Talent Management Processes

Contingent Workforce Management: Compliance

by Taleo Research

Many tax and labor laws were written to protect the unskilled laborers of the 1950s and 1960s, not the highly paid professionals that comprise a large segment of today’s expanding contingent workforce. Some laws contradict others; some laws are vague and open to interpretation; some laws seemingly defy logic. Non-compliance and/or erroneous interpretation of these laws can cost a large company thousands of man-hours (conducting audits and/or legal defense) and millions of dollars. A recent increase in the number of “employee misclassification” lawsuits has awakened enterprises to the risks—and resulting financial penalties—that they face in this arena.

Employee Misclassification
Companies found to have misclassified independent contractors are liable for huge fines and potentially for payment of employee income taxes, Social Security contributions and unemployment taxes, etc. Companies have also faced civil suits from the misclassified workers who have sued for retroactive benefits packages including medical insurance, vacation pay, pension and stock options. The well-publicized case, Vizcaino vs. Microsoft, resulted in Microsoft agreeing to pay more than $97 million to as many as 12,000 former contractors who were found by the IRS to have been misclassified as employees.

In one six-year period, the IRS audited more than 11,000 companies and reclassified some 438,000 workers, collecting back taxes, penalties and interest from the negligent corporations. Remarkably, in 2001 alone, the IRS audited approximately 50,000 companies for contingent workforce compliance. Yet a surprising number of Global 2000 companies, in the absence of formal contingent workforce policies and procedures, relegate the management of these potentially costly risks to project and line managers who have little knowledge of labor and tax law.

Those managers are not equipped to

  • Ensure the company does not violate applicable tax, employment and privacy laws, as well as any industry regulations.
  • Safeguard the company against potential losses, including intellectual properties theft.
  • Negotiate contracts in a manner that minimizes the corporation’s potential liabilities.

According to the General Accounting Office, employee misclassification costs the US Treasury an estimated $20 billion annually in lost tax revenues. The government is actively looking for ways to minimize those losses.

Misclassification costs can include:

  • Social Security Tax
  • Federal Income Tax
  • State Income Tax
  • FUTA
  • Failure-to-deposit penalty
  • Failure-to-file return penalty
  • Interest on deficiencies
  • Defense and/or litigation expenses
Managing Risk
It is critical that every company comply with all tax and labor laws that relate to contingent workers. A company operating in a regulated environment (financial services, transportation, energy, health care, etc.) must also ensure compliance with all regulatory requirements. Ensuring and tracking compliance is such a huge challenge that many organizations become paralyzed by the prospect or mired in “inertia by committee.”

In a perfect world, every corporation would comply with every applicable law and regulation. Unfortunately, until it creates negative headlines and large, unplanned expenditures, it is sometimes hard to get this variety of “risk” on the radar screen.

Mitigating Risk

Some compliance risk is hard to address; some is easy to manage or avoid. Without policies to guide hiring managers and systems to ensure compliance across the organization, companies expose themselves to unnecessary risk.

Risk can be greatly mitigated by addressing the following four areas:

 

  1. Policy
  2. Contracts
  3. Processes
  4. Documentation
Take Action
With the costs of a temporary workforce becoming greater, and the legal exposures more pronounced, developing, implementing and administering a comprehensive, carefully crafted Contingent Workforce Management program is becoming a key initiative in many organizations.

The companies that successfully reduce their costs and lower their co-employment risk through comprehensive, well-designed Contingent Workforce Management programs stand to gain significant benefits and competitive advantage.