The legislative landscape is becoming an increasingly complex labyrinth, particularly as lawmakers and regulators scramble to update their policies and conform to the new iterations of talent that have evolved in the workforce. The reality is, we’re no longer staffing and managing direct-hires or contingent workers. The alternative work arrangements spawned by the gig economy have called into question the accepted norms of classification. Businesses are caught in the crossfire of compliance and cost savings. But a strategic managed services solution could hold the remedy to this ongoing problem.
New Laws, New Challenges
Bills like California’s AB 5, which essentially requires companies to reclassify independent contractors (ICs) as statutory employees (with a few exceptions) have dramatically altered the world of hiring and staffing. And as goes California, they say, so goes the rest of the country. Varying versions of AB 5 will undoubtedly spread throughout the United States. However, the Golden State’s divisive new law isn’t an isolated incident.
The Securities and Exchange Commission (SEC) also wants to implement enhanced reporting protocols for hiring organizations. As SHRM explained:
"Public companies will have to submit reports on their human capital if the Securities and Exchange Commission (SEC) finalizes a rule it proposed Aug. 8. Human capital reporting may result in a hiring boon for HR professionals, legal experts say, as HR will play a pivotal role in reporting this information. Nonetheless, some worry that human capital reporting would put public companies at a competitive disadvantage to companies that aren't public."
The House of Representatives passed a bill on Oct. 18 to include an additional SEC reporting requirement for public companies to disclose how many employees work abroad and how many work stateside. The Senate has referred companion legislation, sponsored by Sen. Gary Peters, D-Mich., to the Committee on Banking, Housing and Urban Affairs.
Companies want the cost savings and on-demand availability of gig talent. Contractors seek independence, flexibility, and additional income sources. The government demands compliance. As new rules of governance roll out, it’s unlikely that all the aforementioned players will continue to get everything they want out of the arrangement.
Managing Risk, Delivering Compliance
One of the most formidable hurdles facing the gig economy springs from the uncertainty of which independents in the gig economy are truly defined as independent contractors. We believe that managed services providers (MSPs) hold the key to transcending the gaps that persist between qualifying a contractor and effectively overseeing compliance.
It often seems that the assessment process is where things begin and end. Whether the MSP’s team is conducting the evaluations or the client has self-identified and (hopefully) vetted ICs, this undertaking alone tends to emphasize conformity and indemnification over compliance. The prevailing concern is control. So after taking every precaution to deflect risks in qualifying ICs, how can an MSP help manage the issues of control? Primarily by treating ICs as the service providers they truly are; by approaching the relationship in the same way they deal with staffing supplier partners.
Independent service providers should receive the same dedicated representation as suppliers through an MSP’s supplier management group. Independent service providers should have access to communications and all necessary materials they have requested in order to perform their services. They should not, however, have access to company uniforms, equipment, vehicles or regular facilities at a client site.
The MSP can design and oversee the engagement, on-boarding and ongoing administration processes of independent service providers in the program, and identify red-flags along the way that could lead to risk exposure. Performance issues should be discussed only as they relate to agreed upon contractual obligations between the IC and the client -- the same as they would with any outsourced service provider.
Designing an environment for independent contracting should focus on standardization, consistency and compliance.
The MSP should build a document management portal, which is maintained in a controlled environment.
The MSP should limit any perceived managerial roles with the contractor: administration and on-boarding procedures are performed by the MSP; regular communication occurs between the independent service providers and the MSP, only in relation to contractually bound and scheduled milestones, deliverables and Statement of Work (SOW) commitments -- not employee related issues such as attendance, timekeeping, hourly productivity checks, etc.
The MSP can act as a payment processing agent between the IC and the client, yet those terms should be clearly outlined upfront in the Professional Services Agreement (PSA) and SOW. The billing structure should be negotiated to ensure that financial control factors are adhered to. The MSP should restrict the inclusion of ICs in company functions unless absolutely necessary to the performance of the work as contractually stated.
All HR related information must be directed to the IC.
As a best practice, the MSP can reassess ICs who stay on projects longer than a predetermined amount of time, addressing red flags.
The MSP can ensure that the utilization of ICs occurs for specific, specialized work only, such as projects with established start and end dates that full service employees are not performing.
But what happens if the determination rendered indicates that the candidate is unlikely to be viewed as a legitimate IC? The beauty of an MSP program lies in its resources. Candidates who fail the assessment could still be payrolled by a member of the MSP’s supplier network, or the MSP’s own payrolling company, as a W2 worker of that organization, eliminating the risk of IRS penalties and classification issues.
It’s Not a Headache, It’s a Hangover. MSPs May Have a Cure.
Clients caught in the crossfire of an employment classification battle between government regulators and ICs are miserable. Many who wish to use ICs end up passing because they “don’t want the headache.” The reality for companies that run afoul of the law, however, is that it’s really more like a hangover. They had too much fun the night before, felt on top of the world and then paid for it the next day. The point is, the throbbing pain these organizations are now feeling could have been avoided through a bit of restraint, moderation and control.
The use of ICs doesn’t need to be prevented, and there’s no reason to think they’re going the way of the dodo because of newsworthy lawsuits or tougher legislation. The government is merely reiterating the foundation of existing case law.
The first step is to restructure the relationship with ICs in a manner consistent with legislation and corporate objectives. The second step is revising professional services agreements to enforce the independence of the contractor, treating the individual as any other company that provides services -- not as full-time or even temporary talent. The third step in managing an IC population is not to manage them at all.
We don’t oversee the way in which mechanics repair our vehicles. We don’t control their schedules, provide them tools, dictate their workspaces or request timesheets. We sign a contract at the start of the work. If the contract is breached, we are owed restitution. If the work is unsatisfactory, we discontinue service. The relationship with independent contractors should be viewed as no different.
The value of MSPs would be akin to having a personal assistant, who is utterly familiar with the process of car repair, to intermediate the relationship and payment processes on our behalf -- to provide additional input, offer administrative support to expedite the work, ensure contractual compliance for deliverables and report on the quality of the output from a position of expertise.
The nature of the workforce has changed. And with that transition naturally follows a slew of new regulations. And regardless of how one feels about the recently unveiled laws, they largely serve as a response to histories of violations and non-compliance with existing policies. The good news is that solutions are within our reach and capabilities.