What are the hidden risks of contingent workforces?

By

EY Global

Multidisciplinary professional services organization

4 minute read 26 Apr 2018
Related topics Tax Workforce Risk

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More companies are relying on the nontraditional workers of the gig economy. But are they ready to manage the potential obstacles?

Amid the rise of the gig economy, businesses are increasingly relying on nontraditional forms of labor such as seasonal and on-call workers, temps, freelancers and consultants. Such workers are trending toward becoming the majority in many companies. But behind the potential bottom-line benefits lurk a range of tax, brand, financial or legal risks.

Much of this growth has taken place with limited involvement of human resources, and few companies have established policies to ensure compliance with complex contingent workforce legislation.

“Not many companies are thinking about this in a systematic way,” says Anna Kahn, EY Global New Services Leader. “For those that are, there is no consistently applied guidance or operating procedures.”

Different sources place the number of contingent workers already working in large corporations at 20% to 35%, although there is little existing data about this group or how it is being managed. Meanwhile, these businesses may be more focused on other areas in the war for talent, including how to address key skill shortages and capitalize on an increasingly diverse and mobile labor pool.

The big trade-off

This new labor model offers a few benefits for workers. It opens up a broader range of work options and greater flexibility, particularly for those with family commitments. It could prove valuable to workers whose skills might not lend themselves to a career within one specific organization, or to older workers who are entering different life phases.

But critics say it is merely a way for companies to reduce their fixed labor costs, with workers trading a fixed salary and benefits for a freedom that brings much more uncertainty, requiring reforms to protect them. Indeed, US Senator Elizabeth Warren has proposed a new framework to “rethink the basic bargain for workers who produce much of the value” in the US economy.

Contingent workers in a coffee shop

For businesses, the contingent workforce brings manifold benefits. Acute skills shortages are driving many organizations to look at new ways they can source “best in class” talent. For example, many employers are looking for more flexibility to apply specialized labor to specialized tasks.

Legislation is also an important consideration. “Right now, the legislative environment in many countries makes it difficult for employers to use people on a contingent basis,” explains Tony Steadman, EY Americas Leader for Total Talent Supply Chain. “However, I think we are going to see new legislation coming through to make it easier to employ non-permanent staff [as well as providing protection to these workers].”

However, many corporations have little visibility with regard to how the contingent workforce is performing. Often, there are no easy answers to questions such as:

  • How long have contingent workers been on site?
  • What systems do they have access to?
  • Who is actually managing workers’ performance or their deliverables?
There is usually no consolidated view integrating internal and external talent. Different systems are looking at different processes and different talent pools.
Anna Kahn
EY Global New Services Leader

Different systems, without consolidation

Bifurcated talent management systems are part of the problem. Many organizations have a traditional human resources function that looks after talent acquisition and the management of direct hires, with technology that supports their workflow.

The contingent workforce, on the other hand, can be run by HR, finance, procurement or sometimes directly by the business, and each function has its own technologies and workflow.

“As a result, there is usually no consolidated view integrating internal and external talent. Different systems are looking at different processes and different talent pools,” says Kahn.

Although businesses avoid some fixed costs associated with traditional hires, Kahn points out that contingent workers can be expensive in the longer term. “The additional costs associated with going through an agency, for example, can amount to as much as 30% of a temporary worker’s annual salary,” she says. “When a business has thousands of contingent workers at any given time, we are talking about substantial sums.”

Also, many businesses need contingent workers to travel and work in multiple jurisdictions — in some cases where they may not have a legal entity. This poses tax issues around permanent establishment.

How to unlock more potential

The sheer scale and growth of the contingent workforce is causing organizations to focus on how best to utilize this resource. However, Steadman is concerned that most corporations are still dealing with it incrementally, by simply adding people to an existing contingent workforce, rather than looking forward to find new solutions.

“Companies are not gaining optimum value from contingent employees,” Steadman says. “Many lack the ability to match accurately their need for talent with the availability of talent.

“This, in turn, impacts their overall level of operational performance and their speed to market, and will directly impact their profitability because companies need to really understand labor costs — and labor’s ability to add value to the business.”

Steadman believes that over time more companies will move toward a total workforce approach that integrates direct hires and contingent workers in a consolidated operating model, with a common technology platform.

“We know that companies are at various stages on this journey,” he says. “This new talent paradigm will allow us to fill in the details — and help companies understand and manage this vital resource.”

Summary

Contingent workers are trending toward becoming the majority in companies, but behind the bottom-line benefits lurk a range of risks.

About this article

By

EY Global

Multidisciplinary professional services organization

Related topics Tax Workforce Risk