Mitigating Risks To Maximize The Advantages Of Your Contingent Workforce

INTRODUCTION

The "traditional" workplace as we once knew it is changing, and a key component of this evolution is the rise of the contingent workforce. Companies are continuously seeking innovative ways to cut costs, increase efficiency, and perform competitively, and the strategic use of contingent workers can be an effective tool in advancing these goals. Across the board, companies are increasing their use of contingent workers, which can include independent contractors, temporary workers, consultants, and interns. Indeed, according to a research study published by Oxford Economics, a whopping 83 percent of American companies say they are increasingly using contingent, intermittent, seasonal, or consultant workers.1 The changing nature of the workforce is forcing companies to learn to manage their workers in new and different ways. There are also risks associated with the use of contingent workers, including significant potential liability for worker misclassification. It is critical for companies to be aware of those risks, and knowledgeable about how to navigate them.

THE BENEFITS OF USING CONTINGENT WORKERS

There are myriad motivations driving companies' increased use of contingent workers. The most obvious benefit, of course, is that effective and appropriate use of contingent workers can provide significant cost savings—including employment tax savings, savings on unemployment and workers' compensation insurance, administrative savings, and savings on employee benefits (which are typically not provided to contingent workers). Using contingent workers also gives companies flexibility to better match the flow of work to the amounts they pay for that work, by using fewer contingent workers during periods of downtime. Ironically, these cost savings can provide additional job security to a company's permanent workforce.

Another benefit of using contingent workers is that with the increasing pool of highly skilled contractors and consultants, using contingent workers can allow companies to better match worker expertise with their specific, ever-changing business needs. Indeed, in recent years, there has been a meteoric rise in high-level executives and professionals leaving their permanent positions to become independent workers—and they are well compensated for the expertise they bring to the table.2 Benefits to workers can include the increased autonomy and flexibility of being an independent contractor or consultant, as well as the interesting, challenging, and dynamic work that project-based assignments can offer. In addition, for workers who are interested, excelling in a contingent position can sometimes lead to permanent employment.

POTENTIAL PITFALLS

Notwithstanding the significant benefits, the potential risks of using contingent workers cannot be overstated. The most significant potential risk in a contingent worker relationship is the potential liability associated with worker misclassification, which we discuss in detail below. Another important risk companies must manage is protecting their confidential, proprietary, and trade secret information. With contingent workers who perform work for a company before—or even while—doing work for someone else, it is especially important to take appropriate steps to ensure that any company information they may access is adequately protected. Using international contingent workers creates additional issues and risks involving international laws, immigration laws, tax laws and others.

Additionally, there are intangible drawbacks to using contingent workers, such as impacts on morale if permanent workers perceive that they are missing out on opportunities for interesting work or overtime due to the contingent workforce. Contingent workers can also feel disconnected from the traditional workforce and less personally invested in the company and its long-term goals.

MISCLASSIFICATION

Misclassifying workers as independent contractors or (unpaid) interns instead of employees—even if unintentional—can subject a company to enormous liability, including back taxes, penalties, and litigation costs and damages, among others. Independent contractor misclassification has been an area of particular focus for the Internal Revenue Service (IRS) and the Department of Labor (DOL) in recent years.3 Indeed, in 2011, as part of the DOL's "Misclassification Initiative," the agencies joined forces to combat worker misclassification.4 California recently enacted legislation authorizing the Labor and Workforce Development Agency (LWDA) or a state court to impose civil penalties ranging from $5,000 to $25,000 per violation for an employer's willful misclassification of independent contractors.5

Misclassification is also an increasingly active area for lawsuits filed by contingent workers, including putative class actions seeking employee benefits (such as the Vizcaino v. Microsoft "permatemp" case that resulted in a $97 million settlement) and damages for alleged wage and hour violations. Allegations of...