Contingent Staffing
Use of Contigent Workers: How to Make Intelligent Staffing Decisions
Introduction
This paper is designed to aid employers in making intelligent and informed business decisions concerning the use of contingent or alternative workers in their workplace. In today's labor market, and what is predicted for the near future, the number of available workers for available jobs does not match. Many companies must look to different resources than in the past to fill available positions. Perhaps your business is seasonal in nature or has manufacturing upturns and downturns that make permanent headcount impractical. Perhaps you have a specific project to accomplish and will not need the resource beyond that.
How Do You Define Contingent Workers?
Contingent workers are also referred to as "contractors," "temporaries," "flexible staff," and "alternative workers," to name a few. It may be clearer to state what a contingent worker is not – contingent workers are neither full-time regular nor part-time regular employees. They may be defined as non-company employees. Throughout this paper, the term "contingent" applies to all types of non-company workers.
Some common definitions or groupings of contingent workers are:
- Contractor: A contractor is an individual or firm that contracts directly with the company to perform services. A further definition could include one who is engaged to perform a certain service for another, according to his/her own manner and method, free from control and direction of an employer in all matters connected with performance or service, except as to results or product of work.
- Suppliers of outsourced services: All responsibility for the process rests with the supplier. Management of the people involved in the process, the quality of the process, and the metrics that measure the process are all the supplier's responsibility. For example: Operating a company cafeteria is not in your core business strategy. This process is outsourced to ABC Corp. ABC manages all aspects of the food service operation, employing and managing their own employees and measuring the quality of the service they provide.
- Temporary Staffing: Moving pieces of work to a supplier but retaining the management of the process and responsibility for the quality of the process and keeping the metrics involved with the process. Sometimes provides for temporary fill-in of a regular employee. Typically, temporary workers are provided via a third party staffing firm. For example: An administrative assistant is going to be out for six weeks to have surgery. The work must be covered during the absence. A staffing firm is engaged to provide a temporary fill-in worker during this time.
- Employee Leasing: a leasing firm (sometimes called a professional employer organization) employs, pays and otherwise maintains the employees and leases them to the client company. The PEO provides the total human resource functions for these employees and charges the client company a fee to do so.
Why is Correct Classification Important?
At first glance, employers might presume no one outside the company is interested in how the company classifies and manages its workers. Wrong! As with many other aspects of the business, there are numerous outside entities and laws involved in how you classify and manage workers, whether they are actual employees or contingent workers! Some of these include the Internal Revenue Service (IRS) and the Department of Labor (DOL). The impact of external focus on how a company defines and categorizes its labor pool can be dramatic. Misclassification of a worker can have significant consequences. The company may be liable for payroll taxes, income and employment taxes that were not withheld, along with any penalties and interest. In addition, the company may be required to retroactively cover the worker in employee benefit plans. These ramifications can be expensive and time-consuming.
A fine line exists between actual employees and contingent or contract workers. There is no "bright-line" test or rule to show who should be considered an employee and who is not. Utilizing a third party to engage and pay contingent workers may reduce risk, leading to an increase in popularity of temporary staffing, project and contract staffing firms. The IRS uses a "20 Factor Test" as a guideline for their investigators to determine if a person should be classified as an employee or a contractor for tax purposes. The courts use a similar control test to define common law employee status. The key issue is CONTROL: specifically, behavioral, financial and environmental. Generally, a contractor is someone who engages to perform a certain service for another, according to his or her own manner and method, free from control and direction of the employer in all matters connected with performance or service, except as to results or quality of work. As with any other aspect of human resources law, the courts often determine the intent or spirit of how regulations are interpreted. The IRS's 20 factors that are outlined below are used to assist in determining if a worker is correctly classified as a contractor or an employee. Remember that every case is individual and all of the factors come into play, with each of them impacting the outcome. The relevance of the factors must be assessed in light of each specific case.
The 20 Factor Test
- Instructions: If the worker is required to follow the company's instructions as to when, where and how s/he is to work, employee status may exist.
- Training: If the worker is required to undergo company training to any significant extent, employee status may exist.
- Integration: If the worker's services are integrated into the heart of the company's operations in such a way that it suggests the worker is subject to the direction and control of the company, employee status may exist.
- Services rendered personally: If the services must be rendered personally by the worker, it implies that the company is interested in the methods used to complete the work and the results, indicating employee status may exist.
- Assistants: If the company hires, supervises and pays assistants for the worker, then employee status may exist. If, on the other hand, one worker hires, supervises and pays the other assistants pursuant to a contract by which the worker agrees to provide materials and labor, this indicates contractor status.
- Continuing relationship: A continuing relationship between a worker and the company suggests employee status, even if the work is performed at frequently recurring, or even irregular, intervals.
- Set hours of work: If the company establishes the work hours, this implies control over the worker, signaling employee status may exist.
- Full time required: If the worker must devote full time to the company and is therefore restricted from doing other gainful work, employee status may exist.
- Where the work is performed: If work is performed on the company's premises, especially if the work could be performed elsewhere, employee status may exist.
- Order or sequence: If the work must be performed in an order or sequence established by the company and the worker is not free to follow his or her own pattern of work, then employee status may exist.
- Reporting: If the worker is required to submit regular oral or written reports to the company instead of just achieving the results, employee status may exist.
- Payment for services: Payment by the hour, week or month generally implies an employer-employee relationship. Payment by the job or straight commission implies the worker is more likely a contractor.
- Payment of expenses: If the company pays the travel or business expenses of the worker, employee status may exist.
- Furnishing tools and materials: If the company supplies tools, materials and other equipment, employee status may exist.
- Significant investment: If the worker does not invest in the facilities used by the worker, employee status may exist. If the worker makes significant investment in the facilities used, typically contractor status exists. (Areas that are often scrutinized are home offices and equipment.)
- Profit or loss: A person who usually does not realize a direct profit or loss as a result of providing services (because they are compensated by a fixed rate) is typically an employee. A person who can realize a profit or loss directly as a result of his or her agreement to provide services is more likely a contractor.
- Working for one firm at a time: A worker who performs services for only one company at a time is typically categorized as an employee.
- Services not available to the general public: A worker who does not generally make his or her services available to the general public is typically viewed as an employee.
- Right to discharge: The right to discharge a worker at any time is a factor indicating employee status. In contrast, a contractor may not be discharged if the contractor produces the desired results that meet contract specifications. A contractor relationship may only be terminated upon completion of the contract.
- Right to terminate: A worker with the right to terminate his or her relationship with the company at any time without incurring any liability is generally an employee.
Do these 20 factors make it clear if the worker is an employee or not? Not always! There is currently federal legislation proposed to create IRS code to replace the 20-factor common law test with a supposedly simpler Internal Revenue Code. While this may or may not happen, the above factors are still practical questions for employers considering how to classify and use contingent staff.
Contingent Staffing Guidelines
In addition to the above factors and guidelines, a company can further differentiate between employees and contingent staff by other types of tangible and intangible treatment. Human resource professionals have long counseled managers on the care and treatment of employees. When it comes to contingent staff, care and treatment must be carefully handled. Contingent staff are not employees of the company and should not be entitled to or eligible for many company programs and events. It is critical for the company to recognize contingent workers as employees of a contingent-type agency or as independent contractors. As such, the company should not provide the following to a contingent worker:
- Company business cards.
- Company credit cards.
- Letters of recommendation.
- Name plates.
- Company stationary.
The following types of programs should be handled by the contingent worker's employer and not by the company:
- Recreational or social activities.
- Performance appraisals, salary adjustments, employee benefits.
- Disciplinary action.
- EEO/harassment policies, procedures and interpretation.
- Recognition programs.
- Training.
- Travel.
Of the above items, the final two, training and travel, are more blurred in nature. Generally, generic training that is available to the public, and on-going developmental training should be the responsibility of the contingent workers and/or their employer. The company should provide any training that is specific in nature and required to successfully complete the job assignments. This often includes machine or specific software training or site-specific safety training. If a contingent worker will be required to travel during the course of their assignment, his or her employer should be responsible for all costs, reservations and reimbursements. The company should provide adequate notice and information to the appropriate employer.
In addition, the company should provide information on specific work-related policies and procedures contingent workers need to be aware of during their job assignment. These may include parking, building access, ID badges, smoking, phone systems, e-mail and other communication systems, solicitation, dress code, safety, company culture and conduct, and confidentiality and non-disclosure.
Conclusion
Employers must be aware of the ramifications involved with the use of contingent workers. There are ways to minimize the risks involved, specifically by knowing the legal and common-law landscape, using external vendors such as temporary and contract firms, and developing and enforcing company policy on the care and treatment of company employees and contingent workers. As we all continue to fight in the war for talent, having a staffing toolkit designed to provide the utmost in flexibility will go a long way toward ensuring the company's success and growth.
Article by Susan L. Burleigh, SPHR from http://www.shrm.org/hrresources/whitepapers_published/CMS_000330.asp