Strategies for Engaging External Talent and Mitigating Risk Using HRIS Platforms
Organizations today rely on a workforce that not only consists of traditional employees but also of external contributors, or contingent workers. Contingent workers can include independent contractors, temporary workers, agency workers, freelancers, and all non-employees. In the past decade, there has been an unprecedented increase in the number of these contingent workers in the United States, with one source citing an increase of almost 50% between 2005 and 2015.1
A new world of challenges and opportunities with the contingent workforce
This rise in the contingent workforce is no surprise. Businesses are turning to workers outside their normal full-time employees because of shortages in skilled labor, the need for increased agility, seasonal business demands, and rising operating costs. The use of contingent workers is much higher in some industries and roles, particularly skilled positions.
In addition to these evergreen needs, the popularity of the digital gig economy, shifts in the workforce due to technology, and changing views on work-life balance will cause the number of workers with non-traditional work arrangements to continue to grow.
- 70% of workers and 68% of employers think contractors, freelancers, temporary workers, and consultants will dominate the workplace by 2025.2
- Up to 30% of a large company’s HR spend goes toward contingent workers.3
- 68% of all non-employee labor and talent is unaccounted for in the average enterprise’s budgeting, planning, and forecasting.4
In the past, HR deferred the contingent workforce to procurement, thinking of it as a spend issue rather than a people issue. This perspective is shifting as these workers become a significant part of the workforce—and the performance, skills, and engagement of these external contributors significantly impacts company profitability, reputation, and brand.
HR leaders today are realizing the need to take a more proactive role in managing the total workforce and implementing corresponding strategies for their businesses.
There are several benefits to taking a more holistic approach. By managing employees and contingent workers, HR has better visibility into the total talent pool. Existing tools for training and onboarding can be used to get contingent workers up to speed more quickly and align them to organizational goals—all through a more engaging experience.
Benefits to organizations with a total workforce management program
The percentage of organizations that get enhanced visibility into the total talent pool5
The percentage of organizations that experience a reduction in overall labor spend6
The percentage of organizations that see enhanced alignment between projects and the talent they require7
Even with these benefits, there are several reasons organizations have traditionally avoided integrating contractors into their HR programs and practices, one of which is legal concerns. There are stringent legal requirements to ensure that organizations do not manage contingent workers as full-time employees when they do not receive the same compensation, benefits, career paths, and other opportunities. Compliance can be difficult to navigate, but there are some general guidelines you may want to consider in the context of managing your contingent workers more strategically and effectively while mitigating your organization’s risk.
It’s important to assess and understand the risks
When an organization hires contingent workers, it assumes risk. In the United States, to only give some examples, risks could materialize through an IRS tax audit, a Department of Labor investigation, or a class action suit by disgruntled independent contractors. In such cases, your organization could be at risk for fines or payments related to violations of labor law, unemployment and workers’ compensation, violations of unpaid overtime and minimum wage rules, and benefits. Additionally, the public perception of organizations that choose to hire contingent workers over full-time employees can be delicate.
There are three main areas of risk regarding contingent workers:
Misclassification is when an organization, whether intentionally or unintentionally, classifies a worker as an independent contractor when they should be classified as an employee. In general, the difference between an independent contractor and employee lies in the amount of control the employer has over how and when the work gets done. While some organizations intentionally misclassify workers in order to cut costs or seek competitive advantage, many fall into this trap unknowingly—the definitions are not perfectly black and white. To stay on the safe side, it’s important to ensure that your definitions hold up to all applicable legal standards. In the next section, we’ll explore just that.
- Co-employment responsibilities
Many contingent workers have been contracted through temporary staffing agencies. These agencies sometimes assume the risk of compliance and responsibility for managing the relationship with the contingent worker. Some may even treat the worker as an employee of the agency and handle all required payroll deductions. However, your organization may still be liable for misclassifying contingent workers, even if it was technically the staffing agency’s fault. The law may determine that the contingent worker is “co-employed,” and therefore falls under your responsibility for correct classification, compensation, and other needs.
- Keeping independent contractor roles clearly distinguished from employees
Even if you have correctly classified an independent contractor, your business is responsible for maintaining that classification. As time goes on and business needs change, it’s easy for contingent workers to take on more responsibilities, or for your business to begin treating them more like employees. It’s helpful to have clear policies in place stating what is allowed and not allowed regarding contingent workers, and re-evaluate frequently in order to ensure continued compliance.
A quick guide to navigating the legal framework
Understanding how to correctly classify your workforce can be a difficult task, so an attorney should be consulted to ensure complete compliance. Some U.S.-specific examples below can get you started.
The IRS common law rules
The IRS provides three questions to consider in order to help you determine the degree of independence and control:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does their job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.)
- Type of Relationship: Are there written contracts or employee type benefits (e.g., pension plan, insurance, and vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?
Read the full guidelines here.
Significant factors from the Fair Labor Standards Act
While courts have taken on employee classification issues on a case-by-case basis, the Fair Labor Standards Act provides a seven-point list of considerations to help determine the difference:
- The extent to which the services rendered are an integral part of the principal’s business
- The permanency of the relationship
- The amount of the alleged contractor’s investment in facilities and equipment
- The nature and degree of control by the principal
- The alleged contractor’s opportunities for profit and loss
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor
- The degree of independent business organization and operation
Read the full fact sheet here.
Although state practices vary, many courts use the ABC test to settle disputes of unemployment coverage or workers’ compensation. This test helps determine whether a worker meets three separate criteria to be considered an independent contractor:
- The worker is free from the employer’s control or direction in performing the work.
- The work takes place outside the usual course of the business of the company and off the site of the business.
- Customarily, the worker is engaged in an independent trade, occupation, profession, or business.
How to maximize external talent and mitigate risk
Transitioning to a total workforce management approach will provide benefits to workplace culture, engagement, productivity, and costs. Incorporating contingent workers into the human resource information system (HRIS) may help you to realize these benefits, and also equips you to better manage your total workforce. Although this list does not reflect on the legal implications of taking any such steps, there are a few specific considerations to weigh as you think about your approach to total workforce management.
Get a total view of the workforce
Displaying contingent workers in the organizational chart and directory can lead to better visibility into the total workforce—all employees and contingent workers. You’ll be able to see the exact number of contingent workers and where they’re located in the business. You’ll also be able to easily find work-order details such as start and end date, which can help you determine when the duration of their contract might start to look like a W-2 employee. In addition, workflow reminders can alert managers of events, such as upcoming end dates of work orders, so appropriate actions can be initiated. The HRIS will also allow you to analyze the entire workforce holistically. Most important, this means that managers can be held more accountable for efficiently managing contingent workers, because the HRIS provides them easy access and visibility into the entire workforce.
When integrating your contingent worker data into the HRIS, you may want to keep contingent worker records clearly designated and categorized separately from employee files. In any event, you are responsible for keeping your contingent worker data up to date, with active and inactive contractors clearly marked. Such declaration may still not be the perfect solution, as in many cases, if contingent workers stay with your business for longer than a year, the distinction between independent contractor and employee can become less clear.
Provide learning activities to contingent workers
By incorporating contingent workers into the HRIS, you can then provide access to important learning content. This improves the training experience for contingent workers and decreases ramp-up time to maximum productivity. Equipping contingent workers effectively leads to a better experience for all contributors, who often work closely together and rely on each other’s skills and knowledge.
Again, providing opportunities similar to those of payroll employees can blur the lines between an independent contractor and employee. To mitigate this risk, you may want to carefully determine which courses are offered to contingent workers and how. A good question to ask is whether the training for that contingent worker’s specific role is required? Anything more could be considered career development, which is a benefit that seems to imply employee status, just to give one example.
Extend onboarding and social collaboration tools
With access to onboarding and social collaboration tools, contingent workers can quickly join teams and get up to speed. They’ll have the ability to connect with the resources, people, and details they need to complete their projects and collaborate on tasks. Extending these tools to contingent workers allows the entire workforce to understand everyone’s contributions, progress, and relationships with one another—leading to more effective teamwork and better results.
The main issue with misclassification is the amount of control an employer has over the work of an independent contractor. To avoid this risk, you should never require a contingent worker to participate in onboarding or use social collaboration tools. Independent contractors are required to deliver the results or product for which they were hired, but they should have complete control over the method they choose to reach those outcomes.
Identify contingent workforce needs with workforce planning tools
By extending workforce planning processes to include contingent workers, you can identify specific skills needed to achieve business goals and better plan for the number and kind of contingent workers your organization needs. A holistic planning process may allow you to better determine which roles should be filled with full-time employees and which should be filled with independent contractors—and ensuring the nature of work and demands makes that role eligible for contracted work.
Knowing when to hire a contingent worker versus a payroll employee isn’t always easy. At first glance, hiring a contingent worker may seem convenient and cost effective, but you should consider the whole picture. Is this role part of a short-term project? Or will you likely have continuing needs for this type of skill set? Another aspect might be the value of relationships that worker might create; to keep that value within your organization, you may want to hire them as a full-time employee. Also consider the value of establishing a more consistent pay level—contractor pay rates can fluctuate very quickly and may incur higher costs over the long term.
Embracing the total workforce
Treating your contingent workforce as a strategic people asset of your business, like you consider full-time employees, may mean more risk for your business or burden for human resources if you don’t evaluate it in advance and implement clear guidelines. Leveraging your HRIS to holistically manage both your employees and contingent workers can help you maximize your total talent and gain important competitive advantages. With modern systems, you can break down the silos between HR and procurement and manage your total workforce under a single banner of processes, capabilities, and integrated solutions.
With human capital and talent management software, you can:
- Visualize all workers
- Apply select talent processes to contingent workers (such as learning and collaboration)
- Plan and analyze the total workforce
With collaboration tools, you can:
- Connect contingent workers with information and subject matter experts from day one
- Train all contributors and boost their productivity
- Align the total workforce around objectives and tasks
With external workforce management software, you can:
- Procure, manage, and optimize the external workforce
- Improve talent/service quality
- Support risk mitigation and policy compliance
As the contingent workforce grows, so should your approach to managing your total talent. Improve decision-making with insight into the total workforce. Increase engagement, enablement, and alignment across all contributors with better access to the right tools. And finally, improve overall business performance with strategic, effective total workforce management.
1National Bureau of Economic Research, “The Rise and Nature of Alternative Work Arrangements in the United States, 1995–2015,” September 2016.
2Randstad, “Workplace 2025,” 2016.
3IDC, “HR Must Deliver on Transformation,” 2017.
4Ardent Partners, “The State of Contingent Workforce Management 2017–2018: The Convergence of Talent, Technology, and the Future of Work,” October 2017.
5Ardent Partners, “The Modern Guide to Total Workforce Management,” 2017.