Argentus Search Stories: How to Avoid Risk in Contingent Staffing

March 23, 2016

 

Misclassification

As the workforce evolves and becomes nimbler, many companies are utilizing the high-skilled contingent workforce for change management and strategic business projects. More and more business leaders are hiring high-skilled contractors using their functions’ budgets to hire quickly, with fixed term contracts – allowing them to gain strategic advantages in areas such as Supply Chain and Procurement while avoiding the high costs of permanent hiring and onboarding. As we wrote about last week, a major Deloitte survey found that 42% of executives plan to increase or significantly increase the use of contingent workers over the next three to five years.  

The world of work is changing.

But there’s one related issue we wanted to draw attention to today, one that opens companies up to tremendous amounts of risk when hiring contingent staff. It’s an issue we’ve written about before that’s rearing its head again in the world of contingent staffing:

Employee Misclassification.

What is employee misclassification? The rise of a wave of high-skilled professionals working on contract (what Deloitte calls “the gig economy”) has led to an expanding gray area about the difference between a contractor and a permanent employee. U.S. case law has provided some clarification on this topic, but areas of interpretation persist. Basically, a contractor is performing fairly self-directed work in a consultative capacity, with a fixed end date. A contractor might use their own resources (equipment, etc.) to perform the work. A permanent employee is performing highly-directed work, indefinitely, on the company’s payroll.

Companies open themselves up to risk when they classify workers who fit the profile of perm employees as contractors. And this might mean huge financial penalties.  

A U.S. Court of Appeals decision in 2013 ruled that agreements between companies and employees stating that the employee is a contractor are not enough to avoid the risk of employee misclassification. What matters is the substantive nature of the employee’s relationship to their employer. A huge factor when it comes to establishing that a contractor is a contractor – and avoiding financial penalties — is the payroll question: is the contractor payrolled by the company or by a third party?

Here’s where the story comes in.

Out of the blue, Argentus President Bronwen Hann was approached by a long-term contact who heads up the Supply Chain function for a major multinational Consumer Goods company in Canada. “This individual contacted us because he knew we do contingent as well as direct hire,” she says. “He wanted to have a discussion with us, and in the discussion he said his company’s Supply Chain function had a number of contractors directly on their payroll. These were trusted individuals who were well-known in terms of their skill base, brought in to work on a variety of projects related to change management initiatives.”

“My contact had worked with these individuals before at another multinational company, and had maintained those relationships. So he brought them in. The issue was, HR didn’t realize it was a misclassification problem for these contractors to be payrolled directly by the company. When the contractors started having inquiries from workplace insurance and the Canada Revenue Agency, they sought a 3rd-party option to payroll these contractors and avoid the risk of employee misclassification.”

Companies don’t want to put themselves in the position where they’re leaving their flanks vulnerable by payrolling contingent staff directly,” she says. “The best way to deal with that is to payroll them through a third party, which is why they came to us. It’s great to see companies moving into contingent staffing for Supply Chain and Procurement. But it’s only a matter of time before the Canada Revenue Agency will lower the boom on companies who misclassify contingent workers by payrolling them directly. In IT or Engineering, it’s unheard of that companies would hire contractors on their payroll – but in finance, Procurement, and Supply Chain, many business leaders don’t recognize the risk of employee misclassification because contingent staffing isn’t as mature in these areas.”

Suffice it to say, Argentus was able to bring these contractors onto our payroll, helping the organization avoid the misclassification risk.

To us, the most telling thing about this story is that this risk exposure happened at a multinational company – not a small organization – indicating that companies, no matter how sophisticated, still might have more to learn when it comes to utilizing this booming method of staffing for Supply Chain and Procurement.

Want to learn more? Reach out to Argentus at 416 364 9919. We’ll be happy to help discuss how you can mitigate risk in your contingent staffing initiatives. logo_icon

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