Harnessing the Power of a Contingent Workforce Through E ective Management

Transcription

1 Harnessing the Power of a Contingent Workforce Through E ective Management James Pheifer and Mark Arian * E ectively managing a contingent workforce is not a new problem, but it is one that requires new solutions. Managing the resources that comprise an organization's contingent workforce along with the processes and risks to procure those resources can be overwhelming. Organizations must continually assess the challenges presented by this segment of their population. At the same time, they must balance the need to prioritize the completion of various tasks with e ectively managing those performing such tasks. I. WHAT IS THE CONTINGENT WORKFORCE The genesis of the term contingent workforce is generally credited to economist Audrey Freedman of the US Department of Labor and dates to the mid-1980s. Some years later, the DOL began formally using the term, describing it as those who do not expect their jobs to last or who reported that their jobs are temporary. Yet there is no consistent de nition, as this category or worker sometimes includes independent contractors, leased employees, on-call workers, temporary help agency workers or more, depending on the body of law using the term at the time. Employers have looked at contingent workers as any resources to cover absences, complete xed-term project work or meet uctuating demand. And much like the businesses this segment of workers supports, the de nition of contingent worker continues to expand and evolve most rapidly over the past decade, paralleling the rise of a true global marketplace, economic shifts region, an aging workforce, a shortage in talent with critical skills, dramatic changes in manufacturing processes, and the increase in business process outsourcing. The DOL has not counted the number of workers classi ed as contingent since However, some studies have suggested that they represent as much as 30 percent of today's workforce. Many of these studies further suggest that as much as 40 to 50 percent of the workforce will be comprised of contingent workers by the end of the decade. * JAMES PHEIFER is a principal in Ernst & Young LLP's Human Capital practice. He has over 17 years of broad-based human resources consulting experience, including HR risk management, HR strategy and design, and HR process improvement. Prior to re-joining EY, James was an in-house human resources attorney where he was responsible for compensation, benefit, and employment law matters. James is co-leader of the practice's contingent worker solution and has dedicated a large portion of his time to workforce management issues, including wage/hour and contingent worker matters where he fuses his technical background with practical business solutions. MARK ARIAN is a principal in Ernst & Young's Human Capital practice. Mark has over 25 years of experience helping clients across multiple sectors and industries to achieve growth synergies and improve operational results. He is an attorney and is co-leader of the practice's contingent worker solution. Mark comes to EY from AON, where he was Executive Vice-President. Prior to AON, Mark was both the Global Practice Leader for Change Management and the Global M&A Leader for Towers Perrin. Mark also spent 19 years at Hewitt Associates, where he was a founder and the Global Leader for the Corporate Restructuring and Change (M&A) practice. 21

2 II. CHALLENGES OF A CONTINGENT WORKFORCE Given this expanding and disparate group of workers functioning as just-in-time resources to supplement an organization's full time workforce, managing this segment presents a variety of challenges, which can be broadly categorized as follows: risk, process, and cost. A. Regulatory Risk: Contingent workforce compliance has long been a signi cant concern to most organizations. In the United States, a vast network of similar-but-di erent rules are set forth in various bodies of law: the Internal Revenue Code (the Code), the Employee Retirement Income Security Act of 1974, the National Labor Relations Act, the Civil Rights Act, and the Fair Labor Standards Act. These rules de ne the employee-employer relationship for speci c purposes embedded in each statute. Additionally, there are a host of state and local laws that a ect and regulate contingent workers. And over the years, regulatory action, court decisions and federal, state and local legislation have created multiple standards to adjudicate this relationship. This maze of standards has only served to complicate compliance e orts. Journal of Compensation and Bene ts The result of these complexities and inconsistencies is that organizations are often indi erent or worse, simply ignore the compliance aspects of their contingent workforce. Due to a traditionally low risk of audit and litigation, despite many of the landmark cases over the past 15+ years, many organizations do not view contingent worker reporting and compliance as a high priority or a tangible risk. This can be an expensive mistake as the hard and soft dollar costs associated with incorrectly designating an employee as a contingent worker can be severe. 22 Those who have taken this approach in the past must understand that the landscape is likely to change with the passage of the A ordable Care Act and associated Code Section 4980H, because incorrect designations can results in expensive penalties and unnecessary excise taxes. As many practitioners are aware, Code Section 4980H mandates that an employer provide an o er of coverage to a certain percentage of its full-time employees. For 2015, that percentage is 70 percent but increases to 95 percent for 2016 and later. The United States Treasury, in de- ning a full-time employee, referred to the Internal Revenue Service's standards for common law employees a threefactor qualifying test of behavioral, nancial and relationship of the parties for every individual contingent worker. Noncompliance results in a penalty equal to $2,000 multiplied by every full-time employee of the employer. A simple example illustrates the magnitude of noncompliance (even though the penalty is calculated monthly, this example assumes a full year of non-compliance): E Organization A has 10,000 full time employees who are issued a W-2, all of whom receive an o er of minimum essential coverage. E Organization A also has a signi cant contingent workforce of 5,000 non- W-2 workers providing services, none of whom receive an o er of coverage from Organization A or any other entity. E Before taking into account its contingent workforce, Organization A passes the o er-of-coverage test under Code Section 4980H(a) at 100% (10,000 / 10,000 = 100%). E Assume that after an analysis, 1,000 contingent workers were deemed to be Organization A's common law employees. The ratio looks much di erent now: 10,000 covered /

3 11,000 total population = 90.9%. E In 2016 and beyond, this would generate a penalty of $22M per year (11,000 employees multiplied by $2,000 per employee). Whereas the risks of noncompliance prior to the ACA were somewhat abstract and largely dependent upon audit or litigation, the post-aca landscape changes the risks of misclassi cation dramatically. Although the regulations prescribe potential relief for various segments of the contingent workforce, the application of these rules in practice are not yet known, requiring extreme diligence and documentation of decisions by the employer. For those companies with operations outside the United States, the landscape is becoming even more challenging and fragmented. As the trend toward more exible labor increases, many governments have become increasingly concerned about the social costs and long-term impact the contingent workforce may have on the economy. In response, many foreign governments have chosen to enact laws that speci cally target these concerns and layer in protections for contingent workers. Contingent Workforce For example, the European Temporary Agency Work Directive 2008/104/EC, and the associated regulations, were intended to confer speci c rights on contingent workers that approximate those rights a orded to an organization's permanent employees. These rights are categorized as: E Day 1 rights that start at the outset of an assignment and provide access to collective facilities, of- ce space and rights to information about job vacancies; and E Week 12 rights that provide access to basic terms and conditions in relation to pay, working time and annual leave, including certain parity of pay rights relating to personal performance. Similarly, China introduced new legislation in 2013 intended to restrict the use of contingent labor generally referred to as dispatched employees. These rules provide signi cant hurdles for both the temporary sta ng agencies, as well as the associated contracting organization, via increased worker protections. B. Decentralized Processes: As much as any other human resource-related process within an organization, management of a contingent workforce is often 23 highly decentralized and disconnected. Despite this decentralization, the volume of stakeholders generally represented by the process is high: legal, human resources, nance, internal audit, procurement, and operations all have a very important role to play. Most contingent worker processes fall short because they are designed in a decentralized, disconnected, and narrow manner. This often leaves those who require reliable outputs from the process in a position where they must rely on awed information (e.g., application of eligibility rules for quali ed retirement plan purposes, or de nition of full-time employee for health plan/aca purposes, etc.). C. Cost Considerations: Operational agility is essential to remaining competitive in today's business landscape. One of the long-standing reasons for the rise in the contingent workforce centered on cost management. If a business with variable demand could utilize a workforce upon demand, then it could control a very large portion of its selling, general and administrative expenses (SG&A). However, as the use of contingent workers rose, the variable nature of their demand started to wane. Organizations began to utilize this segment in

4 a manner that more closely resembled consistent, full-time employment. Hence, the rise of business process outsourcing and leased employees naturally resulted in situations where the costs of contingent workers became buried in operational budgets and spread out among multiple vendors. Over time, the organization's line of sight to the cost of its contingent workforce began to fade, making it less transparent in the aggregate. In turn, this made it extremely di cult to obtain accurate costs to factor into various human resources analytics, including the amount spent on headcount, ultimately losing the ability to assess the cost/ bene t of buying a contingent workforce versus building an employee workforce. III. ADDRESSING THESE CHALLENGES With an ever-increasing portion of the workforce consisting of contingent workers, organizations will struggle to meet their operational objectives without rst addressing the challenges created by this segment of their human capital. Although every organization utilizes the contingent workforce di erently, certain entities' practices and solutions can be leveraged to address most of these challenges. More important, e ective utilization will provide organizations with the Journal of Compensation and Bene ts opportunity to more strategically deploy its contingent workforce. A. Integration Into Talent Management Framework Often overlooked, organizations must begin to search for ways to integrate its contingent workforce with its talent management framework and processes. Beyond mere tempto-hire situations, an organization's contingent workforce can provide a built-in sourcing and talent pool. In many instances, contingent workers will be familiar with an organization's processes, thereby making onboarding more e cient and allowing these new employees to become more productive earlier in their employment lifecycle. Contingent workers are also more likely to have an understanding of the organization's culture, thereby ensuring a better t and, potentially, a more stable workforce. Despite the need for integration, human resources departments must always remain cautious to ensure that they are vigilant to compliance concerns in order to preserve the independent status of their contingent workforce. B. End-to-end Processes As previously referenced, most organizations manage their contingent workforce in a decentralized, disconnected, and narrow manner. E ectively 24 managing this population and the associated risks now requires a set of global, integrated and centralized policies, processes and procedures with a primary process owner. Such processes should be end-toend and cover the contingent workforce's entire lifecycle: from procure to manage to disposition. For example, a centralized process owner can work with operations to identify a speci c need, work with procurement to leverage existing vendor arrangements, work with legal to ensure that all assessments have been performed, and work with human resources for tracking and analytics purposes. To the extent the contingent worker is ultimately o ered a full-time position within the organization, the centralized process owner can then work with operations and human resources to manage the onboarding process e ciently and ensure that the contingent worker obtains all applicable service crediting. As with all critical processes, arigidsetofcontrolsarenecessary to ensure compliance and reliability of information. For example, bene t managers must be able to rely on outputs from the organization's contingent workforce processes when assessing the percentage of employees eligible for minimum essential coverage under the A ordable Care Act.

5 C. Technology The diverse nature of an organization's contingent workforce, and the variety of systems historically used to track these workers, has contributed to the di culty in e ectively managing this population. Independent contractors may be tracked via accounts payable. However, it may di cult to track and distinguish the independent contractors from other parties paid via accounts payable. Temporary employees may be invoiced from a sta ng rm on a cost-plus basis. However, individual temporary employees may be di cult to track and correlate to speci c positions within the organization because they are not identi ed individually. Even with comprehensive processes, a large contingent workforce population can be di cult to manage without an associated technology solution. Technology solutions for an organization's contingent workforce continue to develop rapidly. Comprehensive solutions currently provide for the ability to track employees and support all of the peripheral processes utilized in managing this diverse population, generally providing a framework that can be leveraged for vendor management purposes as well. E ectively selecting and implementing an appropriate technology solution hinges on Contingent Workforce two main objectives: streamlining the acquisition of contingent labor and leveraging automation for process management, visibility and control. Oftentimes, an organization's workforce can be the most expensive component of doing business in today's environment, yet also one of its key competitive advantages. Given the trend of do more with less, most organizations are focused on reducing costs and increasing e ciency. One area for substantial and often untapped savings is managing an organization's services spending essentially, spending associated with a contingent workforce. Organizations are embracing technology solutions to reduce services spending and streamline processes in procuring, managing and disposition of their contingent workforce, including temporary, contract and consultant labor. In addition to cost reduction, organizations are nding that they cannot answer basic questions about their contingent workforce: How much money is being spent annually on our contingent workforce? What is the average pay rate for our IT contractors? What has been our best resource for nding talent? Vendor management solutions (VMS) technology can help organizations address and automate these 25 gaps. After all, what is the point of having a contingent and exible workforce if you don't have access to data that allows you to e ectively utilize that exibility? The best VMS technology provides a software solution that allows organizations to effectively manage the procuremanage-dispose contingent workforce lifecycle. It should also automate all activities within the user interface. This gives unprecedented real-time access and control over this vital supply chain, generating substantial savings in the process. By automating the complete contingent workforce lifecycle, the right technology solution enables companies to dramatically improve process e ciency, decrease costs, enhance supplier collaboration and communication, reduce billing and better understand and manage the extended enterprise. IV. THE FUTURE OF THE CONTINGENT WORKFORCE The contingent workforce will become an ever-increasing reality and resource for most organizations now and into the future. Several factors on the horizon demand a continued focus on more e ectively monitoring and managing this population, such as:

6 Journal of Compensation and Bene ts E Legislation from various local, state and national governments regarding the need to better protect this segment of the population; E Better aligned human resources and nance functions; E Continued demand by business leaders for holistic human resources analytics, including better insight into an organization's total cost of workforce; and E Balancing the impact a large contingent workforce has on the organization's culture with the operational agility a orded by such workers. High-performing organizations will continue to look for ways in which to harness the power of this labor pool, despite the challenges presented. Addressing these challenges head on with practical, innovative and forward-thinking solutions can provide organizations with the edge necessary in an increasingly competitive and global landscape. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP. 26