Legal Decision out of the U.S. Underscores: When Hiring Contractors – Work THROUGH a 3rd party. Mitigate RISK

July 30, 2013

From Forbes in the U.S. last week comes an interesting post about the legality of companies who hire workers as independent contractors.

We all know the global workforce is becoming more fluid and nimble. It’s estimated that by 2030, up to 40% of the workforce will be independent contractors rather than traditional permanent employees. And that’s certainly not limited to Administrative/Clerical BUT a large expansion is and will be Professional & Executive level Contract – Interim Staffing such as Strategic Sourcing, Procurement, Logistics and Materials Management for example. The benefits of independent contract jobs are vast, especially in Procurement. It’s beneficial for companies who can hire seasoned Procurement experts on a project-by-project basis or for something extremely strategic as needs arise. The advantages are tremendous because they keep costs under control and companies can trim and stay on budget. Additionally, Interim Professionals can really diversify their experiences and put more money in their pockets compared to their permanent colleagues. The added advantage is that they also catapult themselves up the career ladder faster so that sole contributors for example can become Directors 3 to 5 years faster.

But it’s important that companies tread carefully when it comes to the legalities of hiring Professionals on contract. We do see rogue departments in many companies across all industries finding their own talent – Striking out and hiring individuals and writing up their own direct contracts with them as independent contractors. That is a very risky way of doing business. This happens a lot here in Canada. And there has been a lot of press in the U.S. especially about companies that have hired people who are for all intents and purposes are full-time, permanent employees, but they list them as contractors because it is more attractive to save money on tax obligations and benefits for both the employer and the individual. And these companies mistakenly think that just because an employee has signed an agreement that they’re a contractor, they’re shielded from legal liability. Not the case!

As Forbes’ legal contributor Richard Tuschman identifies, The U.S. 11th Circuit Court recently issued a pretty important decision that says such an agreement isn’t enough.

Here’s the crucial takeaway: “Under U.S. employment laws, whether a worker is an employee or an independent contractor depends on the application of a legal test, not on the existence of an independent contractor agreement.”

The court applied a 6 factor test to determine the “economic reality” of the situation, and whether the employee is an independent contractor or a full-time employee in the eyes of U.S. labour laws:

  1. How much control does the company have over the work to be performed?
  2. How much opportunity is there for profit or loss for the individual depending on their managerial skill?
  3. How much has the worker invested in equipment or materials necessary for their work?
  4. Did the services rendered require a special skill?
  5. How permanent is the working relationship?
  6. Is the service rendered an absolutely integral part of the company’s business?

Obviously, looking at this metric there are huge gray areas in terms of what counts as an independent contractor and what counts as a full-time employee.

In IT, a sector that has used contractors for decades, it would be unheard of to direct hire a contractor without a 3rd party agency to provide an arms-length relationship between contractor and company. Why then would it be different for other staffing areas? It’s beyond me.

Contract is growing rapidly in many other our verticals – in our specific area it’s RED HOT in Procurement and Supply Chain Management – so it’s important that companies looking to hire contractors for these functions –  whether it at an analyst or at a Director or a VP level – pay attention to these important legal issues. It’s important that they understand how to minimize risk by utilizing staffing through a 3rd party such as an Argentus. As a company working on the forefront of contract staffing in Procurement and Supply Chain, we’re more than willing to assist and can maneuver through the potential mine fields of Contingent Workforce Management for our customers.

What’s becoming clear is that the U.S. courts aren’t too keen on companies who hire “contractors” because they are too sloppy to think it through and appear to merely skirt legal obligations. This underscores the need for companies to solidify and certify their legal positions when it comes to contractors.

So time to look around and see that your company is doing it the right way. Mitigate RISK. Time to have a chat with Argentus.

It’s a NEW workforce @work! or call me at 416-364-9919

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Over and Out for now



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