely allergic to providers who claim to be one-of- a-kind without any peer or competitorwe call this new evolved form of HRO life contingent workforce outsourcing or CWO.
In case this new handle throws you, here is our definition of a bona fide CWO provider. It denotes a provider who facilitates clients ability to aggregate and track spending, billing, and performance of more than one type of non-W-2 worker. This includes traditional temps plus independent contractors and consultants.
THE CALIFORNIA TAXABLE INCOME TRAP
As it turns out, the problem of tracking all flavors of contingent workers has been plaguing larger organizations for decades. But because consultants, temps, and contractors are never hired centrally, no one single point of accountability existed. In the 1980s and 1990s, several Silicon Valley giants such as Sun Microsystems, Silicon Graphics, Intel, AMD, and Apple were haunted by the California State Franchise Tax Board (FTB). Knowing that these big firms hired boatloads of contractors and that these 1099-type workers seem to have a particularly hard time filing tax returns, the California FTB assigned a SWAT team of staffers to involuntarily reclassify 1099s as W-2 workers and slap the big Valley employers with back payroll tax bills for the 1099ers. Oftentimes during this two-decade period, these big employers would have multiple tax bills for multiple millions of dollars, all assessed against their will. There were many cases where, even when the contractors paid their own taxes on time, the employers were forced to pay as well. Double the taxation, double the fun.
In response to clients cries for a quick fix, in the mid 1980s, temporary services developed a crude form of 1099 compliance called payrolling. It simply involved putting a would-be contractor on the W-2 payroll of a temp service. That would ensure that the workers payroll taxes were paid. The client would avoid getting whacked with one of those surprise payroll tax assessments. And the temp service would make a nice little markup on a highly-paid worker that the temp service did not even have to recruit. Many times, a large employer would simply ban the hiring of contractors or consultants unless they were payrolled.
Ultimately, however, independent contractors and consultants got wise to this taxable-income trap. Consultants simply refused to be payrolled because it took away their precious ability to write off expenses and lower their taxable income basis. Many of these wily contractors gave clients a draconian choice: Increase their base rate 25 to 35 percent in order to offset the negative earnings impact of payrolling, or pay the normal rate and let the contractor file his or her own 1099-type tax return. Clients relented. They needed these talented contractors. Just like that, the temp service payrolling solution became a tool too small for the job.
OUTSOURCERS PIONEER ANOTHER NICHE
Enter the CWO guys. Among the brave pioneers in this field, a standout is Gary Nelson and his firm ABE. Started in the mid 1990s, ABEs innovation was to run 1099ers through a 1099-compliance screen. Based on the IRSs 20-question test, ABEs screening service gave employers a way to test their contractors compliance. If the contractors passed the test, they stayed independent. If they failed, Nelson ran them through his W-2 payrolling service, charging a small markup over the wage and mandatory payroll tax. Nelson, owner of San Francisco-based Nelson Personnel, a $230 million temp service group, knew this was a nice little fix but less than the whole answer. He knew they needed a technology platform that would allow larger employers to track 1099ers, temps from several providers, and other contractors that seemed to breed like rabbits throughout the organization. His ultimate solution is called WorkforceLogic, and it enters a field that is brimming with potential and potential competitors.
The numbers tell the tale of the size of the CWO market. According to the Bureau of Labor Statistics (BLS), nearly 10 percent of the U.S. workforce can be classified as contingent. The BLS predicts that the contingent growth will outpace FTE growth by a 3:1 ratio over the next 10 years, and that by 2010, nearly 25 percent of the U.S. workforce will be contingent or part-time.
In fact, the fastest growing segment of the contingent workers is returning retirees. As the Baby Boomers continue to retire in mass waves, the BLS predicts nearly 50 percent of those workers will return to the workforce within three years of their retirement in an independent, temporary, or part-time capacity.
Employers who now use CWO warn HRO Today to avoid the assumption that the contingent workforce is primarily comprised of temps from traditional temporary service agencies such as Adecco, Manpower, and Kelly. In fact, this type of temporary worker represents less than 25 percent of the contingent workforce. Independent contractors represent nearly 60 percent. What is more, the independent contractor segment is growing faster than any other segment of the contingent workforce. Independent contractors are also more highly paid than traditional temps. On average, independent contractors or consultants working in large company environments earn double their temporary counterparts wages, and pose the greatest 1099 compliance risk for both payroll tax liabilities and Sarbanes- Oxley type violations.
WHY CWO? WHY NOW?
The business trends behind the up-tick in contingent work are inexorable. Retired employees with valuable skills are now hanging out a shingle. Employees who want a flexible lifestyle prefer to work as consultants. Two of the largest and most-talented segments of the U.S. workforce, retiring baby boomers and Generation Xers, are foregoing full-time W-2 jobs and opting to work as contingents. In addition, multi-earner families where one partner has company-funded employee benefits make it possible for the other partner to work freelance. With business expenses fully deductible, a 1099er can live life at a much lower effective tax rate than her W-2 counterpart. But by hiring this valuable and cost-effective source of talent, managers are diving into a domain that is much harder to run than if all the workers are W-2ers.
CWO is a toolkit that has evolved to handle the non-W-2 business wave. As contingent workers continue to grow at a double-digit annual pace as a percentage of the overall workforce, companies are feeling an ever greater need to have tools to manage this quickly-growing phenomenon. Capturing and managing data that allows managers to see and control their entire contingent and full-time workforces is a complex task that is now possible with contingent workforce management or CWO tools.
LEADING CWO* PROVIDERS
PrO Unlimited; prounlimited.com
*This includes managing traditional temporaries, independent contractors, service
workers, individual and small consulting agencies, and project-based workers.