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.

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

80%
The percentage of organizations that get enhanced visibility into the total talent pool5

62%
The percentage of organizations that experience a reduction in overall labor spend6

57%
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:

  1. Misclassification
    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.

Mismanaging contingent workers could not only cause financial and legal repercussions, but lasting damage to your brand and reputation.

  1. 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.
  2. 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:

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:

Read the full fact sheet here.

State-by-state guidelines

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:

To be safe, it’s best to make sure your classification of contingent workers meets the guidelines of each of these tests.

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:

With collaboration tools, you can:

With external workforce management software, you can:

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.

6Ibid.

7Ibid.