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What is contractor payrolling?

Nov 07, 2019

Mark Galloway
Mark Galloway

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.

What exactly is contractor payrolling?

Contractor payrolling is the process by which an organization manages engagements for contingent workers that the organization has itself sourced directly. It goes by a number of names, such as payrolls, directly sourced contractors, contract administration and flow throughs. 
Type-of-Payrolling-ProgramsBefore your organization decides on a payroll model that’s the best option for bringing qualified talent quickly and cost effectively into your contingent workforce, below is a list of critical considerations that will help form an insightful decision:

Who is doing your payrolling now?

Any assessment should start with identifying who is managing your payrolling today.  Is your organization running an internal program, outsourced to a single vendor or an adhoc program where multiple firms could be handing your contingent worker payrolls?  Once your provider is known, it’s important to evaluate their processes, documenting key points – like onboarding, worker classification and incident management- are they well covered?

What is the contractor experience like?

Review the contractor’s experience with your current payrolling model. Is this experience good? Are workers being paid on time and satisfied?  Are you experiencing high turnover? Is it easy to submit time sheets and expenses or has the organization received complaints? Is the contractor experience compatible with your hiring brand? In today’s competitive gig economy, providing a great candidate experience is essential. 

Is your program architecture open or closed? 

Can a vendor support all legal statuses, engagement types and job types (open architecture) or not (closed architecture)?

Who handles issue management?

It doesn’t happen often, but workplace problems or incidents do happen, and there are frequently special considerations and compliance requirements when a contingent worker is involved. As part of assessing your program, it’s important to determine who is responsible for issue management for your contingent workforce, especially for issues that have HR/contract and potential litigation consequences. Is there a process in place for recognizing and addressing these issues?  What is the chain of command for escalations or decision making?  If you’re using a third-party payroll provider, are they fully engaged, as to protect the integrity of the intended contractual relationships?  

Is there a process in place to manage misclassification and non-compliance?

Classification is a critical step in contingent worker programs that relates to ensuring contingent workers are onboarded appropriately in the context of their worker status, overtime eligibility, workplace safety requirements and other important engagement management factors.  Classification is 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 consequences. To stay compliant and competitive, growing organizations will typically shift from a ‘direct contractor payrolling model’ to a third-party payrolling model, built around the selection of a dedicated supplier with established and verifiable procedures. 

Does your rate card have integrity?  

Most contingent worker programs use rate cards as a tool to control spending and evaluate program efficiency. This is great in theory, but in practice, it’s only as effective as the quality of an organization’s process for ensuring that contingent workers are assigned to the correct job categories.  Incorrect categorization – whether intentional or accidental – will negatively impact a rate card’s integrity and reported numbers like savings. 

Procom’s data estimates that over 80 per cent of programs suffer from rate card leakage to some degree, resulting from category expansion (an intermediate worker being moved to a ‘senior’ rate card bracket), category shifting (a business analyst being placed as a business systems analyst) or the frequent practice of categorizing workers to exception categories that are excluded from rate card analysis.  

Controlling rate card leakage starts with proper categorization of contingent workers based on their resume credentials, interview assessment and prior work experience.  Improper categorization typically drives 6-13 per cent in additional rate expenses. This makes having a solid plan for position categorization a critical element in the overall framework of contingent workforce program spending controls.

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. 

Does your organization have a solid framework for identifying contingent worker risk? Download our free Checklist on CW risk factors: 


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