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The contingent workforce, made up of provisional, temporary employees, is a workforce to be reckoned with. This growing segment of the U.S. population enjoys independence and flexibility while offering employers the same. There are some drawbacks, however, to using contingent workers. Tax and labor liabilities are major risks employers take on when they employ contingent workers.
Advantages for employers
Using contingent workers offers employers flexibility, “just-in-time” labor, and skilled, specialized workers matched to specific projects. It often saves the employer time in filling positions and saves money in wages, benefits, and taxes.
Advantages for contingent workers
Contingent workers can have more control over their time and work methods. They have more flexibility to attend to family and personal needs, and they often make more money than traditional workers.
Disadvantages for employers
It can be hard for employers to assign oversight responsibility for temporary workers. Who is ultimately in charge: HR, Procurement, individual managers? Securing talent can be inefficient and costly. Of course, compliance issues can cause confusion. Using a well-designed Contingent Worker Management (CWM) system can greatly improve a company’s bottom line. CWMs create a centralized process for hiring, managing vendor relationships, and pricing.
Disadvantages for contingent workers
Contingent workers can experience a lack of job security, lack of benefits, lack of acceptance or approval from more traditional workers, and difficulty securing loans and credit.
Risks
Make sure you don’t mistake an employee for an independent contractor. Not all contingent workers can be labeled independent contractors for tax purposes-even if they have signed worker status agreements with you. The Internal Revenue Service (IRS) doesn’t consider such agreements binding when considering a worker’s status.
Section 530 of the Revenue Act of 1978 lists 20 factors the IRS uses in determining a worker’s status. One of the most important considerations is how much control the employer has over the contractor’s time or work methods. The more control, the more likely the worker is an “employee.”
Areas of liability
In addition to any state labor regulations, using contingent workers can expose your company to significant liability in the following federal areas:
- Labor laws
- Compensation and benefits
- The Employee Retirement Income Security Act (ERISA)
- The Fair Labor Standards Act (FLSA)
- The Equal Pay Act
- Discrimination laws
Litigation
A large computer company is an example of a company sued for mislabeling its contingent workforce. In 2000, after a decade-long battle in the courts, the company agreed to pay its contingent workers (often called “permatemps”) a $97 million settlement. The case against the company began when the IRS sued the company for back taxes, stating that its independent contractors were, in reality, “common-law” employees. The contingent workers then took the company to court for benefits and stock options. The main problems for the company were the amount of control they exercised over the “contingent” employees and the amount of time the workers were employed. The contingent workers were often with the company for many years.
Shortly after the settlement, this company instituted a new policy: All temporary employees must now take a mandatory minimum 100-day break after one year on the job.
Conclusion
Today’s contingent workforce may be just what you need to meet an important deadline or to fill a vacancy until a regular employee returns from medical leave. Just make sure you’ve covered the bases in terms of terms of employment law, tax law, and fair labor practices.