This blog is part of our Workforce Strategy Series
No matter what you call them – anonymous, invisible, nomad, freelance or one of many other nicknames – independent contractors (ICs) are a growing and important segment of today’s hybrid workforce structure.
How Big and How Important?
Very big. According to the 2014 State of Independence in America Report, there are 17.9 million independent workers in the United States. This is up 1.2% from 2013 and 12.5% since 2011. They also estimate that there are another 12.1 million part-time independent workers, for an estimated total of 30 million workers.
Very important. In a deep dive look at the Independent Contractor workforce by MBO Partners, the 2014 Independent Contractor Workforce Report, they found that 71% of the companies surveyed reported using independent contractors on a continuous basis. But that’s not all. Respondents to their study were primarily human resource department members, yet their study went on to show that independent contractors were frequently engaged by a variety of departments within an organization and outside the knowledge or oversite of human resources.
A Strategy for Specialization
For many companies, ICs are an integral part of today’s workforce structure. They are our equivalent to the hired gunslinger of the Old West. If the frontier townspeople knew that the James Gang was in a bad mood and riding their way, it made sense to hire a gunslinger or two – experts with six-shooters and Winchesters – to be there to greet them. Nobody told these guys how to do their job; they just did it, got paid and went on their way.
The same concept applies to companies today. If an organization has a project that requires a specialized set of skills or a unique expertise, an IC provides a valuable solution. Large or small, companies are always in need of one-off skill-sets for short-term assignments that are important, but don’t represent long-term or permanent jobs.
The Key is Risk Avoidance
Used correctly, independent contractors can help spearhead special projects, deliver pinpoint expertise and drive key results. Used incorrectly, and they can also be a major legal liability. In our opinion, the most important term for any company to keep in mind when looking at ICs is Unique Role.
According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
In other words, tell your gunslinger to keep the town safe, not how to get rid of the bad guys. That being said, the single largest risk to using ICs is the risk of misclassification.
There have been a variety of state-based studies showing between 10 and 20 percent of employers misclassify at least one worker as an independent contractor. Misclassification typically occurs when a person who should be a direct employee, and receive a W-2 form to file tax returns, is designated as an independent contractor, and receives a 1099-MISC form instead.
Since the U.S. Supreme Court has not established a definitive rule for determining whether an individual is an independent contractor or an employee, the U.S. Department of Labor has developed an economic litmus test to help clarify a person’s employee or IC status, consisting of seven factors the Court has considered significant:
- The extent to which the services rendered are an integral part of the principal’s business
- The permanency of the relationship
- The amount of the alleged contractor’s investment in facilities and equipment
- The nature and degree of control by the principal
- The alleged contractor’s opportunities for profit and loss
- The amount of initiative, judgment, or foresight required for the success of the claimed independent contractor
- The degree of independent business organization and operation
These factors are provided to help guide companies in determining employee or independent contractor status, but as typical in life, employers need to use their common sense and sound judgement.
In addition to misclassification, there are other topics companies need to consider, such as security, access to systems, performance measurement and others. That being said, used correctly, independent contractors can be a dynamic part of a hybrid workforce strategy, contributing critical skills and focus that can help drive a company’s success.
GHR Technology's Workforce Strategy Series provides informative briefings covering a variety of workforce topics that impact a company’s strategy, structure and approach to workforce design and execution. Our intent is to provide a basic understanding and valuable insights into the themes that drive today’s workforce realities.
There are an estimated 31 million Independent Contractors in the U.S., and they can be a valuable part of your workforce strategy...or a major legal risk. Are you safely tapping into this hidden workforce?