Free Agents in the Workplace - Part I

• Jun 01, 2003

This is the first in a two part series on the increased use of independent contractors in the environmental field. Part One focuses on the pros and cons of using contract labor in your company. Part Two, which will appear in an upcoming issue, will cover the laws that define an independent contractor and an employee.

Since the mid-nineties at least 30 percent of the U.S workforce has been made up of contract labor. The contract labor trend began in the 1980s and has continued strong within all industries. Contract labor was the most rapidly growing segment of employment in the 1990s. Contract workers will continue to replace permanent employees as a method for the businesses to curb labor costs.

The use of independent contractors in all aspects of environmental management is becoming prevalent. Independent contractors are valuable and often necessary components in meeting environmental staffing needs in both the private and public sectors. These contractors can be found working for environmental consultants, in EHS (environmental, health, and safety) departments of industrial and manufacturing facilities, in government agencies and a variety of other work areas.

Virtually all aspects of the environmental arena use independent contractors. The reasons for their use are as varied as their places of employment. Some are retained on the basis of skills, knowledge and /or experience. Others are employed to augment full-time efforts to meet deadlines such as regulatory compliance deadlines, to prepare for audits and certifications such as ISO 1400, to facilitate permit applications, etc.

There are a number of questions that each entity using independent contractors should examine regarding the nature of employment for those on contract. Are these workers really temporary or contract? What circumstances would make an employer question the nature of employment? Can an employer think that the contractor is now a permanent employee? Answers to these questions could have a considerable impact on the total staffing of a business. They also have implications in areas of employer responsibility and liability.

There are definite conditions that differentiate the contract laborer from a full-time permanent employee that should be explored. There are definite benefits to using contract labor; however, managers and human resource professionals alike should be aware of the advantages as well as the disadvantages of hiring contract workers.

Who is a Contract Worker?
Independent contractor, contingency worker, contract employee, temporary worker, freelancer, just-in-time worker and casual workers are all names for contract labor. Businesses have discovered that it is more cost effective to use contract labor than hire a full-time, permanent employee to maintain the competitiveness in the global environment. Contract labor can also be credited with the expansion of new businesses.

There are many differences between a contract worker and a permanent employee that companies should be aware of. Independent contractors own their own businesses, therefore they are responsible for paying their own taxes, Social Security, Medicare and professional malpractice insurance. Permanent employees are generally responsible for specific tasks that are repetitive and narrowly and rigidly defined. Independent contractors are brought in for specific assignments within a project and leave once the project has been completed. Therefore, allowing human resource costs to be measured by the project and not having to be allocated as a fixed cost from year to year.

Displaced employees who decide to sell their services and expertise back to their previous employers account for many of the independent contractors. A displaced worker who becomes an independent contractor can deduct all of their expenses related to self-employment on their taxes. A permanent employee may only deduct business expenses exceeding 2 percent of their adjusted gross income. The greatest risk for independent contractors is the ability to find their next assignment.

Vendor contractors are companies that supply employees under a written contract to perform specific tasks or projects for another company. The vendor company must assume responsibility regarding worker's compensation laws, government mandates and all tax burdens pertaining to employees. The vendor, therefore, decides which workers to send to which locations, how many hours will be worked and which specific projects will be done, as well as providing the equipment to be used.

Temporary agencies are essentially third party staffing companies. These companies assume the responsibility of paying the employees as well as adhering to all workers' compensation laws, government mandates and the tax burdens that come with having employees. However, unlike a vendor contractor, a temporary agency shares a co-employment relationship with the purchasing company. The company using the temporary service is able to control the work to be done, scheduling of the employee and provides the equipment to be used, such as computers, typewriters, pens and paper. Temporary employees can also receive benefits such as health insurance and vacation from the agency that they work for.

The Advantages and Disadvantages of Using Contract Labor
An advantage of being a temporary worker is the ability to investigate internal postings for job openings as well as exploring his or her compatibility with the company. The temporary worker is no longer viewed as underskilled or less desirable than a permanent employee is. An advantage for companies to use temporary workers is that the worker is easily replaced if they are not working to the companies' satisfaction, which allows the company to be more flexible and provides greater security for the permanent employees. The biggest advantage for a company to use temporary workers is the fact that the temporary agency is responsible for prescreening the workers on technical or clerical proficiency.

The Pros
Economics is the number one reason contract labor has become increasingly popular in the environmental management industry. A prime example of the economic benefit of using contract labor is that the cost of providing benefits to permanent employees, such as social security as well as other mandatory employment taxes along with health and life insurance, vacation and sick pay, pensions and bonuses are almost 30 percent higher than a contract worker's earnings. The hiring company will probably pay fewer dollars (based on a predetermined hourly rate) for a contract worker than it would to a permanent employee. Contract labor, therefore, proves to be more cost-effective and profitable than paying permanent employees annual benefits.

Adequate workforce is another reason to use contract labor. In many work environments there is a need for larger workforces for peak times or special projects. It is not feasible for a company to invest time, resources and training to hire permanent employees and then suddenly lay them off. Using contract labor provides flexibility by supplying already skilled workers and producing at maximum performance without a training curve. Through their company's use of contract labor, permanent employees are typically insulated from layoffs. This in turn gives the employee a sense of security and a higher morale.

Contract labor is a great fit for projects that require a large workforce with specialized skills. Firms that provide contract labor services have a large inventory of workers skilled in many diverse fields and specialization. These workers can be supplied on short notice for a day or a few months and have already been prescreened to determine the level of their expertise in a specific field.

Satisfaction is another advantage for using contract labor. If any of the contractors are not performing as expected or perhaps are violating the company's policies or procedures, the vendor can efficiently replace them. The vendor receives feedback from the company concerning the workers performance and any training needs that should be addressed in the future. Fully trained and safety conscious contractors are a definite advantage for the environmental management industry.

Recruitment and hiring costs are another essential reason for adapting contract laborers into the industry. A new strategic management trend suggests that unless an organization can perform a support function extremely well, they would be better off using contract labor. A company should contract out any activity that it is ill-equipped to handle, which would enable the company to focus on its core business. An example of this would be using contract labor to provide services as an environmental consultant or a contractor brought in to finish a project in a manufacturing plant. Employment levels, recruiting needs, paperwork, interviews and skills testing associated with hiring are also greatly reduced by using contract labor for items that are not the company's specialization. This will result in significant savings for the company.

Recruitment process cost is another reason for using contract labor. Hiring a permanent employee on to the payroll could add up to 50 percent of the cost of hiring a contract worker. Many tasks are involved in hiring and maintaining a permanent employee such as: 1) recruiting time; 2) interviewing time; 3) reference checking; 4) payroll processing and mandatory filing compliance; 5) taxes; 6) vacation, sick, holiday and bonus pay; 7) company paid health and life insurance; and 8) pension plan contributions 9) training.

Temporary agencies that provide contract labor assume responsibility for all the above tasks. These firms are able to meet the immediate needs that a company might have because they pretest and interview the laborers to determine skill level and experience. Only those workers with industry experience are selected for employment, which results in saving both time and money. If the company were to hire a permanent employee for the position, the search and training could take eight weeks or longer to complete the process for a specialized position.

The learning curve pertains to the training of new permanent or existing employees. Training new employees or providing opportunities for developing new skills for existing workers is both time consuming and costly. Some projects have a time schedule that does not allow for training of an existing employee for the task, making it essential to use contract labor.

Rapidly changing technology can also make it difficult to accelerate in the time needed for completing a project. Independent contractors, who are already proficient in the expertise needed or the technology being used, can begin producing results immediately, therefore eliminating the need for costly training and saving an enormous amount of time. Independent computer programmers, for example, would provide vast experience from working for a variety of different clients, and they are usually project-based in orientation.

Fringe benefits that permanent employees usually receive, such as pay for sick leave, vacation, holidays, medical, dental and life insurance, are not provided to contract workers. Employers must also pay worker's compensation, unemployment insurance and FICA, federal and state taxes for all permanent employees. These benefits can amount to 40% of the total labor costs incurred by businesses. Utilizing contract workers cut these costs because they are paid by the independent contractor. Not having to pay these benefits can save a lot of money that can be used in other ways to produce income and profits. On the other hand, independent contractors must take into account that they must pay their own federal, state and FICA taxes as well as provide their own insurance. A sick day for an independent contractor signifies a day of lost income.

The Cons
Employee development may suffer by utilizing independent contractors or temporary workers. A workplace filled with contract workers can impede team or employee cohesiveness development and significantly reduce the company's reservoir of knowledge, skills and abilities. The company's investment into developing its employees fades as the trend toward contract labor increases. Companies are not going to spend valuable resources on the career development of contract personnel.

Using contractors can jeopardize a company's beliefs and attitudes and effect its corporate culture. The contractor will only be with the company temporarily; therefore they are not as likely to be committed to the same goals and ideas as a permanent employee would be. The tasks that a contractor performs may lead toward achieving long-term goals that the contractor will not be around to see achieved, therefore they may not have a strong commitment to fulfill long-term goals.

Contract workers usually lack loyalty to a particular company unless they are accepted as full participants. They complete daily assignments for a particular project and then move onto another company and the next job. Regular employees may treat contract workers as they would other permanent employees; or they may even go so far as to be resentful and frustrated toward the contract employee. The permanent employee usually views loyalty and commitment as very important to the overall success of the company.

Safety issues are major concerns for companies hiring contractors. Having contract workers at a manufacturing plant or other site may increase the risk of accidents happening. The independent contractors are not familiar with the facility, machinery, procedures, safety policies or materials. They may be vulnerable or ill prepared to contend with workplace hazards. The company relies heavily on the temporary service to send only workers with certain skill levels and safety training. If a worker slips through a crack in the prescreening process and is not as experienced or safety conscious, he or she could jeopardize others' safety. Until an accident happens and an investigation shows inadequacy, it is difficult to determine the contract worker's level of skills and safety training.

The record of accidents caused by or involving independent contractors is high. Union leaders and industry critics have argued that these workers do not receive adequate safety training and supervision. Independent contractors injured while on a project are not covered by the company's worker's compensation insurance. However, job-related injuries and illnesses can result in the filing of liability disputes against the company.

Social responsibility should be a major aspect of any organization. Most industries have a high use of contract laborers who only work intermittently. This can create doubts about the company's commitment to ethics and social responsibility. Some people think that contract workers' annual income is supplemented by federal, state or local unemployment benefits between work assignments. This view shifts responsibility to the general public.

Security is another drawback to using contract labor. Independent contractors may sometimes have access to proprietary information. Due to the freedom in employment choices, the company's information security may be jeopardized. The contractor who is working with your company today may be working with your competitor tomorrow.

Supervision can be difficult to implement, but must be secured to ensure productivity and safety. A contract worker will require more supervision than a permanent in-house employee.

Loss of expertise is yet another drawback of using a contractor. Once a project is completed the independent contractor moves on. With the independent contractor goes all his or her valuable knowledge.

References

• Archer, E.R., "Words of caution on the temporary workforce," HR Magazine, September 1994, pp. 168-167
• Barrier, M., "Now you hire them, now you don't," Nation's Business, January 1994, pp30-33
• DuRivage, V.L., "New policies for the Part-Time and Contingent Workforce," M.E. Sharpe, Armonk, New York 1992
• Fierman, J., "The contingency workforce," Fortune, Jan. 24, 1994, pp. 30-36
• Morris, G., "Contract maintenance flags safety, " Chemical Week, Aug. 26/Sept. 2, 1992 p. 32
• Nye, D., "Alternative Staffing Strategies," The Bureau of National Affairs, Inc., Salem Ma., 1992.
• Victor, K., "Explosions on the job," National Journal, Aug. 11, 1990, pp. 1941-1945
• Wolfe, M.N., "That's not an employee, that's an independent contractor," Compensation & Benefits Review, July/ August 1996, pp. 60-64

This article originally appeared in the 06/01/2003 issue of Environmental Protection.