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What Are Contingent Workers?
Contingent workers, sometimes called gig workers, are typically hired on a project, role or seasonal basis instead of as regular employees. This alternative work arrangement offers flexibility both to workers and companies and has many other benefits. As of this writing, it is estimated that 25-30% of the US workforce is made up of contingent workers, with more companies adopting this model each year.
Contingent Worker vs Employee
A contingent worker is not an employee of a company and is hired on a temporary or project basis to complete certain tasks. Sometimes contingent workers are hired through a staffing agency (temps); others may contract directly with the company (freelancers). Companies don’t usually pay employee payroll taxes for contingent workers, nor do they offer benefits.
Employees, on the other hand, are typically hired on a full-time or part-time basis and earn a wage and benefits. The company pays employee payroll taxes for employees. There is an expectation of an ongoing relationship with most employee-employer arrangements.
Types of Contingent Workers
Contingent workers can be independent contractors, freelancers, temporary workers, and other types of non-employee workers. Sometimes the terms are used interchangeably since there is considerable overlap in these broad definitions. Let’s explore three of the most common types.
Independent contractors often perform services for multiple clients in a specialized area of talent. They typically work on a project basis, using an agreement (or scope of work) that outlines the work to be performed. They likely provide their own tools and equipment to perform the work and complete the work on their own schedule. They may even establish their own company and hire others to perform services for them. Independent contractors are responsible for the payment of their own self-employment payroll taxes.
Freelancers also typically work on a project basis for client companies. Sometimes employees in one company may work on the side as a freelancer for others. For example, a graphic designer can work on their own time to use their talents to benefit other companies who don’t need a full-time graphic design expert. More recently, internet-based companies are bringing together freelancers with companies that have projects that need to be done. Freelancers are usually paid as non-employees and are responsible for self-employment taxes.
Staffing agencies find and place workers with companies for a specified period of time or during a busy season. While some of these temporary workers may be hired permanently at the end of their temporary assignment, many temporary workers like the flexibility of choosing assignments they want to do without a long-term commitment. Temporary workers are usually paid as employees of the staffing agency that places them, so they don’t have the self-employment obligations that other types of contingent workers have.
Other Contingent Workers
Other terms for contingent workers include gig worker, outsourced worker, and consultant. The main characteristics of any contingent worker are the nature of the employment relationship (usually non-employee) and permanence of the employment relationship (temporary).
Should a Company Hire Contingent Workers?
The advantages of hiring contingent workers, especially in a tight labor market, are significant. There are also drawbacks to consider.
Advantages of Hiring Contingent Workers
- Flexibility. An external workforce can be very helpful for companies that need to ramp up or down their employee base quickly due to economic conditions or seasonality of work. This also results in increased job security for regular employees, who don’t have to be downsized when business needs change because the elasticity of the contingent workforce protects them from these types of fluctuations.
- Cost. Being able to hire talent on an as-needed basis can be very cost-effective. Besides the flexibility of reducing labor costs when business fluctuations occur, companies benefit from having specialized talent on demand rather than paying for this expertise year-round. For example, an in-house attorney will require a competitive annual salary and benefits, while a contract attorney who assists as needed will be paid only for services performed.
- Reduced administrative burdens. The time and costs involved in recruiting, hiring, training, and managing regular employees is greatly reduced by using contingent workers, who may only need short-term, job-specific training and little administration.
- Speed. Sourcing and hiring employees takes time, and sometimes the need for critical talent is immediate. By using contingent workers, employers can move quickly to fill their openings.
- Unique skills. Contingent workers may have hard-to-find skills that businesses need. Hiring for these skills takes time and maybe more expensive than finding someone who works independently. Even if the long-term plan for a company is to bring this talent inside the organization, contingent workers can fill the gap until the positions can be filled internally.
Disadvantages of Hiring Contingent Workers
- Management. Many contingent workers aren’t given the same onboarding orientation and training as regular employees and may need more management as they get started. Some managers are hesitant to trust non-employees and may micro-manage their work until they are confident they can do the job. This can divert time and resources away from other important priorities.
- Control. The very nature of some contingent work is flexibility in where and how work is to be done. This can be uncomfortable for managers who want to be more hands-on with their team members. Trusting outsiders to do a job well takes great communication and follow-up skills that managers may need to learn.
- Misclassification. The IRS and Department of Labor have guidelines to help classify workers as employees or non-employee contractors. Companies who bypass these guidelines and/or misclassify employees as non-employees may face costly legal penalties.
- Commitment and loyalty. Contingent workers don’t have a long-term commitment to the company for whom they are performing services, nor is there an expectation of loyalty to the company.
- Confidentiality of company information. Depending on the nature of the contingent worker’s position, they may have access to confidential company information that can be shared with others outside the company.
- Overdependence. Companies may come to depend on the unique skills of certain contingent workers and then lose them to other projects. Striking a balance between in-house talent and external talent can be challenging.
- Integration and teamwork. Employees tend to integrate within the company and develop friendships with co-workers more than contingent workers, who don’t anticipate working for the company very long. This may translate into better teamwork amongst employees and lessened teamwork with contingent workers.
What Are the Advantages and Disadvantages for Being Contingent Workers?
As with any employment relationship, contingent workers also enjoy certain benefits and drawbacks of this type of work arrangement.
Advantages of Being a Contingent Worker
- Flexibility. Many people like the freedom that contingent work allows them. They aren’t stuck in a job they don’t like, and they can often create a livelihood doing what they love. They can also work according to a schedule that fits their preferred lifestyle. This is especially attractive for people juggling childcare or eldercare responsibilities and for those preparing for retirement, but who aren’t ready to stop working altogether.
- Variety. Contingent workers often enjoy the variety of projects and associations that this type of work allows.
- Skill development. Some contingent workers learn or improve skills that help them become more marketable when they are ready to seek regular employment.
- Resume and network builder. The contingent worker can enhance their resume with work experiences and network within the companies where they work to increase their capacity to find regular employment.
Disadvantages of Being a Contingent Worker
- Money. While some professional-level contingent workers may become financially successful doing contract work, many contingent workers don’t earn as much as they would if working full time.
- Benefits. Most contingent workers don’t qualify for company benefits, such as paid time off, 401k and profit-sharing plans, health plans, and other perks regular employees enjoy.
- Security. Many contingent workers need to hustle their next assignment and don’t have the security of a regular paycheck.
- Self-employment. Many contingent workers are responsible for paying their own self-employment taxes. Understanding and complying with these obligations can be challenging, especially for those who don’t have much of an accounting background. They either need to hire someone to help them or hope they are doing it correctly themselves, which could result in owing money at tax time and tax penalties.
Classification Factors for a Contingent Worker
Many employers like the convenience of paying their contingent workers as non-employees. They avoid a lot of paperwork, such as I-9 and W2 forms, and save money on payroll taxes. However, many factors are involved when determining if someone must be paid as an employee. Misclassification can be costly for employers, so understanding how to classify contingent workers is essential. Let’s examine some of the tests that should be used to make this determination. Keep in mind that satisfying the requirements of one law or agency may not be adequate for another, so care must be taken to comply with each.
Fair Labor Standards Act
Under the Fair Labor Standards Act, the employment relationship is defined by certain factors, such as the amount of control exercised by the employer and the contractor’s opportunity for profit and loss. Refer to Fact Sheet 13 for a complete list of the factors employers need to consider.
Internal Revenue Service
The IRS also looks at 11 factors in the areas of behavioral control, financial control and type of relationship. Refer to publication 15a for more information.
Some states, including California, have their own guidelines to determine classification status. Each state’s workers’ compensation laws are also important to understand. Employers should contact their state’s labor department for more information.
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Carol Eliason Nibley, SPHR, GPHR and Principal Consultant at PeopleServe, has more than 25 years of experience in human resources, most recently serving as Vice President of Human Resources for a technology company in Utah County. Carol has taught HR certificate courses at Mountainland Technical College and in other settings for more than 12 years.
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