The Unique Challenge of Independent Contractors

Companies hire contingent workers for a variety of reasons, such as dealing with peak production periods or in an effort to keep spiraling labor costs (taxes and benefits) under control. Some types of contingent workers are supplied via services or agencies, which takes away most of the legal compliance risks to your company and places it back on the agency or service providing the workers. This is not the case, however, with one class of contingent workers – independent contractors.

managing-independent-contractorsTemporary workers provided by employment agencies tend to be low-to-mid-level workers needed for short-term engagements. Independent contractors, on the other hand, tend to be seen as much higher-level talent that can be brought in for special projects that may last months or even years.

It’s not surprising to then find out that when it comes to traditional temps, many organizations (46%) need look no further than their procurement departments for managing the process, and only to a lesser degree do HR (19%) or individual managers (16%) get involved. When it comes to independent contractors (ICs), however, the situation gets significantly muddier. The breakdown of management responsibility for ICs is HR in 33% of organizations, procurement in 29% and individual managers in 24% of organizations (source). This lack of unity in having a single department responsible for IC management is of concern because ICs carry a greater compliance risk than traditional temporary workers.

Using ICs carries much more risk to organizations because the burden of misclassification falls squarely on your company rather than a staffing agency or vendor. This means your company is vulnerable to either a federal audit or running afoul of state and local regulations. Either way, compliance trouble can largely negate the benefits of using ICs in the first place.

The key to making effective use of independent contractors is to have a rigorous and vigilant system in place that continually assesses the company-IC relationship to ensure that it doesn’t cross over into the realm of an employer-employee relationship. Along with these assessments should come regular IC compliance reviews specifically aimed at fulfilling the latest regulatory requirements (which can be a changing landscape). If your company uses a lot of ICs, it will be well worth your while to establish an IC-specific dashboard and analytics to track what’s happening with ICs in your organization. Such a central repository of data and records should be as inclusive as possible, starting with the initial communication with an IC.

General management considerations to keep in mind to avoid compliance risks include the following:

  • Avoid anything that looks like the kind of performance appraisal you conduct with your regular permanent employees – that’s a clear indicator to regulatory bodies that you’ve misclassified the worker.
  • Be careful about how much control you exercise of the specifics of the work the IC takes on. If your instructions are too explicit or you ask them to only work during specific hours, you’re once again treating them more like an employee than an IC. In general your focus should be on results and deliverables, not the specifics of how and when it gets done.
  • The best way to pay ICs is with an agreed-up fixed, flat rate for specific deliverables and outputs. Paying by the hour makes less sense as you wind up paying for any problems that get in the way of the work and that need to be resolved.
  • Make sure your recruitment and hiring of ICs is every bit as careful and rigorous as it is for all your permanent employee hires. You need to take that level of care and precision in order to find the right talent early on. You can also consider giving a potential IC a smaller, low-stakes project as a test drive for greater things to come.

Independent contractors are a growing and increasingly permanent part of the workforce landscape. While the benefits of utilizing ICs can be significant, so can the risks associated with making sure you stay compliant with government regulations. With a bit of careful planning and wise execution, your company will be in a position to make the most of independent contractors in the 21st century.

November 13, 2014   Updated :March 25, 2015   compliance, contingent workers, independent contractors, talent management   

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