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Contingent worker programs are often the focal point of fiery discussion. For larger companies, or those with more than 1,000 employees, almost half of the workforce comes from multiple regions. That said, it’s surprising that organizations state they can only see 49 percent of their contingent workforce programs in terms of their measurement and cost. While many businesses turn to contingent workers to supply manpower and talent, with its ever-growing reach into multiple regions, the risks increase.
Do these statistics sound familiar to your business, or worse still, do you not know?
The long-standing tradition of turning to recruiters to manage contingent workers leaves organizations vulnerable, due to their ignorance surrounding compliance issues and governing regulations around contracted labor. As such, organizations need to pay close attention to the managed service providers they hire to avoid the financially devastating consequences of ignoring compliance.
With shifting market power, a changing workforce and the rising global labor market, organizations need to better manage contingent workers in a multi-regional environments or risk financial and other consequences. Indeed, many organizations’ efforts to manage talent is decentralized. Instead of giving a high-level executive control over the workforce, managerial-level employees make haphazard decisions – without guidance nor based on the organization’s policies. Strategic decisions need to be made, especially in light of changes made at the federal level. In response to the wheeling-and-dealing by organizations, the U.S. Department of Labor and Internal Revenue Service issued a memorandum in 2011 to curtail misclassification of employees.
In spite of such laws across the globe, even big companies in the U.S. get it wrong. Take Fedex, for example. The misclassification of contingent workers led the IRS to charge FedEx with $319 million in back taxes. Following suit, two large California newspapers were also required to pay hefty amounts for the misclassification of newspaper carriers – to the sums of $11 and $22 million.
In the U.S., non-compliance holds more than just financial risks. Criminal penalties may also occur, with imprisonment possible for improperly classifying workers. The IRS can obtain a felony conviction against individuals or organizations, with sentencing reaching a 5-year limit. Corporate officers can also be held personally liable for the infraction, up to 100 percent of the taxes and fines. While organizations may have a slightly easier time in the U.S., needing to only make the choice between 1099s or W2s, abroad the issue of compliance becomes much more complicated.
The risks are amplified when operating contingent workers in multiple regions, as organizations must become familiar with laws and regulations in each country – or depend on their service provider’s or recruiter’s knowledge. Indeed, as an organization’s reach becomes broader, the degree of specialized knowledge of compliance for contingent-worker regulations grows.
Contingent-worker regulations vary by country, and they’re not easy to understand. In Germany, for example, fixed-term contracts are limited to two years, unless the employer can establish cause for extending the contract. Agencies that lease contingent workers must hold a special license. The risk for organizations that do business with a non-licensed agency is risk: These employees can claim to be employed, thus the employer may be held liable for back pay, social security contributions and tax withholdings.
With the ever increasing use of a global contingent workforce, organizations must make a concerted effort to explore their management practices. Tried-and-true solutions for managing contingent workers might not be the right fit as the organization’s reach extends into additional regions. Upon closer inspection, the knowledge managed service providers and vendor management systems offer must support the organization’s growth objectives. Without such scrutiny, the organization may unknowingly expose itself to increased risk. With every transaction abroad to hire contingent workers, the exposure increases, along with financial and criminal liabilities.
With all this in mind you should ask whether your current method of managing your contingent workforce is unknowingly putting you at risk.