In the past 20 years, work billed to contingent labor has risen by 21 percent, online recruiter community ERE.net says. The current economic climate has forced organizations to cut back on their labor costs and they are now focusing on leveraging contract labor. According to an Aberdeen Group report in January, 16 percent of the average enterprise's overall workforce is considered contingent labor.

Respondents of the Aberdeen Group survey expect a moderate increase in their use of contingent labor in the next two years, and one-tenth of employers expect a "significant" increase. HR specialist Dr. John Sullivan, at ERE, calls contingent labor "a permanent mechanism" rather than "a temporary fix" in terms of talent flexibility. According to the U.S. Department of Labor (via BNET), the cost of hiring a contractor is as much as 30 percent less than hiring a permanent employee.

"It is essential for organizations to build a world-class contingent labor management framework in order to drive strategic talent management," Sullivan writes at ERE.

So how can companies accomplish that task?

Aberdeen Group suggests outsourcing rather than self-sourcing the engagement of independent contractors. According to the study, outsourcing brings a host of benefits such as cost savings and shortened onboarding times.

When it came to complying with internal and federal policies, 63 percent of organizations were able to do so when they outsourced, compared with 48 percent who self-sourced. Companies that outsourced saw an 8 percent cost savings compared with 6 percent of the self-sourced; onboarding length was 2.7 days in comparison to 4.1 days; and time-to-fill an open requisition took 8.6 days in comparison to 11.5 days.

Whether companies choose to outsource or self-source, they also need to determine whether contingent labor is right for the business. "If your organization has component work that must be delivered in order to enable your goods and services, but that would erode profit margins if completed using traditional labor, then your organization should evaluate contingent labor options," ERE advises.

Also, it makes sense to use contract labor when there isn't enough steady work to justify a permanent position, BNET says. These include projects that need specialized skills but not for long: tasks that are short-term and work that fluctuates. When hiring specialists, ERE recommends taking advantage of their short stay and creating a long-term impact. One way companies can do so is by using specialists as training and development resources.

Businesses should consider implementing a labor procurement system that acts as a single point of control to source and assess all contractual labor, as well as investing in tools to evaluate performance throughout the project.

Companies looking to take advantage of contractual labor must be careful, however, as misclassifying workers can be a costly endeavor.

In a recent Internal Revenue Service (IRS) study of 1,200 employers who claimed work was done by contractors, more than 90 percent of the contractors were reclassified as employees, HR That Works says. The average back-tax bill for guilty employers is about $3,000 per employee, with some liabilities exceeding $100,000. The average misclassification assessment was more than $68,000 per employer.

Without adding penalties and interest, these misclassification errors can add up to 41.5 percent of the contractor's payment, BNET adds. Companies also run the risk of being sued by former contractors who had to refile taxes, pay interest and penalties, and take back years of claimed business expenses after being reclassified.

Businesses can avoid misclassifying their workers by knowing the difference between an employee and a contractor.

According to the IRS, when working with contractors, managers only have control over the direct the result of the work and not the method of accomplishing it, BNET says. For example, independent truckers are contractors if they make deliveries using their own trucks and set their own schedule. The drivers are not contractors if a company gives them a daily schedule, a driving partner and the trucks to make the deliveries.

Basically, contractors do the job for a fixed fee and get paid only when work is completed. A company can't ask contractor to give up other work opportunities either.

Ideally, businesses should classify their contractual workers correctly from the get-go. For help in determining a worker's status, fill out this IRS form or check the IRS' tax guide.

Resources

Managing Contingent Labor Strategically
by Dr. John Sullivan and Master Burnett
ERE.net, March 15, 2009

Contract Labor Management: Superior Workforce Strategies for a Demanding Environment
by Christopher Dwyer
Aberdeen Group, January 2009

Contract Labor Management
by Christopher Dwyer
Aberdeen Group, Feb. 3, 2009

Independent Contractor Management
by Christopher Dwyer
Aberdeen Group, Feb. 10, 2009

How to Manage Independent Contractors
by Lynn Haber
BNET

Hiring and Managing Independent Contractors
HR That Works, 2008

Publication 15-A (2009), Employer's Supplemental Tax Guide

Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding