Is a mismanaged contingent workforce putting your company at risk?

In September 2021, the New York Times reported that US-based technology company could be liable for more than $100 million for underpayment of temporary workers. The sum includes back salaries for over nine years of noncompliance with pay parity laws in 16 countries covering agency-provided temporary workers. Not only did the whistleblower complaint allege worker underpayment. It also accused the company of securities violations because it had failed to disclose the risk to investors.

In a separate 2023 ruling, the US National Labor Relations Board ruled that the same company is a “joint employer” of contract workers hired via a staffing firm. As a result, it is obligated to negotiate with the workers if they unionize. The company relies heavily on staffing firms to meet its labor needs. Now it faces the prospect of collectively bargaining with US workers for the first time in its history.

In the UK, a personal service company (PSC) contractor recently lost a four-year battle with His Majesty’s Revenue and Customs (HMRC), the government’s tax, payments, and customs authority, over unpaid taxes and national insurance contributions (NIC) associated with services performed for a large multinational financial services provider. Under terms of the UK’s IR35 anti-tax-avoidance legislation, the contractor and his employer were found liable for £141,000 in unpaid taxes, NICs, and penalties.

Aggressive enforcement of off-payroll working rules is further illustrated by a recent case in which HMRC recovered more than £260,000 in unpaid tax and NIC from a company who supplied workers to the healthcare sector. The First Tier Tribunal (FTT) determined that the staffing supplier’s contracts were with individuals, not PSCs. It ruled the workers must be treated as employees.  

These examples represent just a few ways contingent workforce program owners put their companies at risk by mismanaging their relationships with non-employee workers. At a minimum, misclassification and other mishandling of external labor can lead to inefficiency, cost overruns, and loss of physical or intellectual property. At worst, they can lead to litigation, fines, and payment of statutory remittances and employee entitlements, all accompanied by adverse publicity and reputational damage.The ever-changing world of employment law

In the US, a vast network of rules touching contingent labor are set forth in various bodies of law. These included the Internal Revenue Code, the Employee Retirement Income Security Act of 1974, the National Labor Relations Act, the Civil Rights Act, and the Fair Labor Standards Act. Even the Affordable Care Act of 2010 establishes rules for payment of benefits to contingent workers. There are also a multitude of state and local laws that affect and regulate these workers.

Other countries have similar, but different, tax and labor laws and regulations. The maze of national, regional, and local standards only complicates compliance efforts, especially for multinational companies.

On February 2, 2023, the European Parliament voted that many self-employed contractors and gig workers will be treated as employees unless they are engaged on very clear business-to-business terms such as being paid a fixed price for defined deliverables.

This directive will force many staffing companies, digital platforms, and employers of record (AOR)/ agents of record (EOR) to change the way they operate in Europe. Users of self-employed contractors and consultants will also have to adjust. While the new regulation only applies to EU countries, the UK has indicated that it may attempt to replicate this directive. 

The risk of worker misclassification

These examples illustrate that one of the most common problems in the management of an extended workforce is worker misclassification. This happens when a business incorrectly identifies the relationship that exists between their organization and a contingent worker. Since businesses typically rely on a mix of agency workers, independent contractors/ personal service company contractors, freelancers, consultants, and outsourced service providers, the risk of misclassifying some of this non-employee talent is always present. But because it is so common, and the consequences can be so severe, companies need to make every possible effort to prevent misclassification of their contingent workers.

Laws and regulations are not the only contingent workforce risks

Regulatory compliance failure is a primary risk in mismanaged contingent workforce programs, but risk can manifest itself other ways. These can include:

• health and safety risks
• security risks
• lack of operational governance
• failure to comply with company policies and procedures

Another major concern is overspend on contingent labor. This can occur for many reasons including:

• unclear definition of scope
• inappropriate skill leveling
• failure to follow established rate cards
• lack of competitive bidding
• contingent labor category and assignment mismatch
• inadequate partner/supplier selection

The path to risk mitigation

Fortunately, there is a way to mitigate contingent workforce risks. Not only will it reduce legal and regulatory risks. It also can reduce overspend – typically by 15-20% or more.  It will also accelerate time to value – the interval between identifying a critical need and having the right resources in place to fill it.

Take charge of your extended workforce and transform how work gets done

Risk reduction starts with a commitment to integrated workforce planning across the organization. Businesses must match workers with the right skills and the right contract to each role or assignment. This will require:

• shifting to skill-based, rather than role-based, workforce planning
• establishing the necessary policies and processes to execute an effective total talent acquisition program
• implementing appropriate technologies to make these programs operate efficiently and compliantly

The transformation can be daunting. But the result will not only reduce your compliance risks. It will give you a more agile, more resilient workforce that delivers a sustainable competitive advantage.

To succeed, you need a system that will give you total workforce visibility. And you need it now.

We know because we’ve done it. We’ve helped hundreds of businesses implement the necessary technologies to manage their extended workforce. The results have been lower costs, increased efficiency, and reduced risk. And it all starts by giving you complete visibility of your workforce in real-time – employees and non-employees alike.

To learn more about how total workforce visibility can protect your company from compliance risk, contact us here.