By increasing transparency, your business can take advantage of contingent labor while mitigating risk of an audit.
By Joel Capperella
Here are the facts. The dynamic of the workforce is changing. The U.S. government estimates that there are as many as 10 million independent contractors in the workforce. Since September 2009, more than 330,000 temporary jobs have been added, making this workforce segment perhaps the only to experience consistent growth in the last year and a half. What’s more, as the economy continues to recover, and businesses begin to actively pursue expansion, these numbers will likely grow.
Independent contractors are individuals that are paid as a vendor by your company to perform work on or off-site, with minimal or no supervision from you or your managers. Typically, they are engaged to complete a defined task or series of tasks, or provide specific subject matter expertise. They are not employees of your company, do not receive a paycheck or company benefits, and are responsible for their own tax payments and insurance.
For businesses that want to increase production but are tentative or unable to start rebuilding their permanent workforces, independent contractors are safe bets. Because they are not company employees, employers don’t have to pay employment or payroll taxes. And when the contractors’ specified project is complete, if the organization can’t afford to keep them engaged or doesn’t have work for them to do, it can simply end the relationship without the complications that come with releasing permanent employees.
Further, an increasing number of displaced workers are beginning to entertain contracted positions over full time employment, creating a “free-agent” talent pool of capable and seasoned professionals. Businesses have a sizable pool of well-qualified talent to choose from, while unemployed workers have the opportunity to put their skills to use.
Under the Microscope
These increasingly visible and expanding communities of independent contractors have received more attention in recent months from the national and state governments that, like most businesses, felt the effects of the downturn and are looking for ways to counteract revenue shortfalls. To recoup funds, government agencies are looking at independent contractor usage with increased scrutiny.
The most noticeable example of the government crackdown on the misuse and misclassification of independent contractors is the federal government’s “Misclassification Initiative.” Included in the President’s 2011 budget, the initiative earmarks $25 million for additional enforcement personnel and competitive grants to boost states’ incentives and capacity to address the issue.
The Internal Revenue Service also launched a program this spring to randomly examine independent contractor classification and usage at 6,000 companies over the next three years.
Even before this prodding, revenue-strapped states had been peering into the classification of workers and actively pursuing litigation to recover unpaid taxes. In 2009, one case alone involving FedEx Ground aroused the attention and support of eight states.
Individuals, too, have gotten involved in the misclassification crackdown, bringing class-action lawsuits against former employers for both misclassification and mistreatment of their positions as independent contractors. In these cases, the employees’ claims for denied wages or overtime can lead to additional penalties for the organizations, including fees for back taxes.
The watchdogs are out in full force and from all angles. What are the implications?
In an attempt to protect themselves from scrutiny, many businesses might be inclined to eliminate their use of independent contractors or temporary staff altogether. Hesitant to begin hiring full-time permanent professionals, such organizations will continue to rely on the “more with less” model, testing the limits of their already-stretched workforce, and ultimately, limiting the employment opportunities for unemployed workers.
Such drastic measures are not necessary, however. And in fact, eliminating independent contractors from your workforce is shortsighted.
Identifying the Risks
A more appropriate response is to increase the transparency across all segments of your workforce and enhance collaboration among business leadership, HR leadership and procurement. While these three groups historically have operated autonomously, the recent economic and political forces identified above have necessitated their alliance to ensure comprehensive and protective workforce strategies are created and adhered to, all employees are categorized and their work defined, and the organization’s risk, cost, and quality objectives are met.
The fact is, misclassification and misuse of independent contractors is often the result of something as simple as miscommunication among leadership or between employer and candidate, employer and staffing partner, etc. To eliminate this risk, ensure that all parties involved in hiring understand the legal definition of an independent contractor, and what the laws governing their usage allow and prohibit.
For example, common red flags that might indicate violations of independent contractor laws include:
- The independent contractor is doing the same or very similar work, under the same or similar conditions, as a regular (W-2) employee.
- An independent contractor works on-site, has a company badge, company desk, company phone, company computer, etc.
- A manager gives the independent contractor daily instructions and/or closely supervises his/her work.
- The independent contractor does not have specific contractual tasks to complete and does not perform work for other customers.
To mitigate risk and protect your organization from litigation, business leaders must work together to determine the company’s workforce needs, and formally define the role and responsibilities of the independent contractor.
Collaborate and Increase Transparency
Workforce segmentation is complicated, which is why it’s so important that all three parties at your organization—business leadership, HR leadership, and procurement—become transparent and involved in the evaluation and management of the workforce.
This is often easier said than done among departments and individuals accustomed to working independently and having complete control over their aspects of the talent processes. To start the conversation, learn what is required of your colleagues to perform their jobs well. Uncover the details of their operational realities, and review them in the larger context of how they impact overall performance.
Consider the opinions and alternative approaches to executing talent processes suggested by your colleagues. Each group has their strengths; capitalize on them to drive greater efficiency of your talent supply.
Lastly, come to the table prepared to clearly articulate well-defined talent needs. Be candid in your requirements, and don’t get stuck on headcount. Creative talent sourcing and the incorporation of independent contractors or other flexible workforce segments might be the most efficient means to meeting the company’s talent needs.
Once all parties are bought into this collaborative approach and ready to incorporate independent contractors as a viable segment of the workforce, it’s important to ensure there are processes in place to protect the organization from risk.
Do all your contingent labor engagements and vendors follow the same procedures for screening, selection, compensation, on-boarding and off-boarding throughout the organization?
An annual audit of your staffing agencies or in-house program ensures protection in today’s changing employment environment. Here are four key areas to hone in on every year to make sure your company’s independent contractor usage falls within standards.
- Screening. In some cases, staffing agencies drop background checks without telling employers. In other cases, employers and agencies don’t follow consistent screening or testing procedures—a huge risk. And in an environment where unemployment is high, it’s typical to see an increase in the number of discrimination cases, as more people go through the screening process. Make sure your internal screening and testing processes, as well as those implemented by your vendors, are formalized and not putting you at risk.
- Paychecks. Make sure contingent employees are being compensated for the correct hours and benefits according to federal and state laws. You might want to consider payrolling through a third party, and transition your independent contractors to a managed service provider that then becomes the employer of record. One word of caution: Make sure you understand the financial health and stability of the agency. Recently, some vendors have been unable to meet their payroll. Take time to understand the agency’s financial situation, and make sure it is paying its contractors and bills.
- Co-employment. Co-employment refers to situations where two companies maintain control over an independent contractor’s work. This issue typically arises when the responsibilities of the staffing provider and the employer are unclear and overlap Staffing agencies should have consistent practices in place to ensure the employer is protected. The agency should take the lead with this issue and make sure the contractor knows to call the agency, not the employer, when there are issues with paychecks, benefits, performance, and records. Specific co-employment discussions should be part of any agency review.
- Insurance coverage. Insurance is an invisible safety net for when something goes wrong. Set specific insurance requirements in your agency contracts, and audit them on a regular basis to ensure the safety net is actually there and in good repair. If the agency has let the coverage lapse, or reduced its coverage to save money, you could be left unprotected.
The Great Recession has left few businesses unaffected. Profits decreased, headcounts were slashed, and morale plummeted across organizations of all industries and sizes.
And yet, efficiencies have emerged. Forced to get creative with their budgets and headcounts, companies have begun evaluating and adjusting the composition of their workforce to allow greater flexibility.
The independent contractor community is a valuable one. To experience that value at its fullest and incorporate contractors into your workforce mix without subjecting your organization to additional risk, you need comprehensive visibility into your entire workforce. A cooperative and collaborative approach to workforce management is the key to mitigating risk and maintaining a fully functional temporary workforce.
Joel Capperella is senior vice president of client solutions for Yoh.