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Are you using the best payrolling model to manage your direct sourced contractors?

Aug 19, 2019

Every organization is responsible for managing the payroll of its employees and contract workers: tracking and reporting each employee’s wages, bonuses, and all deductions, as well as active support for the workers during the length of their assignment. And depending on the jurisdiction of where the company operates, there can be upwards of 20 different employment records to manage and comply with government regulations.

No matter the size of an organization, contract workforce payroll administration is a complex and time-consuming process involving many departments. Companies may choose to run their contingent worker contracting and payroll functions internally, with responsibility spread out over a variety of departments, from HR, to procurement and accounting/AP, but that isn’t always the most efficient way to go. Staying on top of the frequent changes to legislation can be problematic, and any oversights can result in non-compliance, which could lead to serious fines and reputational damage.

As organizations grow, and become more focused on compliance and spend management for their contingent workforce, they will typically shift from a ‘direct contractor payrolling model’ to a third-party payrolling model, either built around the selection of a dedicated supplier or through informal referrals to a variety of suppliers.

Differences in payrolling models based on contingent workforce management

Direct/No Payroller
This model involves the client company directly handling all aspects of the contractor engagement, onboarding and payment duties. Responsibilities are often spread across a variety of functional areas, ranging from human resources to procurement, contracting and accounting, and coordination responsibilities often are placed on the individual hiring manager that is sponsoring the engagement of a particular contingent worker. 

The company is responsible for managing all aspects of the payroll process, including the administration of tax and benefits forms, payroll deductions and submission to government agencies. This approach is often used by companies that prefer to manage the payroll process internally due to perceived cost savings over hiring an outsourced provider, or there is no structure in place to help manage contingent workforce costs, and address compliance or risk management issues specific to these types of workers.

There is a higher level of risk with this model since employee/contractor regulations and categorizations may change frequently. It can be difficult for busy HR personnel to stay up-to-date with current laws, particularly for companies with operations in multiple jurisdictions or those who employ exempt/non-exempt, seasonal, contract or part-time workers. Government non-compliance fines can be significant and unforgiving.


Informal/Semi-structured Payroll Referral Program
This model is often not an ‘official’ company mandate – instead it usually involves individual hiring managers referring the favoured contingent worker to an existing approved staffing vendor. This process unburdens the hiring manager from having to manage the contracting and payroll onboarding tasks internally.

Hiring managers typically select companies they have a good existing working relationship with, resulting in simplified onboarding that speeds up the contingent worker hiring process. The trusted vendor has also likely been onboarded through the company’s procurement process, and already has all necessary legal agreements in place and meets jurisdiction-specific compliance requirements such as valid business licenses, tax remittance capabilities, pay schedules, employee categories, or a particular aspect of payroll calculations (insurance, workers’ compensation, etc.).

Though this model is generally faster and easier for hiring managers, it is difficult for the company to track and manage its corporate spending of directly-sourced contingent labour. Likewise, the use of multiple staffing vendors results in legal and compliance inconsistency between contingent labour engagements, as well as service levels and individual worker management.  

The company typically does not use structured pricing models or pay rates. Additionally, using multiple vendors results in difficulty negotiating high-volume flat and/or preferred fees for the hiring process, resulting in the potential for abusive vendor pricing.


Single, Dedicated Payroller
This model involves a single outsourced service provider responsible for managing a company’s entire payroll record keeping process across all jurisdictions where that company employs personnel. It represents the company’s decision to treat contingent labour hiring and management as a corporate priority, and offers benefits around streamlining operations, enforcement of established spend approval processes, consistency in record keeping through a single vendor, and securing the lowest possible price for the service.

 It also lowers a company’s risk by incorporating a single point of accountability and audit for all of the compliance activities related to contingent worker onboarding and management, and decreases the likelihood of overlooked short-term, contract or seasonal workforce records and improper worker classification. This model can be especially advantageous for employers who may operate in multiple domestic or international jurisdictions.

Whichever model you choose to go with, it is crucial that you know the benefits and risks associated with each. There is no scenario that is completely risk free; whichever model your organization chooses to go with, it’s crucial to know the benefits and risks associated with each. Does your organization have a solid framework for identifying contingent worker risk? Download our free Checklist on CW risk factors:

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Mark Galloway
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Mark Galloway
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Related Insights

What is contractor payrolling?

Amid the rise of the gig economy, more and more organizations are turning to non-traditional workers to quickly and efficiently reach their corporate goals -- so much so that 40 per cent of the U.S. workforce alone is currently made up of contingent workers, with the number expected to rise to 50 per cent by 2050.  

Yet while gig workers are trending toward becoming the norm in most companies, a flexible workforce can open organizations up to a myriad of tax, financial, legal and branding risks not associated with traditional worker programs.

Fortunately, however, there are methods to help mitigate these risks, and organizations don’t have to face the threats that come with a contingent workforce alone.  

One of these methods is outsourcing employer responsibilities like contractor payrolling to a trusted vendor who will manage workers’ wages, bonuses, and deductions as well as provide support during the length of a worker’s assignment(s). The client partner will also identify and implement internal measures to protect organizations from serious risks like unforgiving fines, penalties and negative employer branding.

Contingent Workforce Management

Contractor payrolling models: Which is the best option to manage your organization’s contingent workforce?

In today’s competitive business climate, organizations need an agile workforce that can execute strategies and achieve corporate goals quickly and efficiently. Yet, employers must also be responsible for managing their workers’ wages, bonuses, and deductions as well as provide support during the length of a worker’s assignment(s).

It’s a complex, time consuming process, and staying on top of the frequent changes to legislation can be problematic. Any oversights will result in non-compliance, which could lead to serious fines and negative employer branding.

To stay compliant and competitive, growing organizations will typically shift from a ‘direct contractor payrolling model’ to a third-party payrolling model, either built around the selection of a dedicated supplier or through informal referrals to a variety of vendors.

But which model is the best option for bringing qualified talent quickly and cost effectively into your contingent workforce? Depending on your organization’s acquisition needs, below is a list of payrolling models to consider:


Direct/No Payroller
Risk level: High
Some organizations choose to run their contingent worker contracting and payroll functions internally, with responsibility spread out over a variety of departments-- from HR, to procurement to accounting/AP, but that isn’t always the most efficient approach.

This model involves the client company directly handling all aspects of their contractor's engagement, onboarding and payment duties, with coordination responsibilities often placed on the individual hiring manager that is engaging the contingent worker.

Who does the process work?
The client company is responsible for managing all aspects of the payroll process, including:

• The administration of tax and benefits forms
• Payroll deductions
• Submission to government agencies 

Why would organizations use a Direct/No Payroller model?
The organization may prefer to manage the payroll process internally due to perceived cost savings over hiring an outsourced provider.

There is a higher level of risk with this model since employee/contractor regulations and categorizations may change frequently. There is no structure in place to help manage contingent workforce costs or address compliance or risk management issues specific to these types of workers. It can be difficult for busy HR professionals to stay up-to-date with current laws, particularly for organizations with operations in multiple jurisdictions or those who employ exempt/non-exempt, seasonal, contract or part-time workers. Government non-compliance fines can be significant and unforgiving.


Informal/Semi-structured Payroll Referral Program
Risk Level: Moderate (Costly) 
This model is often not an ‘official’ company mandate – instead, it usually involves individual hiring managers referring the contingent worker to an existing approved staffing vendor. This process unburdens the hiring manager from having to manage the contracting and payroll onboarding tasks internally.

How does the process work?
Hiring managers typically select organizations they have an existing working relationship with, resulting in simplified onboarding that speeds up the hiring process.

Why would an organization use an Informal/Semi-structured Payroll Referral Program?
The trusted vendor has also likely been onboarded through the organization’s procurement process, and already has all necessary legal agreements in place and meets jurisdiction-specific compliance requirements, such as valid business licenses, tax remittance capabilities, pay schedules, employee categories or a particular aspect of payroll calculations (insurance, workers’ compensation, etc.).

Though this model is generally faster and easier for hiring managers, it’s difficult for the organization to track and manage its corporate spending of directly-sourced contingent labour. Likewise, the use of multiple staffing vendors results in legal and compliance inconsistency between contingent labour engagements as well as service levels and individual worker management.  

The organization typically doesn’t use structured pricing models or pay rates. Additionally, using multiple vendors results in difficulty negotiating high-volume flat and/or preferred fees for the hiring process, resulting in the potential for abusive vendor pricing.


Single, Dedicated Payroller
Risk Level: Low  
This model involves a single outsourced service provider responsible for managing n organization’s entire payroll record, keeping process across all jurisdictions where that company employs workers.

How does the process work?
It represents the company’s decision to treat contingent labour hiring and management as a corporate priority, and offers benefits around:

• Streamlining operations
• Enforcement of established spend approval processes
• Consistency in record keeping through a single vendor
• Securing the lowest possible price for the service 

Why would an organization use a Single, Dedicated Payroller? 
This model can be especially advantageous for employers who may operate in multiple domestic or international jurisdictions.

This model lowers an organization’s risk by incorporating a single point of accountability and audit for all of the compliance activities related to contingent worker onboarding and management and decreases the likelihood of overlooked short-term, contract or seasonal workforce records and worker misclassification.


There is no scenario that is completely risk free; whichever model your organization chooses to go with, it’s crucial to know the benefits and risks associated with each. Does your organization have a solid framework for identifying contingent worker risk? Download our free Checklist on CW risk factors:
DOWNLOAD WHITE PAPER

















Contingent Workforce Management

Managed Services Programs: Is an MSP right for me? Contingent workforce insights

The world of work continues to evolve – quicker than it ever has before – and competitive organizations are increasingly investing in the power of a contingent workforce to become more agile in these disruptive times. As employers everywhere are using more forms of contingent workers, it’s likely that your organization is also getting on board with the same transformation.

According to McKinsey, up to 30 per cent of an organization's workforce in the U.S. is made up of contingent workers, with employers having unprecedented access to a talent pool of 42 million of them. And while the rise of a flexible talent provides many benefits, it also leaves employers grappling with the hurdles of managing the many complexities that come with these types of workers. For answers, organizations committed to a more strategic approach to contingent talent management are turning to a Managed Services Program or Managed Services Provider (MSP) as an effective resource.

If you’re considering investing in a Managed Services Program or are interested in learning how an MSP can help optimize contingent workers to drive real business value across your organization, the following insights will help you make an informed decision.


What's an MSP?
Today, Managed Services is one of the fastest growing outsourced talent acquisition solutions, with Everest Research Group reporting that the global MSP market surged 10.1 per cent between 2015-2016, with experts predicting the solution to outpace global economic growth.


Why do organizations partner with an MSP? 
As tech and globalization continues to drive business strategies, it’s critical for employers to become more agile, and a contingent workforce is the widely-adopted answer to bridging skills gaps and driving both growth and innovation. At its most basic delivery level, an MSP will help an organization easily streamline and manage its entire contingent workforce program by improving efficiency, controlling costs and mitigating unforgiving fines, penalties and reputational damages associated with compliance risks. 

While early MSP models maintained a focus on process improvements and cost savings, more mature MSPs, however, are now seeking ways to increase access and delivery of high caliber talent while reducing time to hire. To do so through the use of technology stacks,  MSPs are leveraging direct sourcing solutions for greater access to talent pools and niche skills, sourcing alternative acquisition resources like Artificial Intelligence (AI) and other initiatives that increase savings while ensuring quality talent engagement and retention.  


Different types of MSP models
Typically, MSP programs fall into one of these models:

Vendor neutral: All MSP vendors have equal opportunity to fill a position within a specific time.
Master vendor: A Preferred or Master Vendor is given preference to fill a position first but must release the role to other vendors if they fail to find talent within a specific time.
Hybrid: This type of model will include elements of the first two programs. 


MSP drivers, MSP focus and benefits
For most organizations partnering with a Managed Services Provider, there are seven key drivers that are aligned with specific operational challenges. These drivers include:

1. Operational challenge: Minimizing risk of non-compliance
MSP focus: On/Offboarding with contingent workforce audits and rate compliance visibility.
Benefit: Improved compliance, including rate compliance and worker on/offboarding compliance; better worker classification audits to minimize co-employment risks.

2. Operational challenge: Controlling rogue costs related to spend
MSP focus: Cost control.
Benefit: Greater visibility into costs using vendor performance metrics to ensure effective negotiations and development of sourcing strategies.

3. Operational challenge: Drive for improved performance and cost efficiencies
MSP focus: Closer supplier management with access to benchmark rates.
Benefit: Increased contingent workforce quality and performance with reduced time-to-hire. This is a result of supplier base optimization and requisition optimization through hiring manager feedback on services and formal Service Level Agreements (SLAs).

4. Operational challenge: Sourcing hard to find talent
MSP focus: Developing new sourcing models.
Benefit: Support in implementing technology in conjunction with delivering process change.

5. Operational challenge: Speed of change and large ramp up of worker volumes
MSP focus: Agility to support peaks and troughs of contingent worker needs.
Benefit: Outsourcing the MSP program can be a more effective way to manage business cycles.

6. Operational challenge: An increase in complex operations
MSP focus: Souring optimization to support diverse needs.
Benefit: Scaling your contingent workforce program to new markets where internal knowledge may be limited.

7. Operational challenge: Managing VMS technology and integrations
MSP focus: Service and technology support.
Benefit: Significant operational changes can require a new solution as it remodels its blended workforce. An MSP will support these tech changes across the entire contingent workforce delivery.

Beyond these key drivers, competitive organizations are also turning to an MSP in order to build on their employer brand and leverage the use of predictive analytics to ensure a better contingent workforce program with access to niche skills.


Is an MSP right for me?
An MSP will require organizations to have a minimum amount of contingent worker spend in order for the program to be successful and self-sufficient. When deciding whether or not an MSP is the right solution for your organization’s needs, there are first some basic and more complex factors to consider. First, it’s critical to understand how much contingent workers are currently costing your organization. It’s a unique number to individual employers, yet can be difficult to account for, as nearly 60 per cent of contingent worker costs is unaccounted for in the average organization.  You’ll also want to know how current buying is being done for the various elements of your contingent workforce and what controls are in place to manage the current program.


Additional questions on your checklist should include:
• Has my contingent workforce program outgrown my current management strategy and are my needs become more complex?
• Am I securing contingent workers in the time frame I need to?
• Do I have clear visibility into contingent worker spend?
• Have recent policy changes made me concerned about compliance?
• Am I engaging more contingent workers now than I have in the past, and do I plan on securing more in the future.


The role of a trusted MSP partner
A trusted partner should be committed to advising on the best solutions available to meet an organization’s business goals and to delivering innovative services that transform how they acquire and manage talent. This is done by listening to an organization’s specific needs and tailoring a solution that delivers both short and long-term value across an entire contingent workforce program. 

Your MSP partner will also help manage and mitigate risks associated with operating a 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

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