What happens when a job for life becomes a job for a day?
For decades, businesses have relied on the contingent workforce to backfill labor gaps, access specialist skills and meet short-term labor shortages. Until recently, however, it has operated as an adjunct to the traditional full-time workforce.
In the EY Contingent Workforce Study survey, US employers reported that contingent workers comprise, on average, 17% of their total workforce.1 This is consistent with various other estimates that place current proportions of contingent workers in the US workforce at anywhere from 16% to 40%. Although the definition of the contingent workforce, or gig economy, varies considerably, we can all agree that this is a substantial number — and that it’s growing fast. Research undertaken by Lawrence F. Katz of Harvard University and Alan B. Krueger of Princeton University indicates that, over the last 10 years, the number of workers employed in alternative work arrangements in the US has increased by more than 66%.2
The world is entering the fourth industrial revolution, a period of innovation and disruption that is upending business models and requiring organizations to rethink their workforce needs. In this context, the contingent workforce is expected to continue to emerge from the shadows and play a far more prominent role in the total workforce composition — turning many jobs for life into jobs for a day.
In doing so, it is important for both employers and workers to understand the implications — and to dispel the myths that could be stigmatizing the role that the contingent workforce can and will play in the future of business.
1 Is the gig economy a fleeting fad, or an enduring legacy?, EY, 2016.
2 Lawrence F. Katz and Alan B. Krueger, The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015, 29 March 2016. (Note: the contingent workforce is taken to be equivalent to employees in alternative employment arrangements.)
US employers reported that their organizations are, on average, made up to 17% of contingent workers.
Five employer myths about the contingent workforce
1. It is just another workforce fad
The nature of when, how and where we work is constantly evolving. Nine-to-five jobs and 40-hour weeks have given way to roles based on utilization and productivity. Cubicle farms have morphed into open-concept work environments and then, more recently, into mobile offices where workers can work from anywhere, anytime. Now, full-time employment is giving way to jobs on demand.
EY recently surveyed both major employers and contingent workers in the US on the topic of the contingent workforce, where 50 percent of organizations reported an increase in their use of gig workers over the last five years.
This is consistent with other research that suggests that the contingent workforce could grow to be as much as 50% of the entire workforce by 2020.3
Although there are many reasons why the size and use of the contingent workforce is on the rise, there are two that stand out: the global recession and rapid advances in technology. The 2008 global financial crisis, which spawned the worst economic downturn globally since the Great Depression of the 1930s, set in motion a wave of organizational cost-cutting to address revenue shortfalls and eroding margins. Among the largest casualties of these cost-cutting measures were workers. Between December 2007 and early 2010, the US shed approximately 8.7 million jobs.4 The US economy began creating jobs again in 2010. However, these new jobs often required skills that laid-off workers did not have.
This is, in large part, because rapid advances in new technology, when combined with migration of manufacturing and production to lower cost jurisdictions, made obsolete the more traditional manufacturing and other unskilled labor jobs upon which middle-class America had relied for decades. At the same time, technology has provided the tools for employers to reimagine their business models, creating something like the “digitization” of work.
In recent years, advances in automation, robotics, machine learning and artificial intelligence have, in some cases, made humans themselves obsolete. Organizations that are hiring want specialized skill sets to manage these new technologies. They are also breaking full-time roles into discrete tasks that they are increasingly looking for contingent workers to complete. The result is that as many as 47% of the total US employment is at high risk of being automated over the next decade or two.5
These trends and others mean that more than being a passing fad, the rise of the contingent workforce, and the disruption it represents, is here to stay.
3 Ardent Partners, The State of Contingent Workforce Management 2015-2016, 2015, © 2015 Ardent Partners Ltd.
4 “Chart Book: The Legacy of the Great Recession,” Center on Budget and Policy Priorities, http://www.cbpp.org/research/economy/chart-book-the-legacy-of-the-great-recession, 8 November 2016.
5 Carl Benedikt Frey and Michael A. Osborne, The Future of Employment: How Susceptible Are Jobs to Computerisation?, 17 September 2013. Accessed at http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf.
of all organizations surveyed reported making an increased use of contingent workers over the last five years.
The contingent workforce is not evolving at the same pace everywhere".
2. The contingent workforce is evolving at the same pace around the world
The contingent workforce is not evolving at the same pace everywhere. Some countries are embracing it more rapidly and comprehensively than others.
In the EY US Contingent Workforce Study survey, US employers reported that their contingent workforce comprises, on average, 17% of their organization. In the UK, the number of self-employed workers has grown 28% over the 10 years to 2016, against only 6% growth in UK employees in the same time period. There are similar stories of rapid growth in the self-employed workforce in the Netherlands, Belgium, France and even Australia. The rise of the gig economy is increasingly a global phenomenon.
However, the contingent workforce is not evolving at the same pace everywhere. Some countries are embracing it more rapidly and comprehensively than others.
According to the 2016 Contingent Workforce Index, New Zealand ranks the highest for contingent workforce engagement globally. Singapore, the Philippines, Israel and India follow closely behind.6 The US dropped in ranking from second in 2015 to sixth in 2016 largely because of higher labor costs.7 However, availability of workers in both the US and Canada (ranked seventh globally) is significantly higher than the majority of other countries, particularly in the Americas. In Europe, Middle East and Africa, the UK’s and Ireland’s talent pools and relatively moderate regulatory requirements make them among the most attractive options behind Israel for organizations looking for contingent workers.8
How the rise of the contingent workforce will progress country by country will depend largely on how governments, organizations and regulators balance availability and cost-efficiency with legislation and regulations to create a win-win work environment for employers and workers, while also considering the tax and legal implications associated with alternative work arrangements.
6 Contingent Workforce Index 2016 Global Analysis, ManpowerGroup ©2016.
3. Organizations hire contingent workers solely to avoid payroll taxes and benefits
Increasingly, organizations appear to be hiring contingent workers as a means to achieve cost efficiencies. In the EY US Contingent Workforce Study, 55% of employers we surveyed say that the main reason for using contingent workers is to avoid labor costs.
However, for roughly the same percentage of survey respondents (56%), the primary reason for hiring contingent workers is to complete projects requiring specific expertise beyond their existing workforce. For 42%, it’s to respond to seasonal workforce requirements. And for 16% it’s to improve the existing workforce culture and productivity. Ultimately, employers hire workers for a number of reasons other than to solely avoid payroll taxes and benefits.
Obviously, there are benefits to paying for talent on an as-needed basis. But there are also tax- and classification-related risks that organizations need to be mindful of.
Typically, organizations in the US don’t have to pay employment taxes on a 1099-classifiedi contingent worker. However, if a local, state or federal government, or IRS (US Internal Revenue Service) determines that the contingent worker is, in fact, a full-time employee, the financial risks can be substantial. In January 2016, three subsidiaries of a global supply chain company were sued in California for misclassifying drivers as contractors. In May 2016, a class-action lawsuit was filed on behalf of the drivers of a ride sharing company in Florida and Illinois to reclassify them as employees in order to recover tips. Similarly, in November 2015, drivers of a ride sharing company in the UK filed an employee misclassification claim that seeks to change their status so that they are employees of the company. More recently, in February 2016, UK drivers of a transportation company sued the company for workers’ rights and compensation for lost earnings. The previous year, in July 2015, a cleaning services company was forced to shut down its operations amid a lawsuit over worker misclassification.
Red flags that the government or the IRS will look for in determining whether an individual is a contingent worker or a full-time employee may include: how the contingent worker is paid; what levels of access the worker has to internal systems; how the worker is embedded into a team; and whether the worker is enrolled in any reward and recognition programs.
Although avoiding payroll taxes and benefits may be a by-product of hiring contingent workers, it is rarely an organization’s sole strategic driver for using the contingent workforce — nor should it be.
i As defined by the US Inland Revenue Service, a 1099 job is a job that is performed by a self-employed contractor or business owner as opposed to one of your employees.
of employers surveyed use contingent workers to complete projects requiring specific expertise / capability beyond their existing workforce.
4. Contingent workers compromise the cultural fabric of an organization
of employers surveyed believe that existing employees benefit from skills transfer from contingent workers.
In the EY US Contingent Workforce Study, employers raised a concern relating to the impact of contingent workers on the culture of the existing workforce. One in five employer survey respondents indicate that they see a negative impact of contingent workers on the culture of the existing workforce. Respondents also raised questions over whether using contingent workers impedes the skills development of the existing workforce, with 37% suggesting it does.
On the flip side, however, almost one-third of respondents see contingent workers as having a positive impact on their full-time employees. Half of respondents suggest that using contingent workers can be a good way to overcome resistance to change within a legacy workforce; 43% say that existing workforces benefit from skills transfer from contingent workers; and 36% acknowledge that contingent workers are the workforce of the future. In addition, 16% say their main reason for using contingent workers is, in fact, to improve the existing workforce culture and productivity.
Although 37% of organizations say they lack the confidence in their ability to address the impact of contingent workers on organizational culture, they need to try, particularly as the benefits and opportunities that contingent workers offer to the full-time workforce often will outweigh the risks of compromising the existing culture.
5. Regulations will kill the contingent workforce
According to the EY US Contingent Workforce Study, 44% of organizations expect more regulation in relation to contingent workers. However, it is not so much an increase in regulations that could impede the growth of the contingent workforce, but organizations’ ability to implement policies and procedures to remain compliant.
Currently, many human resource departments have a poor grasp of the issues and risks relating to the contingent workforce. As a result, they have not yet implemented the programs and policies necessary to adhere to even existing, let alone new, workforce regulations.
Awareness of the risks is key not only to address compliance issues and avoid unexpected liabilities and costs, but also to facilitate the growth of a workforce demographic that organizations arguably see as the workforce of the future.
of organizations expect more regulation in relation to contingent workers.
Five myths of the contingent worker
1. Contingent workers cannot find full-time work
There is often a perception among employers and permanent employees alike that the only reason contingent workers are not in a full-time role is because they cannot find one. However, evidence from the EY US Contingent Workforce Study suggests otherwise.
More than half of the contingent workers we surveyed see contingent working as how they want to progress their career. In fact, 52% would not prefer full-time employment. Interestingly, this shows a slight increase from previous Cornell research conducted two decades ago, which found that 40% of temporary workers prefer non-permanent employment status.9
Only 20% of respondents indicate that they were doing contingent work because there were no suitable full-time positions currently available.
9 This article cites a 1997 Cornell study called Contract Workers: How Do They Feel About Their Deal?: Darryl Geddes, “Forty percent of temporary workers prefer nonpermanent employment status, Cornell University study concludes,” Cornell Chronicle, http://www.news.cornell.edu/stories/1997/10/forty-percent-temporary-workers-prefer-nonpermanent-employment-status-cornell, 27 October 1997.
would not prefer full-time employment.
2. Contingent workers are often new to the workforce and have never had the experience of being a permanent employee
say they have been in permanent roles in the past.
Again, the given perception of the contingent workforce is that it primarily comprises fresh-faced workers with little experience who have never worked within an organizational environment on a full-time basis.
In fact, a quick look at the demographics of our survey suggest that 65% of respondents were 35 years of age or older. If we look across the entire pool of survey respondents, 84% say they have been in permanent roles in the past. As for why they are opting for contract or contingent work now, 41% say it is because they prefer the flexibility of not being a permanent employee, 33% like to be able to work from home, and 22% indicate that they can earn more through contingent working.
As baby boomers continue to reach retirement age, many who are forced to retire at the age of 65 will choose to continue working on a contingent basis. For the boomer, contingent work offers an opportunity to transition smoothly from the full-time work environment they have known for decades, to the leisure of retirement. Boomers also provide younger workers with an opportunity to benefit from the valuable knowledge they have gathered over their careers.
3. Contingent workers prize flexibility and do not care about a lack of benefits or vacation time
According to our survey, flexibility is the number-one reason contingent workers elect contingent work over full-time employment. However, they are also acutely aware of the drawbacks of this arrangement: 22% ranked job uncertainty as the number one drawback of contingent work; 18% cited a lack of paid vacation; and 16% worried about a lack of health care benefits.
For some contingent workers, such as independent contractors and traditional agency staff, the opportunity for higher labor rates may offset the risk of fewer benefits. That said, almost 70% of contingent workers in the EY Contingent Workforce Study indicate that they would like to get more options on health care and pensions.
However, 66% of respondents believe that the benefits of contingent working always or most of the time outweigh the drawbacks. Only 6% thought it rarely or never does.
of respondents believe that the benefits of contingent working most of the time or always outweigh the drawbacks.
4. Contingent workers don’t care about growing their careers
A third of contingent workers choose to take training into their own hands.
Apart from a lack of benefits, one of the issues contingent workers have about alternate work arrangements is the limit in their ability to grow and develop their skills. This is made all the more difficult considering that one in five workers doesn’t receive any training at all, and fewer than one in two receives training from their employer.
This may be why almost one third of contingent workers choose to take training into their own hands, sourcing and attending training provided by an outside entity.
Training is a key component of developing and maintaining a high-quality talent pool. Technology and innovation are moving faster than education systems can develop programs to adequately prepare the workers of the future. As such, whether a worker is employed on a contingent or full-time basis, it is increasingly to an employer’s benefit to provide more robust training, more frequently, to their entire workforce.
5. Contingent workers don’t need to be engaged and connected to the organization
This may be one of the biggest myths of all. According to the EY Contingent Workforce Study, four in 10 contingent workers feel like outsiders compared to the permanent workers of the organization where they are based. Contingent workers who have been working for a shorter period of time, usually fewer than two years, are more likely to feel like an outsider (52%), as are those who have taken on contingent work because they have to rather than because they want to (54%).
On a positive note, 46% of contingent workers do report feeling like part of the team. This jumps to 57% among 18- to 24-year olds.
Interestingly, full-time workers can feel like outsiders too. Our study also revealed that almost half of full-time employees are more likely to feel like outsiders too.
Of the contingent workers we surveyed, two-thirds say they would work differently if they were a permanent worker, with one third indicating they would invest more into a future plan with the organization and a quarter suggesting they would go the extra mile.
of contingent workers do report feeling like part of the team.
Increasingly, organizations appear to be hiring contingent workers as a means to achieve cost efficiencies.”
The reality is that the contingent workforce has to work for everyone
Disruption is fundamentally altering how the world works. As shifting demographics, consumer demands and disruptive technologies continue to alter the business landscape, organizations have to shift their legacy workforce model to one that equitably balances traditional permanent employees with contingent workers, innovation and automation with human interaction and collaboration, and efficiency with fairness.
Organizations cannot choose one at the expense of the other, without both raising the specter of regulatory intervention and economic collapse.
The future of work includes a contingent workforce. It is time to dispel the myths that it raises and focus on how to make the proliferation of contingent work a win-win for everyone.