During the course of my many years as an industry analyst, I’ve frequently come across organizations that point to the utilization of independent contractors (those “faceless workers” that are all around you but not on the org chart) as a critical strategy in fulfilling key corporate needs without resorting to hiring full-time equivalents. It’s a formidable way of thinking, of course; after all, after the recession of 2008 – 2009, there weren’t many companies that could rehire every FTE that they cut when times were tough. Independent contractors often comprise a variety of functional roles within the enterprise, ranging from marketing and sales to IT and accounting / finance.
Independent contractors (colloquially known as “ICs” ‘round these parts) may not be the most complex component of the contemporary contingent workforce umbrella, but they remain the area that presents the most risk. In fact, during any given week, a simple peek at the Google News results for “independent contractors” will turn up a case in which a mid-market company or large corporation faces a legal battle over lost overtime, benefits or financial breaks from ex-ICs.
And therein lies the problem with ICs. Easy to source? Check. Highest level talent? Check. Fulfill project-based needs across all enterprise functions? Check. Risk-free relationships? Nope. Leveraging workers paid via 1099 are not a hot new item; this practice has been in place within the average company for decades. The core issues of IC engagement and management revolve around the notion of compliance. What lies in wait for those organizations that improperly manage their IC workforce? Misclassification, co-employment, and the dreaded federal audit.
When leveraging ICs, an organization must treat these temporary workers as true non-employees. While avoiding the offering of benefits is a no-brainer to avoid misclassification or an audit, a better way of maintaining proper employer-IC relationships is to control the manner in which ICs interact with managers, supervisors and directors. Federal and state regulatory agencies will often deep-dive into specific relationship issues, such as whether or not ICs were subjected to monthly or yearly reviews from managers, as a foundation for a misclassification violation.
What’s at the end of the audit tunnel? Companies will often be liable to pay back taxes (both state and federal), as well as various financial woes, such as back Social Security withholding or worker’s compensation (the Microsoft misclassification case nearly twenty years ago is often the benchmark for the terrors of IC mismanagement).
All organizations can learn a thing or two from the procurement function in this regard. While it’s not a one-to-one series of strategies that procurement currently leverages that can be applied to IC management, the fact of the matter is that some simple procurement principles should provide some guidance in this arena, such as supply risk management, which often involves regular tracking and monitoring of various risks that could present an issue down the line, or even pure supplier management, which can take an unemotional approach to ICs and manage them as short-term service providers or suppliers. As we’ve learned from so many high-profile misclassification cases, it’s often the human element that pushes ICs out of a gray area and into a more dangerous one.
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