Gain an Understanding of the Contingent Workforce

The following information is from the book SPHR Exam Prep: Senior Professional in Human Resources. It provides a good overview of the contingent workforce, which is becoming an important tool for corporate profitability and global expansion. More information at: http://www.quepublishing.com/articles/article.asp?p=437082&seqNum=8&rl=1

The contingent workforce is composed of those individuals who work for an organization but are not permanent full-time employees. Use of a contingent workforce is increasing and it is estimated that contingent workers represent more than 20% of the total United States workforce. The dynamics of today’s organizational and business environment often drive employers to use contingent workers to achieve a strategic advantage. These drivers of change are discussed extensively in this chapter and in others, but a brief summary is appropriate.

Increased competition and the need for cost-efficiency require that employers have flexibility in adjusting employment levels and employment costs to demand for its product or services and in relationship to its level of operations, both of which might be constantly changing and volatile. A permanent full-time workforce does not permit that. The changing psychological contract encourages lack of permanency of relationships, both in employee and employer expectations.

Contingent workers are in alignment with those expectations. Changing technology often requires new skills that permanent full-time employees might not have and might not be capable of developing. Downsizing and rightsizing could result in the loss of organizational capability, which can be augmented with the use of contingent workers. The increasing difficulty of compliance with the complexity of employment laws and the cost associated with them can be largely avoided by having workers that are employees of other organizations. Finally, significant cost savings can often accrue from outsourcing the organization’s work to organizations located in foreign countries in which the wage rates are low.

However, the use of contingent workers does not come without some organizational concerns and disadvantages. Increased flexibility often brings about loss of control. The employer might be able to control only the outcome of work, not the means used to obtain it. This issue is further discussed in Chapter 5. Use of some types of contingent workers might, in the long run, be more expensive than permanent employees because the source of those workers must not only be reimbursed for compensation and benefit costs but must also be paid a fee in addition.

There is a concern regarding the loyalty of employees that are not employed on a full-time basis. Will the employee act in the best interest of the organization or of the actual employer? Another issue of substantial concern is the impact of this strategy on the remaining permanent full-time workforce. Does the practice lower overall morale and induce stress and concern among the remaining workers who might become worried about their own job security?

A final issue is one of ethics and social responsibility. The SPHR must lead the organization in balancing its obligations to its employees, the community or communities in which it operates, and society as a whole against the organization’s legitimate desire to maximize its profits for stockholders. The advantages and disadvantages of use of the contingent workforce are summarized in Table 3.8.

Table 3.8 Advantages and Disadvantages of Using the Contingent Workforce

Advantages

• Flexibility.
• Savings in the cost of taxes and benefits.
• Access to expertise not internally available.
• Potential savings in overall compensation costs.

Disadvantages

• Perceived lack of loyalty
• Potential for overall higher costs, depending on the situation
• Lack of knowledge of the organization's culture, policies, and procedures
• Concern with disclosure of organizational proprietary information
• Impact on morale of permanent workforce
• Loss of internal capabilities
• Potential for increased training costs when contingent workers must be trained on unique or unusual processes or procedures used by the organization

A contingent workforce can be composed of many types of workers. Employers often use several sources simultaneously. Common types or sources of contingent workers include the following:

Part-time workers Part-time workers can be obtained from a temporary employment agency, in which case flexibility is maximized and the organization avoids liability for taxes and benefits. Part-time workers can be employees of the organization. Although that arrangement might be somewhat permanent in nature and of limited flexibility, organizations often provide no or a limited range of benefits, resulting in cost savings.

Temporary workers Traditional temporary workers are obtained from employment agencies that specialize in providing these types of workers. However, the employer can also hire temporary workers internally.

NOTE

The employer that hires temporary workers must do so based on some rational basis such as temporary or seasonal increases in operations, the need to replace workers during the peak vacation period, and so forth. The temporary workers should be terminated when the temporary demand for additional workforce ceases. Continued employment of temporary workers for extended amounts of time might negate their temporary status and obligate the employer to provide expensive benefits. Microsoft Corporation paid a 97-million dollar settlement to workers that it had mischaracterized as temporary workers.

NOTE

Hiring temporary labor from a temporary employment agency can also pose potential legal problems for the employer. If the organization exercises control over the temporary employees, provides training, negotiates compensation, or engages in other employment-related practices, the temporary employee is likely to be considered by the courts as an employee of both the organization and the temporary employment agency (referred to as dual employment).
In such cases the organization might be obligated to provide certain benefits. In addition, as a dual employer, the organization must comply with all employment laws in its relationship with the temporary workers. For example, the organization might have an obligation to provide reasonable accommodation to a temporary worker under the Americans with Disabilities Act and can be found liable for illegal discrimination or harassment under the Civil Rights Act of 1964.

NOTE

Temporary employees in many situations have the right to join unions that are the certified bargaining agent either of the temporary employment agency or of the organization.


Consultants Often consultants are contracted with to provide expertise not currently available to the organization and not needed on a permanent and continuing basis.

Contract workers Contract workers are often hired on a project basis. After the project is complete, the organization has no further obligation to the individual.

Outsourcing Outsourcing is the process of contracting for services or products with external vendors rather than producing them internally. Frequently outsourcing results in substantial compensation savings because of the economies of scale that are created when an organization specializes in a particular type of work and/or employs specialized software. Outsourcing often permits access to specialize expertise not available internally to the organization.

Offshoring Offshoring refers to hiring workers in foreign countries to perform tasks previously done in the United States. Oftentimes, substantial cost savings can be realized because of the lower compensation rates in those countries.

Leasing Leasing typically involves a contract with a professional employer organization (PEO). A PEO is an organization that assumes the employer rights and responsibilities for employees that it provides to its clients. An employer wanting to lease its currently employees signs a contract with a PEO and the PEO hires the employees. The organization then leases them back, with the PEO assuming the responsibilities of an employer. Employee leasing tends to be particularly suited for small employers that do not have internal expertise to comply with the complexities of today’s employment laws. Also, because the PEO has a much larger workforce, it might be able to provide the former organizational employees with much better benefit packages. Obviously these services do not come without a cost, and it is estimated that leasing raises total labor costs by about 5%. For many employers this is additional money well spent.

U.S. Labor Costs for March 2006

The U.S. Bureau of Labor reported in June on employer costs for March 2006
(see chart below). Wages accounted for over 70% of employer costs and benefits the remainder. The most costly line item employer expense is required taxes with health benefits not far behind.

U.S. Executives Satisfied with Outsourcing Non-Essential Business Functions

Despite the angst surrounding outsourcing, it appears U.S. executives are well-satisfied with turning over nonessential business functions to outside providers. A survey by Capgemini reveals that nearly 73 percent of U.S. companies plan to step up outsourcing activities in coming years, with about 23 percent stating a preference to outsource "a broad range of functions and processes" that do not reflect core business activities. The survey of 288 executives found that most lauded outsourcing as a way to zero in on core business issues (57 percent), improve process speeds (56 percent) and provide immediate cost savings (56 percent).
From:

Workforce Week
www.workforce.com
June 18 - 24, 2006
Vol. 7 Issue 25

The Future of Contingent (Direct Hire Placement) Search

For all direct hire Staffing Company owners this is a good article to take heed...

The Future of Contingent Search
What does the future hold for the age-old industry currently in transition?
Monday, June 19, 2006 by Dr. John Sullivan

article by Dr. John Sullivan and Master Burnett

The traditional contingent search business model is a risky one in that it is incredibly susceptible to macroeconomics, technological innovation, and population demographics. While many industries can balance their product and service portfolios to survive the most brutal application of the laws of supply and demand, many smaller contingent search providers ride a one-trick pony.

In 1999, contingent search providers were riding waves of success that made those on the North Shore of Maui look tame. Search commissions were rising steadily, exceeding 45% in some markets, newbies to the profession were pulling down six-figure incomes, and the influx of job orders seemed unending. Then 2001 hit, and one contingent firm after another cut back, laying off thousands. Now that double-digit employee growth is once again a challenge for most companies, you would think that the glory days of contingent search are back. But, as many firms will attest, they aren't.

Revenue Is There, But Not From the Same Sources

While industry revenue is forecasted to grow from 10.4% in 2005 to 11.6% in 2006, the industry is deriving the greatest percentage of newly booked revenue from value-added services, namely temporary or contract staffing and professional services. More companies are relying on contingent workforces than ever before. It is estimated that in 2006, as many as two-fifths of newly created jobs are first offered on a temporary basis. That's a fourfold increase in the growth of contract labor in just 10 years.

While the job orders being placed with traditional contingent agencies aren't drying up, the increased use of contingent labor and a confluence of technology driving candidate visibility is forcing such firms to change or die. With the opportunity to maintain minimum placement volume needed to sustain a business in jeopardy, many contingent search providers are increasing the scope of value-added services they offer, and are finding clients more receptive than ever.

The contingent search industry has long been one that defined success too early, in that it never sought out opportunities to extend the value of its services beyond the initial placement transaction. This lack of prior industry development has made the industry ripe for a series of progressive, qualitative transition cycles. Early leaders embracing this transition are already blurring the lines between temporary staffing, contingent staffing, retained staffing, professional services, and training. With this transition firms like Adecco and Kelly, which had few urban competitors, today have thousands, ranging from local companies of one to foreign companies of thousands.

The Confluence of Technology Driving Candidate Visibility

Traditional contingent search firms take advantage of their ability to find candidates who have not been found by companies or who have been overlooked. It is, for the most part, a low-volume, high-margin business. However, the confluence of numerous technologies that service the recruiting function and the proliferation of the Internet have made a majority of the world's workforce more visible to corporations and, in the process, eroded the value proposition contingent search providers once banked on.

In this new era, contingent search professionals are finding it a lot harder to find a candidate who:

• Doesn't appear on a lock-out list (a list of the agencies' other clients or strategic partners of the client organization);
• Hasn't already been introduced to the company via the employee referral program; or
  Doesn't already appear in one of a multitude of databases that employers have purchased access to; or
• Hasn't already applied directly to the company sometime in the past four years; or
• Presents a background so stellar that companies don't balk at paying search fees.

In short, the inventory of talent that contingent search providers can trade upon for permanent placement is in extremely short supply.

New Services on the Horizon

As stated earlier, those agencies embracing change are finding more ways to extend the value inside the organization. The most common extension is, of course, the move into supporting temporary labor. While many large service providers like Randstad and Kelly have the market economics to secure the largest companies in a metropolitan area, a number of small- and medium-sized firms desperately need help leveraging contingent staff.

In addition to temporary staffing, a number of other potential services are on the horizon, some that many large organizations should consider taking advantage of. Those we find most interesting include:

Outsourced Referral Program Management

Employee referral programs are quickly becoming the predominate source of hire inside most organizations. Those firms that lead their industries in hires attributed to employee referral can attest that providing world-class customer service to both referees and referrals is essential to maintaining program momentum.

Unfortunately, most HR organizations are not adept at even spelling world-class customer service, let alone delivering it. For years, HR organizations have focused on containing costs and enabling self-service, two objectives that don't always drive customer satisfaction. Contingent search firms, on the other hand, have built their businesses around customer service, servicing not only the client but the candidate as well.

By outsourcing the management of the employee referral program to a trusted search provider, the client organization could gain several key benefits, including:

• The search provider could more easily ramp up and down the human resources attached to the client employee referral program to maintain pre-established customer service standards.
• Under a split-type agreement, the search provider could provide referrals with additional placement services should the client organization opt not to hire, thereby creating a revenue source to self-fund the employee referral program.
• The search provider could provide more advanced analytics regarding the success or failure of the employee referral program because traditionally agencies have been more adept than HR functions have been at applying metrics internally.
• The search provider could leverage economies of scale and build internal staffing proficiencies in marketing and sales skills to support the employee referral program that would not make sense for small- and medium-sized firms to invest in.

External Brand Assessment

While most lock-out list scenarios prevent companies from using an agency to raid another employer, they don't prevent organizations from hiring services to help identify and understand their position in the market as employers. Because contingent search providers have a proven ability to blueprint a competing talent organization, target specific talent, and establish contact with said talent, it makes sense to leverage that ability to identify and gauge an employer's reputation in specific talent markets. Professional recruiters may be more adept at getting an honest perception than market researchers because they have a proven ability to keep talent talking. Under such a scenario, search providers would:

• Build contact lists of target talent in competing organizations.
• Establish relationships with said talent over time.
• Use the established relationship to gather research on how the client is perceived in key areas by the target talent.
• Aggregate the research and report back to the client perceptions that limit the client's ability to attract said talent.

Competitive Landscape Mapping

Nearly every contingent staffing professional can tell stories about when it introduced a candidate to a client who came from a competitor whom the client was unaware of. While companies like to think that their marketing teams are adept at identifying potential competitors, staffing professionals often do a much better job at mapping who-competes-against-whom for customers, and especially for employees.

They are more adept at recognizing industries that hire compatible talent, and much more adept at identifying new entrants to the talent market. Client organizations can use contingent staffing firms to build competitive talent landscape maps as a precursor to organizational benchmarking initiatives. Maps can help insure that organizations have a realistic picture of who is after what talent in a specific geography, and what each player's strengths and weaknesses are.

Recruiter Training

While the visibility of candidates may have improved, the ability of the typical corporate recruiter to acquire said candidates has not. Most corporate recruiters are phone averse, and seem to think that proactively contacting any potential candidate before they have applied to you is an ethics violation!

As such, a number of contingent search firms have started offering training seminars and certification programs that help prepare recruiters to be successful in the role of corporate recruiter. Some aspects of these training programs focus on sourcing techniques, while others focus on how to engage candidates and deal with the all too common objections. A number of Fortune 200 companies now rely heavily on recruiters who have undergone said training.

Under this service, contingent search providers:

• Recruit entry-level recruiters onto their payroll.
• Train the recruiters in full life-cycle recruiting or a life-cycle specialty, depending on client needs.
• Provide the newly trained recruiters with on-the-job experience for a minimum period of time.
• Contract out or place the new recruiters with client organizations and guarantee their on-the-job performances for a set period of time.

Vendor Management

Another service that is growing in popularity among traditional contingent agencies is vendor management. Many corporations are horrible at managing the multitude of services that support the staffing function and could not optimize the deployment of searches or resources if the future of their staffing function depended on it.

Despite years of challenges and a host of software products that have sprung up to do the job, most companies still need help. Because agencies are generally better at using metrics internally and have a profit incentive to use resources wisely, outsourcing vendor management to a contingent staffing vendor again makes sense. They can leverage the same metrics that they use internally for assigning recruiters to job orders to assign subcontractors to accounts. Because their profits are tied to helping you maximize both the efficiency and effectiveness of your staffing efforts, you build in accountability to a corporate function that traditionally hasn't been held accountable.

Conclusion

Contingent search firms have existed for years and will continue to exist for years to come. But like all industries, the contingent staffing industry is not subject to life as we have known it forever. It too must evolve — now more than ever. The position of search firms is one that lends organizations a great deal of power to identify what does and does not make sense to do internally. In short, it gives organizations the strength needed to force trusted search providers to become mini-recruitment process outsourcers. Are you progressive enough to leverage your partners?

Dr. John Sullivan (JohnS@sfsu.edu) is a well-known thought leader in HR. He is a frequent speaker and advisor to Fortune 500 and Silicon Valley firms. Formerly the chief talent officer for Agilent Technologies (the 43,000-employee HP spin-off), he is now a professor of management at San Francisco State University. He was called the "Michael Jordan of Hiring" by Fast Company magazine. More recruiting articles by Dr. Sullivan can be found in the ER Daily archives. Information about his numerous other articles, books and manuals about recruiting and HR can be found at www.drjohnsullivan.com. Dr. Sullivan is also the editor of VP of HR, an e-newsletter providing "out of the box" solutions for senior HR managers. Free subscriptions can be obtained on his website.

EEOC and the Independent Contractor

Factors that the EEOC considers when determining whether a worker is an employee or independent contractor. The worker is an employee if ANY of the following apply:

• the firm or the client has the right to control when, where, and how the worker performs the job;


• the work does not require a high level of skill or expertise;


• the firm or the client rather than the worker furnishes the tools, materials, and equipment;


• the work is performed on the premises of the firm or the client;


• there is a continuing relationship between the worker and the firm or the client;


• the firm or the client has the right to assign additional projects to the worker;


• the firm or the client sets the hours of work and the duration of the job;


• the worker is paid by the hour, week, or month rather than for the agreed cost of performing a particular job;


• the worker has no role in hiring and paying assistants;


• the work performed by the worker is part of the regular business of the firm or the client;


• the firm or the client is itself in business;


• the worker is not engaged in his or her own distinct occupation or business;


• the firm or the client provides the worker with benefits such as insurance, leave, or workers' compensation;


• the worker is considered an employee of the firm or the client for tax purposes (i.e., the entity withholds federal, state, and Social Security taxes);


• the firm or the client can discharge the worker;


• the worker and the firm or client believe that they are creating an employer-employee relationship.

If a worker who was dubbed an independent contractor is evaluated to have been an employee after the fact then back taxes, payments, and penalties may be due to the EEOC and IRS (among other entities).

Computer generated audio file of this article (MP3)