A sea change in the U.S. workforce is swelling. Over the past 10 years, companies looking for alternatives to the traditional employee work model have increasingly turned to contingent arrangements. Recent data suggests that 30-40% of American workers hold part-time, temporary, or contract positions. According to a Randstad Workforce360 Study, two out of three U.S. companies are already using contingent workers. Moreover, while U.S. companies lead the world in using temporary workers as a core part of their business strategy, surveys show the rest of the world is not far behind in the quest for new work paradigms as the economic issues contributing to this shift become globalised. Business executives, in-house counsel, and HR professionals must strategically analyse legal issues surrounding the contingent workforce to stay ahead. This article addresses the key issues you need to understand.
GROWTH OF CONTINGENT STRATEGIES
The U.S. Bureau of Labor Statistics defines contingent employees as "those who do not have an implicit or explicit contract for ongoing employment." While there are many possible contingent work relationships, the most common are workers leased through temporary agencies, independent contractors with a defined scope and duration of work, and interns. The most recent U.S. Department of Labor survey found that roughly 30 percent of the American workforce (or 42.6 million people) are in contingent positions, and the Bureau of Labor Statistics estimates that this figure has increased by at least 30 percent since the last survey in 2006. In its latest report on trends shaping the next decade, tax preparation software company Intuit estimated that by 2020, 40 percent of U.S. workers will be in contingent positions.
BENEFITS OF USING A CONTINGENT WORKFORCE
Companies can derive a number of benefits from using a contingent workforce. Temporary hires and contractors are less expensive than traditional employees because companies generally do not pay them benefits like health insurance, vacations and holidays. Employers can also avoid social security and Medicare taxes, and do not make unemployment contributions for leased workers. Using an agency to prescreen workers and manage employment issues also reduces administrative and human resources burdens. Temporary workers are particularly popular in times of economic instability because they tend to increase efficiencies and flexibility as companies can reduce or increase contingent workers during periods of low or high demand/production. A temp-to-hire method of screening employees may lead to better and more lasting permanent hire decisions. High-talent consultants typically unaffordable to a company for a permanent position may be hired for short periods on specific projects.
RISKS OF USING AGENCY EMPLOYEES AND CONTRACTORS
While there are many benefits to a contingent workforce, companies must also be aware of the risks. Widespread use of temporary workers to perform job functions similar to full-time employees may lead to worker tensions and a decreased sense of security. High turnover can increase training costs, add inefficiencies, and create knowledge gaps – for instance, if a temporary worker is put in charge of a segment of work and the assignment ends without an effective transition.
One of the most significant risks is the possibility of misclassification lawsuits alleging that workers should have been classified as “employees,” and are now owed benefits and other back pay. Microsoft’s landmark settlement of $97 million with its “permatemps” in 2000 still serves as a cautionary tale, and there has been a recent rise of internship class action lawsuits. Moreover, governments at both the federal and state level are focusing on this hotbed issue. The IRS recently conducted a three-year project that included 2000 employee audits per year on worker classification and other issues. Over a dozen states have introduced model professional employer organisation legislation. California recently introduced stiff new penalties of $5,000 to $25,000 per violation for willfully misclassifying a worker as an independent contractor. The U.S. Congress is also expected to reintroduce a bill that would limit “safe harbour” relief under Section 530 of the Revenue Act for misclassifying independent contractors.
REDUCING LEGAL RISKS
The popularity of the contingent workforce model suggests that companies view the benefits as outweighing the risks, and the following guidelines can help reduce those risks:
1. CENTRALISE DECISIONS ON CONTINGENT WORKFORCE STRATEGY AND CONTRACTS.
Companies are vulnerable when different managers make decisions regarding worker classification, whether to hire interns or temps, and which agencies to use. Decentralised planning can lead to redundant or undesirable contracts, inefficiencies, additional expenses, and mixed messaging about how the company views employees. Moreover, hiring global contingent workers presents its own set of issues with respect to visas, international laws, state laws, contract issues, and tax risk. Centralise decisions over long-term strategy, contracts, and temporary worker allowances to ensure the right direction for your company.
2. PROVIDE GUIDANCE TO MANAGEMENT ON WORKER CLASSIFICATION.
State and federal definitions of employee, interns and independent contractors vary; therefore companies must ensure that their employees are properly classified federally and in every state to avoid claims. In general, the amount of direction and control you exert over the individual is critical in determining whether the worker is an employee or independent contractor. Interns must meet a six factor test under the U.S. Department of Labor regulations to avoid wage and hour liability. Further, even if employed by a professional employer organisation, a temporary worker could claim joint employment by both the agency and the client if the worker meets the “employee” definition. In this regard, it is prudent to carefully scrutinise liability terms and indemnity provisions in temp agency contracts. Since managers, and not company executives, interact with the workforce on a daily basis, managers also need to be apprised of the legal tests to ensure that workers’ duties do not stray into an area that would create an employment relationship and lead to company exposure.
3. REGULARLY AUDIT WORKER CLASSIFICATION.
Regular audits as to whether temporary workers, contractors and interns are properly classified can reduce exposure to claims of joint employment and misclassification. Audits also provide an opportunity to ensure that the use of temporary workers is consistent with long-term objectives, and analyse whether workers can be realigned or reclassified.
4. LIMIT THE LEVEL OF DISCRETION AND ACCESS TO COMPANY INFORMATION AS APPROPRIATE.
Temporary workers may not be as loyal to the company, particularly when it comes to keeping business information confidential. Moreover, with the higher turnover rate of contractors and temps, managers need to be instructed to carefully consider whether to put sensitive projects or pieces of company information under the sole management of a contractor.
Job search company CareerBuilder reported that 42 percent of surveyed employers using outside temp workers plan to hire temps in 2013. When converting temporary workers to employees, you should ensure that they are properly classified in their new roles. The scope of the workers’ job duties may change, as well as the salary basis, which should trigger a review to confirm that workers are being properly classified as exempt or non-exempt from federal and state wage-and-hour laws.
By keeping up to date on the changing federal and state landscape, conducting regular audits, thinking strategically about long-term goals and contracts, and providing proper guidance to managers, you can ensure that your company’s contingent workforce is delivering an overall value to your company.
Contact Jacqueline Beaumont or Julie Trotter for more info. View Publication Online