T here used to be Reese’s Peanut Butter Cup commercials with the tagline, “Hey, you got chocolate in my peanut butter!” These commercials—which always involved an improbable meeting of someone carrying an open jar of peanut butter colliding with a person munching on a chocolate bar—ended with both parties realizing that (duh!) the two are better together.
Similarly, all companies require (and benefit from) both employees and independent contractors. Businesses will be able to do certain things better and more cost effectively with contingent labor. Likewise, businesses will continue to depend on the knowledge, stability and cohesion of a permanent workforce for other activities. They are the peanut butter and chocolate of the business world.
The real challenge companies face is maximizing the advantages of both strategies. On the one hand, it’s a competitive market, and no one can afford paying for full-time employees if contractors can do the same job more affordably. On the other hand, talent pools aren’t bottomless, and failing to hold on to the best workers can be a costly mistake. Here’s how to maximize flexibility while ensuring the best potential employees never pass you by.
Consider what you want from employee vs. independent contractor relationships.
Contingent labor is a great way to cut costs and boost flexibility, but sometimes employees make more sense. You should consider employees for positions where:
- Specialized training or knowledge of company culture is imperative
- Conflicts of interest or security are major concerns
- Valuable or controversial internal resources are involved
Employees are also valuable in open-ended or long-term projects, and in initiatives that require complex inter-departmental cooperation.
None of these rules are ironclad, and companies need to use a staffing process that looks at all the options (including employees) to make the best choice. For example, the right business process outsourcing (BPO) partner can probably provide better security and compliance guarantees for sensitive financial services activities than direct-hire temps or leased employees.
Good statement of work (SOW) management can save time and money on a complex, tedious project, while preserving employee morale and allowing you to use your core workforce more efficiently. You’ll often get the best approach by combining multiple models.
Make sure you get the math right.
Optimizing your workforce isn’t easy, and calculating the costs and benefits of contingent labor is particularly complex. When companies treat the choice of contingent vs. permanent workers as simple arithmetic, they tend to overestimate the benefits of temporary labor. When this strategy inevitably fails, they swing back to permanent labor. Companies can spend years doing this without ever developing a sound approach to total workforce management.
The problem is, it’s not easy to directly compare permanent and temporary labor. Temporary labor often cuts costs, but there’s still supplier markup, along with variation in regional rates and by supplier. Skilled or technical workers may actually bill at higher hourly rates, which can make it difficult to calculate the savings your company can achieve by only retaining these workers for the length of a project, rather than hiring them.
You also need to account for the cost and risk of onboarding and offboarding contractors, and the need for good supplier relationship management. Contingent workers may have lower productivity than seasoned employees, or may leave unexpectedly, potentially leading to project delays.
Yet, contingent workers sometimes have unexpected benefits over employees. Outsourcing models can benefit from lower risks and administrative costs. Temporary workers in a tough job may not suffer from burnout or personality conflicts that can plague employees. A contingent workforce might also protect you from higher wage demands or increases in the cost of benefits.
To weigh all these factors, you need to be able to go beyond hourly and per-project pay rates. The IQNavigator Vendor Management System (VMS) gives you the power to do true end-to-end tracking of all types of contingent workers, making it easier to choose the right workforce model for the job. Our Solutions Partner Visier further elevates decision-making, providing analytics on the permanent labor component of your organization, for true total workforce management. Organizations can compare all available work models head to head, giving them the ability to make the most strategic choices.
Understand employment laws.
Your contingent workers could still be employees in the eyes of the law. Misclassifying workers can expose you to significant liability, which far outweighs any cost savings gained in the process. Non-compliant companies end up breaking workers compensation, overtime, tax and unemployment insurance laws.
Lawsuits for back wages and labor commission violations can lead to costly trials, damaged reputations and huge settlements. They can even force companies to shut down (it has happened before). Make sure your worker classification lines up with state and federal employment laws.
The Fair Labor Standards Act (FLSA) regulates employee classification under federal law. Currently, the Department of Labor uses a stricter standard for independent contractors than some courts; there’s a degree of uncertainty for employers, and it’s better to air on the side of caution. Essentially, the more independent a worker is, the more likely the government is to see them as a contractor.
The DOL looks at six main factors in considering whether a worker is an employee or independent contractor under the law:
- Whether the worker is “integral” to the business (e.g., a cake decorator in a cake business or a carpenter in a framing business)
- Whether the worker’s “managerial skill” can affect their potential to make a profit or experience a loss (e.g., the worker’s strategic decision to rent space or advertise)
- How much the worker invests, compared to the business
- Whether the worker needs to use “special skills and initiative” (e.g., deciding which orders to fill and what materials to use)
- The length of the relationship between the worker and business (permanent or indefinite work is employment)
- The amount of control the employer has over the worker (enforcing dress code, giving precise instructions for how tasks need to be carried out, etc.)
The IRS has somewhat different standards for categorizing workers, but both boil down to the same thing: the more control you have over the worker’s actions (and their ability to generate an income), the more they’re likely to be considered an employee. Things like setting their hours, making them work on premises, and providing training all skew toward employee by IRS standards.
A vendor management system can make your compliance program easier and more effective. A recent study by the Aberdeen Group found that organizations employing a VMS are almost 80% compliant, compared to 60% of organizations that don’t use one.
IQN provides a total workforce management solution, allowing you to analyze your contingent labor and employee workforce, and automate procurement and compliance practices to avoid costly mistakes.
Use predictive analytics.
As companies rapidly expand their contingent workforce, it can be difficult to anticipate their labor needs. Organizations that have traditionally secured contingent workers in a support role or outsourced certain business processes—such as call centers—are suddenly faced with the much more difficult task of switching over a large part of their workforce.
Even basics like selecting needed skillsets or titles can get tricky, as procurement works to divide up tasks in the most economically advantageous way. There are different suppliers and regions to consider, with results that can be hard to predict. Who will offer the most competitive rates over the entire range of needed skills? How fast can suppliers fill roles or complete tasks? Where does it make sense to divide up procurement between suppliers, and where is it more rational to go all in with one particular partner? Which areas will continue to benefit from an employee workforce?
IQNavigator’s predictive analytics capabilities make it easier to understand what your organization needs from its contingent workforce and how to choose the right suppliers. We can help you predict needs and competitive rates by region, title and skillset. We provide the insight to compare suppliers head to head and analyze KPIs like time to fill, completion of assignments, and benchmarking of rates by skillset and region. We make it easier to go from overarching strategy to individual assignment decisions, so you’ll always have the right workers, with the right skills, at the right price.
Our market intelligence helps ensure that your strategy stays sound. The availability and cost of contingent labor can swing quickly, reshaping labor fulfillment decisions. The IQN Intelligence Suite lets you access current bill rates for contingent workers globally. You can price contracts more competitively and base staffing decisions on sound labor market insight.
Understand your contingent workforce options.
No contingent hiring model is right for all positions. Companies need to be aware of the different contingent labor arrangements, and employ the strategy that works best for a particular desired outcome.
SOW workers, for example, give companies the ability to regulate timeline and deliverables with little administrative overhead, making management easier. SOW-based projects are ideal when combined with clearly defined goals, along with spending and performance measurements. Often, there’s less cost, less management and less compliance risk; the high degree of autonomy over business practices means there’s little chance of mistaking an employee’s categorization.
Direct-hire temps offer one of the most flexible contingent labor models. They’re useful for seasonal work, filling in for vacationing employees, and bolstering your workforce to overcome unanticipated delays. More and more organizations are incorporating temp-to-hire into their standard employment program as well. Not only does this give companies the chance to verify a prospective employee is the right fit for a job, they can also use it to reduce vacancy rates. Companies looking for employees can fill open positions quickly with temps and automate retention of top performers.
A total workforce management program should weigh the benefits of each type of staffing, selecting the right labor model to meet each need. IQN can help you maximize temporary workforce visibility, giving you the insights to create an HR strategy that balances cost, risk, performance and flexibility.
Consider the effects of supplier management.
A contingent workforce doesn’t just change the way your organization does work—it can also fundamentally change administrative burdens and costs in your business and partner ecosystem. The ability to effectively build and manage supplier relationships is a key factor in the cost savings of contingent labor, and can profoundly change the way it stacks up against a permanent workforce.
IQN VMS is designed to help services procurement manage suppliers strategically and easily. We provide a centralized network to a proven network of suppliers, making it easier to source skilled talent at competitive rates.
Additionally, we automate all the key tasks around sourcing and implementing a contingent workforce program. This massively reduces the administrative workload, ensures consistency across the organization, and reduces both risks and costs. Our Decision Manager tool makes it easy to choose the right source and the right supplier; you’re guided through sourcing strategy and labor law compliance, allowing you to choose the right contract to contain costs while minimizing compliance risks.
We continue to provide automation throughout the talent lifecycle, reducing the complexity and risk of working with suppliers. We enable comprehensive onboarding controls, including background checks, tax forms, and compliance with contract requirements, labor laws and other requirements.
At the end of contract, you have complete offboarding controls, such as facilities access revocation, payment and paperwork management. Automatic alerts inform you of approaching tenure limits or end of contract, as well as spend thresholds. All of this adds up to a streamlined vendor relationship, which can maximize the benefits of contingent workers over permanent employees.
Results-driven total workforce management.
As the non-employee workforce continues to evolve, organizations are increasingly revisiting the employee vs. independent contractor debate and opting for more flexible staffing solutions. There’s simply no way to stay competitive without maximizing the cost savings and flexibility non-employee workers of all types provide. At the same time, companies will always need loyal, motivated and highly trained employees to hold down the fort.
IQNavigator provides contingent workforce solutions that integrate into your total workforce management approach. With better intelligence and visibility, a more efficient business cycle, and smarter partnering, you can get the most out of your talent. With the performance boost of contingent workers and the stability of permanent employees, you can stay ahead of the competition.