The rise of the contingent workforce has triggered an evolution in the way we do business. According to the Bureau of Labor Statistics, in 2017 the US gig economy had 55 million participants. More than 40% of US workers are engaged in alternative work and 33% of companies extensively use gig workers.
The very essence of the term “contingent” means things are subject to change. If you intend on hiring a contingent workforce, things are managed differently than regular employees.
What is a Contingent Workforce?
A contingent workforce is a group of laborers who are available on-demand. Contingent worker payments are usually made through accounts payable and do not include salary, sick pay, holiday pay, vacation time, taxes, social security, or unemployment. Hiring flexible workers will reduce labor costs and drive productivity.
A contingent worker is not a full-time employee of an organization and thus, not eligible for benefits. The gig economy encompasses a variety of contingent workers that can include (but are not limited to):
- Temps (temporary contract workers)
- Independent contractors
- Gig workers
- On-call professionals
- Other on-demand workers
Cultural expectations and shifting personal priorities have led many people to seek alternatives to traditional full-time employment. Modern workers are now exploring the gig economy. The contingent workforce is flush with skilled talent and people seeking flexible, term-based employment. Individuals who are looking to make the most out of their skills, while still maintaining a level of independence, are the most successful contingent workers. This complements contemporary business needs nicely.
What is the Difference Between a Contingent Worker and a Contractor?
The U.S. Department of Labor defines contingent workers as freelancers or independent contractors. They are not employees. The contingent worker is responsible for all taxes and benefits involved.
When someone is employed by a company as a contractor, it is typically with the intention of being hired on part or full-time after a set amount of days (usually 60-90). In this case, the organization is responsible for ensuring taxes are deducted and paid on behalf of the employee.
The difference between the two kinds of employment is whether the worker is classified as an employee or a freelancer. Then the tax situation is figured out from there.
The Benefits of a Contingent Worker
Contingent work has a multitude of benefits for every party involved. Here are some of the reasons why individuals and businesses choose this avenue to operate:
This goes for both parties. Independent contractors are not paying for a commute every day. There’s no need for expensive work clothes or costly meals.
A business owner never has to worry about paying things like:
- Holiday pay
- Sick time
- Health insurance
- Social Security
Moving to an on-demand and flexible workforce can significantly reduce a company’s labor costs. Temporary workers are usually paid through the accounts payable department. This allows a business to further stretch their payroll budgets.
Because there is no commitment to ongoing work, a business can scale their workforce up or down depending on budget needs. Shifting fixed labor costs helps to get a hold on spending and save on overhead, onboarding, and training. It reduces the amount employers pay in taxes and benefits on who they employ.
The value of a contingent worker extends beyond simple cost savings. The gig economy allows a business to find unique and niche skillsets for specific projects or a set duration. Whether you seek to augment the existing workforce or amplify time capacity, these workers are typically available to start immediately and require little to no training.
It should be noted that as contingent labor becomes more of a fundamental business model, laws will change. It has larger implications when it comes to payroll-specific challenges, like rates, budgeting, and legal compliance. Contingent payroll management can be complex and confusing. Still, what you get from the contingent worker benefits, far outweighs the disadvantages.
Contingent Workforce Payments
There are three main things you need to know about contingent payroll management (workforce payments) before building a team.
Legal compliance poses the greatest risk for contingent workforce payments. In particular, worker misclassification. Temporary workers can land in a grey area at times between contractor and employee. You must make sure the line is completely clear. It’s critical to assess each individual that comes on board to determine how they would be considered by the IRS and other government bodies.
Failing to classify contingent workers can lead to a failed audit, potential lawsuit, penalties, fines, and interest fees for back taxes and other premium benefits you should have been providing.
Compensating independent contractors can be trickier than you might think. Since contingent labor is temporary by nature, many staffing policies do not apply to these workers. Especially when it comes to finance. This means inconsistencies in pay rates. Companies should ensure they are properly negotiating an equitable and fair price for the work involved.
Oftentimes, you may be paying contractors a bit more than regular employees for the same work. This can lead to a change in employee morale, loyalty, and performance. Keep that in mind before you hire a large team of temps to work alongside your regular staff.
Since there are a variety of rates being offered, it can be difficult and time-consuming to keep track of everything. Errors and mistakes are made a lot more when there are hundreds of pay rates to organize.
It is critical to understand how many contingent laborers are in your workforce. This gives a business a 360-degree view of their payroll costs. If you are hiring through an agency, the best approach is to ask them.
If hiring isn’t taking place solely through human resources, then payments aren’t being handled through a centralized payroll. You may need to perform an internal audit to get a true idea of how many temporary workers are on your staff. Otherwise, you could overshoot your payroll budget and come up short on contingent workforce payments.
More than 40% of workers in the United States are using alternative work arrangements. This number has risen 36% in just five years. It’s estimated by 2020, contingent workers will make up 40% of the average company’s global workforce. Understanding how to pay these workers now means less of a financial headache down the road.