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.