A contingent workforce is a group of laborers who work according to a business’s needs. Contingent worker payments do not include salary, sick pay, holiday pay, vacation time, taxes, social security, benefits, or unemployment.
The gig economy or contingent workforce can include:
- Freelancers (graphic designers, writers)
- Temporary contract workers (IT professionals)
- Consultants (Sales, marketing, leadership professionals)
- Independent contractors (electricians, plumbers)
- Gig workers (tutors, ride-share share drivers)
- Task workers (home-improvement professionals)
- On-call professionals (nurses, doctors)
Contingent workforce vs. employees
Contingent workers are not employees. The main difference is that employees work for an organization and are on its payroll as long-term workers and contingent workforce performs according to short-term contracts.
Here are some other differences:
| Contingent workforce | Employees | |
|---|---|---|
| Schedule | Flexible schedule, working hours driven depend on deliverables | Set schedule and working hours |
| Payment | Paid per project or contract | Paid a set wage or salary |
| Employee benefits | Not eligible for employee benefits | Usually receives benefits like health insurance, paid time off, or retirement savings |
| Taxes | Responsible for calculating their income and taxes | Employers withhold taxes from salary of employees |
| Hourly rate | Hourly or date rate is usually higher in the absence of benefits | Hourly and date rates are lower, though hours are regular |
| Location and work style | Controls where and how they work | Works according to their schedule and wherever they want |
Contingent worker examples
Creatives: writers, videographers, graphic designers
- Healthcare workers: nurses, doctors
- Field service experts: electricians, plumbers, appliance repair technicians
- IT specialists
- Translators
- Software developers
What are the advantages and challenges of contingent workers for businesses?
Advantages:
- Added flexibilityContingent workers provide flexibility for companies that with seasonal fluctuations or need to adjust quickly to survive economic downturns.
- Money savings Workforce saves organizations money while taking advantage of new opportunities, such as entering new markets.
- Added skillsets A contingent workforce benefits employers by bringing in missing skills and fresh perspectives on how to help the business grow.
- Speed Contingent workers can start working immediately and can help businesses reach goals without needing training.
- Budget predictabilityUtilizing a contingent workforce can help businesses negotiate rates and optimize resources.
Disadvantages:
- Lack of control Employers need to sacrifice some control (working hours and location, among other elements).
- Compliance challenges Evolving tax and labor laws make it challenging to remain compliant, especially for smaller businesses with fewer resources.
- Commitment and loyalty A contingent workforce won’t have long-term contracts with the company and may have other clients they’re working for, leaving them less committed to one employer.
- Team integration Employees may integrate more smoothly within the company than contingent workers who leave the company after their contract is up. This could translate to communication challenges among the team and a contingent workforce.
Why a contingent workforce is crucial to a company
Many businesses utilize contingent workforces for their flexibility in terms of scaling staff up or down to adjust to market volatility. Additionally, many companies don’t know what they need at first. New industry trends necessitate different skills and experience combinations. Since there’s less investment and resources required to hire a contingent workforce, the organization can test out a role and adapt its requirements. This approach also allows companies to hire slowly and find someone with the right skills to push initiatives forward while building a contingent workforce.
Sometimes organizations hire temporary workers for permanent positions or offer contract-to-hire opportunities. This allows the company and the person to understand if they are a fit for the role without a serious commitment.
Classification factors for a contingent workforce
Fair Labor Standards Act
Under the Fair Labor Standards Act, the employment relationship is defined by specific factors, such as the amount of control the employer has. Fact Sheet 13 has a complete list of the factors employers need to consider.
Internal Revenue Service
The IRS also looks at factors such as behavioral control, financial control, and type of relationship.
State Law
Some states, like California, have specific guidelines for determining classification status. Employers should contact their state’s labor department for compliance guidelines.
Contingent workforce payments
Here’s what you need to know about contingent workforce payroll management.
Legal compliance
Legal non-compliance is one of the biggest risks for contingent workforce payments. Employers must make the line between employees and a contingent workforce completely clear.
Misclassification can lead to failed audits, lawsuits, penalties, fines, and interest fees for back taxes and other benefits employers deserve.
Rates
Compensating a contingent workforce may be more complicated than employee payroll. Since contingent labor is temporary, many workforce policies exclude workers, such as raises or compensation.
Managing a contingent workforce and employees can be difficult and time-consuming, especially when keeping track of pay rates. Document and track all payments to reference as needed.
Headcount
When businesses know how many contingent laborers are in their workforce, they gain a 360-degree view of their payroll costs and save financial headaches later on, especially when supported by a contingent workforce management platform.
Benefits of unified payroll payments
Free report: how Papaya streamlines the complexities of global workforce payments