Contingent worker classification and risk: getting it right when hiring at scale

In recent years, the use of contingent labour has increased rapidly as talent acquisition professionals have realised the benefits and agility that comes with tapping into non-permanent talent pools – and the recent pandemic has only accelerated this trend.

According to Deloitte, some large companies now estimate that 30% of their entire procurement budget is spent on talent. However, knowing how and where these individuals sit within your wider workforce - and the associated regulatory requirements - is absolutely vital.

While the rise of the gig-economy has made headlines recently, so too have some high-profile examples of businesses that have got contingent worker classification wrong. In February 2021, Uber was forced to change the status of its 70,000 UK drivers following a Supreme court ruling that its drivers were workers and not self-employed contractors.

So, how do you get contingent worker classification right when you’re hiring at scale?

Today’s talent mix

Today, businesses rely on a mix of agency workers, personal service company (PSC) contractors, sole-trader freelancers, and statement of work arrangements to ensure they have access to the right skills at the right time. According to official figures, the number of temporary employees in the UK increased by 4.9% year-on-year during the three months to May 2021, with 1.57 million people now belonging to this group. Numbers of self-employed workers and limited company registrations are also up.

In response to Covid-19 and subsequent restrictions, many organisations have had to become more agile than ever before by:

• developing capabilities in specific business areas
• expanding and contracting workforces at short notice, and
• bringing on board niche skill sets for specialised (and often unforeseen) projects.

This has all played out against an already chaotic backdrop, with rapid technological advancements, recent changes to IR35 in the private sector, and the shrinking availability of migrant workers all disrupting the status quo.

It’s no surprise that even large organisations are fighting to get to grips with contingent worker classification. And amid the ‘great rehire’ - when businesses are scrambling for skills in a talent-scarce market - there is an even greater risk that workers are misclassified as organisations struggle to rapidly secure, onboard and manage a high volume of talent.

Why contingent worker classification matters

The legal classification of workers can be complicated, and there are risks associated with each category regardless of whether the responsibility lies with HR or procurement. Robust processes must be put in place, for example, to examine if the role an individual is being asked to carry out falls inside IR35, and therefore makes them an employee for tax purposes.

It is also worth noting that tribunals and courts now place greater emphasis on the reality of a working relationship between the engager and individual, rather than what is written into a contract – particularly where supervision, direction and control are concerned.

Getting contingent worker classification wrong will put your organisation at risk of significant fines, as well as irreparable reputational damage. What’s more, incorrect worker classification and failure to pay appropriate taxes can have a knock-on effect across the entire supply chain.

The solution: greater understanding and clarity on process and policy

From the outset, businesses must fully understand the work that will be carried out so they can source the most appropriate type of worker. This controlled decision making drives cost efficiencies and, together with clear processes for engagement, mitigates the risk of non-compliance with legislation.

At a very basic level, a large piece of work that has a clear beginning, middle and end might be best delivered by a service provider under a statement of work arrangement. On the other hand, a short term requirement to cover peak periods will likely be more appropriate for a flexible, contingent worker. These are two completely different engagement solutions, and they come with completely different compliance requirements.

Once you’re clear about which type of worker is required, you need to be clear about the legislation that applies. IR35 is the obvious consideration when engaging PSC contractors. For sole traders, it's important to ensure they’re not engaged in a way that puts them at risk of being ‘employed’ for tax purposes, as the liability for any unpaid tax would sit with the hiring business. For this reason, a temporary agency worker may be the better, lower risk option - even if it’s likely to be more expensive.

With knowledge of relevant legislation, you can build robust worker engagement processes. Ensuring that hiring managers know which workers are entitled to which rights, and the resource and cost implications of complying with relevant regulations, is key. For example, temporary workers may be entitled to bonuses for personal performance if these bonuses apply to the permanent workforce. Having clear and specific policies for each different type of worker you engage is the best way to mitigate these risks.

Seeking specialist help is always a good idea

Needless to say, an experienced staffing agency will be able to help businesses navigate today’s complex landscape surrounding contingent worker classification. A Managed Service Provider (MSP) such as Guidant Global is best placed to provide expert regulatory guidance and assistance in establishing good internal processes. MSPs are also perfectly placed to help businesses explore the viability and potential of outcome-led statement of work arrangements.

Contingent workers are a critical element of any smart strategic workforce plan, particularly at a time when flexibility and ready access to specialist skills are essential. As such, the use of flexible workforce solutions is expected to continue increasing as the channels organisations can use to engage workers expand and become increasingly complex.

Knowing where liability lies, and how contingent workers should be classified as a result, is vital to success. Contact us to find out how we can help.