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Contingent Overcompliance

Excessive fear regarding the misclassification of workers and resulting liability can lead organizations to distance themselves unnecessarily from contractors and temps. The result is bad for both companies and contingents.

July 13, 2012

A healthy respect for the law is one thing.

But companies can obsess about compliance when it comes to contingent workers.

Excessive fear regarding the misclassification of workers and resulting liability can lead organizations to distance themselves unnecessarily from contractors and staffing agency temps. The result is bad for both companies and contingents.

Businesses are understandably worried about growing so close to their contingents that they become the workers' employer in the eyes of the law. Doing so can result in stiff penalties from the Internal Revenue Service related to unpaid payroll taxes, and affected workers may sue firms claiming they have been wrongly excluded from benefits provided to employees. Remember the famous Microsoft "permatemp" case that cost the software giant roughly $100 million?

But organizations can go too far in the direction of caution with respect to contractors and temps. I recently heard an interesting example of what we might call "contingent overcompliance" from John Healy, vice president and talent-supply-chain strategist at staffing provider Kelly Services. Healy said many organizations in many industries have policies that restrict the duration of assignments of temporary workers. A common maximum assignment length is 12 months.

These policies, Healy notes, are attempts to prevent the company from crossing the line into an employment relationship. But the 12-month rule, he says, "is one that has been defined more by internal risk management teams than any specific court ruling."

The amount of time a contractor or temporary worker spends in the service of a company is just one of many factors taken into account by the IRS and courts in deciding whether a worker is an employee. Others include how detailed a company's instructions are to the worker and whether the worker is free to seek other business opportunities.

At the same time, those 12-month restrictions can seriously undermine company strategies, Healy says. Take the life-sciences field, for example. Pharmaceutical companies sometimes have key projects slated for contingents that are 18 months in length, such as clinical trials. When potential researchers or project managers see the one-year time limit they think twice, Healy says. They know they will not get the benefit of being able to brag about a completed project on their résumé.

The best of these contractors may be able find work elsewhere, Healy says. And even if the company staffs the job with a second-tier player, it has to interrupt the project partway through to bring on a new free agent.

"Your policy is causing you to take longer and get less high-quality talent," Healy says.

Smart contingent strategies are of growing importance to firms. To cut costs, maximize flexibility and access key skills, companies are increasingly turning to contract and outsourced workers. More contingent work is going to higher-skilled workers—to pivotal professionals such as engineers and graphic artists. And many of today's temps and contractors are millennials, an age cohort seeking more attention than older generations.

I've argued that to optimize contingent quality, companies should give temps and free agents an "arms-length embrace."

To do so, however, firms will have to fight their fears around misclassification. The Kinks famously called paranoia "the destroyer." Contingent overcompliance may not destroy you. But it can leave you limping behind the competition.

Ed Frauenheim is Workforce Management's senior editor. Comment below or email efrauenheim@workforce.com.