Identifying areas of risk in a contingent workforce program - U.S.
Contingent Workforce Management
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Sep 02, 2019
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Sep 02, 2019
The Canadian gig economy is growing at an extraordinary rate and shows no signs of slowing down.
Yet, engaging contingent talent is risky business. As an organization’s use of contingent workers increases, so too, do the risks associated with temporary talent, yet risk is one of the most talked about, but least understood areas in contingent workforce management. Building a framework for effective risk management requires solid cooperation between an organization’s HR, legal and procurement teams, along with training and support for individual hiring managers.
However, effective risk management starts with a shared language about each risk an organization faces when engaging contingent workers. Procom has identified seven broad risk categories organizations must be aware of when engaging and operating a contingent workforce:
1. Worker misclassification
Misclassification happens when an organization incorrectly identifies the relationship that exists between them and the contingent worker. This serious mistake can result in hefty penalties for the company and back payments to the worker. Most organizations focus on independent contractor classification; however, there are other important classification influencers, such as overtime eligibility (Provincial Employment Standards Act) and position classification for workers’ compensation insurance (WSIB/WCB/CNESST).
• Independent contractor
• Overtime eligibility classification
• Workers’ compensation classification
While classification is primarily an onboarding 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.
2. Criminal behavior
The temporary nature and fast pace of contingent labour makes it vulnerable to abuses and unethical behaviour. Typical attacks centre on frauds or kickbacks that compromise the integrity of the candidate selection process, and/or financial frauds that target the organization's invoice payment process.
• Resume fraud
• Reference fraud
• Financial fraud
• Identity fraud
3. Counterparty risks
An organization’s overall strategy for contingent labour often includes a network of direct and indirect suppliers. This can result in 2nd and 3rd level counterparty risks that are unseen in traditional employee/employer relationships.
Procom defines counterparty risk as: solvency risk, inherited liability from weak operational controls, and vicarious liability from poor compliance with labour laws.
Counterparty risk can be difficult to identify. It’s often viewed as an extension of all of the other risk categories except the company is vulnerable to the actions and governance habits of its counterparties. As a result, the company is indirectly responsible when the counterparty's safeguards break down.
• Liability for unpaid/improperly paid wages or payroll taxes
• Risks due to financial solvency of supplier
• Vicarious liability for prohibited employer practices and/or improperly executed HR processes (improper termination, discrimination, etc.)
• Shoddy operational practices (unenforceable contract agreement templates, incomplete records, unlawful background checks, etc.)
• Improper management of mandatory workplace certifications (expired/revoked professional licenses, safety certificates, etc.)
• Expired or invalid insurance requirements (workers’ compensation, liability, etc.)
4. Employer standards compliance
This risk arises when an organization is assessed based on its failure to comply with employment standards obligations. If the organization is deemed to be either a direct employer or joint employer for its contingent worker(s), fines and other penalties can and often do apply.
Specific compliance obligations vary across Canada’s 14 jurisdictions, but payroll tax compliance, overtime compliance and liability for termination pay are all hot button issues that require special attention. This is especially true following a recent trend under several provinces to establish a ‘joint employer’ obligation between staffing agencies and their clients.
All organizations manage these issues with their own employees, yet this context refers specifically to the vicarious liability an organization has to its contingent workforce, or liability from problematic interactions between its employee and contingent worker.
• Wage and hour claims
• Workplace discrimination or harassment
• Protected leaves
• Workplace safety compliance/violations
• Improper background checks
• Wrongful discharge/termination
• Reclassification liability
• Foreign Worker visa compliance (Citizenship &
• Immigration Canada)
• Statutory holidays/vacation pay calculations
• Employer tax remittances (income taxes, entitlement
program remittances, etc.)
5. Code of conduct
On-assignment conduct refers to damages arising from the conduct of internal managers, or the conduct of the contingent workers themselves while on assignment. Code of conduct issues are especially sensitive, as the incorrect actions of business managers could expose the organization to risks that fall under other topics, such as misclassification or employer of record obligations.
Given this dynamic, it is critical for organizations to have clear training, operational processes and escalation methods to address these types of issues when they arise (or engage a vendor with sound practices to do so on their behalf).
• Workplace injuries. Who is responsible? Who pays? Were health and safety policies followed?
• Workplace accidents/damages. Who is responsible? Who pays? What are the insurance considerations?
• Contractor performance problems. Best way to address incidents of poor performance by contractors.
• Assignment disputes. Who resolves assignment disputes, including scoping, resourcing and deliverables issues?
6. Financial irregularities
The repetitive, high transaction volume of most contingent labour relationships makes it vulnerable to any financial irregularities. These can include accidental duplicate invoicing mistakes or more calculated invoice inflation or over billing schemes.
An organization’s regular financial controls play an important role in risk management. When it comes to contingent labour, monitoring the many influences can be challenging and requires specialized skills for effective management.
• Duplicate invoicing
• Timesheet/invoice inflation
• Early deliverables billing
• Expense claim inflation
• Rate card compliance/job description inflation
• Purchase order/end date enforcement
Co-employment risk is the term used to refer to situations where two or more organizations exert some level of control over a worker, and are therefore are considered to have employer obligations toward the employee. Co-employment risk can often exist when organizations use staff that are provided by third parties.
This concept is captured under the legal term of ‘Joint Employer’ and can arise under a variety of situations, including misclassification/reclassification of the legal relationship to an independent contractor, as well situations involving the assigned personnel (employees) of a temporary help or staffing agency where the client controls significant aspects of their work.
Potential obligations that arise under a co-employment situation could include statutory remittances (such as income tax), responsibility for workplace safety obligations, payment of employee entitlements (such as sick pay, vacation pay and/or overtime), as well as termination compensation and other items.
Specific risk drivers of incurring co-employment liability depend on the facts of a given worker relationship, evaluated in the context of applicable provincial and/or federal legislation. Some provinces, such as Ontario, explicitly provide for Joint Employer obligations under their provincial employment standards legislation, formalizing the obligation end client organizations owe to any assignment employees working.
A properly managed contingent workforce program can protect organizations against many risks across all categories of a contingent workforce and the recent challenges presented by increased scrutiny of worker classification.
Learn more about how you can protect your organization from misclassification penalties with our introduction into understanding classification and your contingent workforce:
Contingent Workforce Management
Contingent Workforce Management
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