The Risks of Engaging Contingent Workers

Contingent workforce engagement is riskier than ever – for all parties and the risk is only growing, growing risk means more resources allocated to minimizing risk. More resource allocation to risk mitigation means fewer resources aimed at growing revenue. And even then – has the risk been removed? How do you know? The harsh reality of engaging contingent workers is that the majority of companies aren’t doing it correctly.

Avoid Misclassification

Most companies are slipping up somewhere along the way when engaging contingent workers and not realizing the consequences it can have on doing business. Whether they’re misclassifying employees as independent contractors, lacking sufficient liability insurances to protect themselves and the talent, or aren’t adhering to proper employment regulations. These regulations can be in the form of pay frequency, sick leave, overtime law, vacation pay, or an array of other laws,

There’s a lot of blurry gray areas when it comes to engaging contingent workers. If contingent workforce management (CWM) and the various governmental bodies that regulate employment had a Facebook page together, their relationship status would undoubtedly read “It’s Complicated.”

One example is with regard to employee misclassification. There seem to be guidelines, but then we’re finding that the guidelines aren’t holding up in some cases.

An example in 2013 featured a small engineering consulting company based on the west coast. An auditor from the Department of Labor visited them and classified more than 30 of its “Independent Contractors” as “Employees”. Despite those workers meeting the vast majority of the criteria that the Department of Labor has set forth as needing to be met in order to be considered truly “independent”, some of these workers were being told when they had to show up to the worksite. Boom. Just like that, everything changed.

One small caveat resembling an employer-employee relationship regarding the employees start time and suddenly they’re not in compliance. The result? Back taxes and workers compensation instantly due from the consulting company for those workers. This went all the way back to the first date they were engaged for assignment. That’s not even getting into the potential penalties that could be enforced. This can be as high as 70% of payroll in some cases.

What happens to workers misclassified as independent contractors?

If workers are misclassified they have to re-file their taxes, and potentially pay higher ones. Not to mention, change their company structure to be a corporation, if they want to continue being paid as an independent contractor.

In this particular case study, you may ask did the Department of Labor decide to run a random audit? Nope. One of the contractors filed for unemployment at the conclusion of his/her assignment, thus prompting a more expansive probe into the consulting company’s contingent workforce. Who’s really to blame in this case? After all, had there been any precedent to suggest this company was at substantial risk?

The consulting company had even reviewed the IRS and Department of Labor criteria for proper worker classification and were confident that the workers leaned heavily to the “Independent Contractor” side.   Still, they got nailed. Hours spent researching, preparing, and onboarding, and still, it did them no good. And that’s just one risk.   There are several others.

If you need help engaging contingent workers, leave it to the experts.

Disclaimer: All information written here is for general informational purposes only and is not intended to be a substitute for professional and/or legal services.