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As organizations around the world struggle to overcome workforce challenges created by emerging technologies and shifting demographics, employers doing business in Canada are also re-examining the traditional employee/employer relationship model.
Contingent Workforce Management
When onboarding an independent contractor, organizations must classify aspects of the contingent worker relationship to ensure compliance with the correct tax and employment laws. Misclassification of workers happens when tax authorities and/or regulatory bodies deem one or more of an organization’s contract workers as actual employees.
Managing a blended or contingent workforce is a logistical challenge in the ever-growing gig economy, and contractor classification is one of the biggest risks facing organizations that operate one.
Between 10–20 per cent of employers misclassify at least one worker, and the Internal Revenue Service (IRS) estimates organizations have misclassified millions of workers in the U.S. alone.
When onboarding contingent workers, these insights will help categorize and classify your worker relationships, so you can focus on moving your business forward.
Common types of classification
The issue of worker classification arises from government concern that organizations may be attempting to avoid tax obligations by misclassifying workers – either accidentally or on purpose. While classification is primarily an on-boarding activity, organizations must be vigilant to ensure the status of the relationship does not change over time and invalidate the original classification. To ignore this may result in future reassessments and penalties.
Below are the common types of contractor classification considerations:
• Legal Status
• Employer payroll
• Overtime status
• Right to work status (I-9)
• Health and safety sensitive
Why does contractor classification matter?
The first thing to understand about classification is that a worker is not classified by their title or by the wording in their contract (e.g., “Independent Contractor Agreement”). Instead, it’s the context of the worker’s role that determines their classification.
If your organization operates a contingent or blended workforce, correct contractor classification is critical to avoiding tax, government and brand related consequences like wage claims, fines, back payments, class-action lawsuits, benefits owed to re-classified employees and reputational damages.
Classification also provides clarity on employer obligations. Employers have certain obligations to traditional employees that they don’t have to contingent workers, such as pension plan or insurance premium contributions and income tax deductions; whereas contractors take on these responsibilities themselves. Furthermore, contractor classification helps organizations manage the engagement with the worker and provide a unique and tailored onboarding experience. Similar to traditional employees, contingent workers want to feel as though the organization they're working with is excited to have them on board, is prepared for the engagement and has all required internal processes in place.
Who handles contractor classification?
Some organizations’ internal HR function will handle classification of employees, and many times, contingent workers are slipping through the cracks. As such, competitive organizations are no longer approaching the management of their contingent workforce in an ad-hoc or as needed basis, and many are turning to a third party to assist in creating an effective contingent workforce management program that drives high levels of compliance.
These third parties include:
Managed Services Provider (MSP): An MSP will manage all or part of a contingent workforce needs according to client requirements. MSPs may or may not offer a Vendor Management System (VMS) of their own, but they normally combine some type of VMS technology into the program(s).
Vendor Management System (VMS): A VMS is a technology solution that provides visibility into an organization’s contingent worker program, including every worker, the length of their engagement and project scope. Basic system functions handle everything from requisition to off-boarding, hiring approvals and processing of time sheets and invoices.
Independent Contractor Engagement Specialists (ICES): ICES will act as an Agent or Employer of Record for IRS purposes in the U.S..
What is the process for handling exceptions?
Contractor classification can be something of a balancing act, and to ensure compliance, employers should audit their processes, documentation and internal rules with the latest legislation and classification systems.
There are also certain scenarios that fall outside the 90 per cent of regular classifications. In such cases, who is accountable for making the final decision? Without a defined escalation process for exceptions, front line management, more often than not, is forced to take on the responsibility of classification as well as their day-today-operations, which can lead to a poor on-boarding experience, delayed on-boarding, last minute rejections, poor documentation or in the worst case scenario, misclassification.
What is the role of a staffing agency?
Staffing firms have a role to play — in meeting clients’ changing skills requirements, advising on the best solutions available to meet their business goals and delivering innovative services that transform how they acquire and manage talent.
Furthermore, due to the risks involved with the misclassification of workers, service providers like staffing agencies embed classification as an integral component into their contractor on-boarding process, and these classification systems evolve over time to be current with the changing realities of contract and employment law. With expertise in contract labor, a trusted partner can help organizations avoid the risks of misclassification – while also protecting the interests of the skilled workers represented.
Contractor classification isn't the only risk organizations face when managing a blended or contingent workforce. If you're interested in engaging contingent talent, or want deeper insights into how to manage the risks posed by your current program, download our free whitepaper A Checklist for Contingent Worker Risk:
Contingent Workforce Management
They go by many different titles: contingent workers, gig employees, freelancers, consultants and contractors, but regardless of naming, they all serve the same purpose in providing organizations with flexible, skilled staffing solutions to help employers quickly respond to market changes and demands.
In an effort to save on cost, better manage talent and regain control over their recruits, organizations have become increasingly more comfortable taking on some or all of the contingent worker engagement process for simple or frequent openings within their organizations.
The practice of engaging contingent workers directly is known as direct sourcing, and while it's true that direct sourcing can save organizations money, the opposite can also be true if the company doesn’t have the proper resources in place or a formal program to manage the process.
Making Direct Sourcing Work for You
According to the World Economic Forum there is a world-wide shortage of skilled workers which makes the process of sourcing and recruiting talent that much harder. Having a program in place that gives you immediate access to a pool of skilled, proven workers has many obvious benefits, not the least of which is a reduction in ongoing recruiting fees and shorter down-times.
Designing Your Own Direct Sourcing Program
The best direct sourcing programs usually complement other recruiting practices rather than replace them altogether. And programs can vary greatly based on the individual organization’s needs and available internal and external resources.
Below is an overview of the five big decisions companies must make when designing their own direct sourcing program, from the informal to the fully-developed:
Informal programs are usually managed by a hiring manager who sources contingent workers directly and often at a higher rate card than necessary. This can happen when the hiring manager has a particular candidate in mind and is more interested in quickly getting a resource in place, rather than opening the direct sourcing process to competition and potentially lowering the rate of pay for the selected contingent worker.
Most often, however, a direct sourcing program model will involve some kind of internal recruitment team, an applicant tracking system (ATS) to manage candidates and an approved rate card.
It’s important that whatever model you choose, there is some structure to it and discussion around the five big decisions. Otherwise your direct sourcing program may end up costing you more time and money than if you had continued to outsource to an external staffing vendor.
For all models, using a third-party service provider to manage the paperwork for your directly sourced contract workforce will help mitigate risk and make your job easier. A good provider:
• Will manage contract administration,
• Be knowledgeable in the latest payroll, benefits and employee/contractor status regulations,
• Can recommend process improvements,
• Ensure compliance and meet submission deadlines to government agencies.
If your organization is considering adding a direct sourcing program to your talent acquisition strategy or would like to learn more about complimenting your current model, download our free whitepaper: How to Optimize Costs with Directly Sourced Contractors
Contingent Workforce Management