Managing Workforce Risk – Part II

by Harold Mills on October 4th, 2010

I bet you never even thought about unemployment and workers compensation claims. In part 1 of Managing workforce risk, I talked about some of the well known risks employers encounter using independent contractors. In part 2, I’ll talk about some of the hidden risks that are caused by the use of independent contractors and how to mitigate those.

Unemployment Claims Risk
Two related risks that come with all hires, and that are mitigated by using contingent labor are unemployment claim risk and worker’s compensation risk. In the previous post I discussed a few of the many government agencies in search of funds. In that list includes state unemployment agencies.

Think about it — more and more people have exited the traditional formal workforce. Studies show that more and more of them re-enter the workforce as independent contractors. There are lots of reasons for this, including the idea that free agency abounds in the hearts and minds of high skilled talent. The allure of not having to deal with corporate politics and tiring bureaucracies is appealing. Don’t forget about the ability to work on your own terms (many independent resources tend to only work 10 to 11 months out of the year). Not to mention the ability to set your own pay on any given project – which, by the way is usually 20% higher than what they get as an employee of a large corporation.

Despite the unemployment numbers these days, there are still demographic changes in our workforce occurring, including the baby boomers who are still getting older and want to retire soon (time doesn’t wait on recessions). Since many of them worked for companies that eliminated pensions in the 80s and 90s, and only offered 401Ks, they were all hit drastically by the recession. Many can’t even afford to retire. So they too need to work, but still want to do that on their own terms. These factors, among others, are leading to structural changes in our workforce and yes, more freelancing independent contractors.

The problem for regulators is as this population increases, their population of traditional employees decrease. This directly translates into a decrease in corporate funding for unemployment compensation pools. The more companies use independent contractors the less unemployment insurance they have to pay (good for companies, bad for states).

The states’ reaction has been not to figure out ways to lower costs (that would definitely not follow government norms), but to seek additional revenue by targeting corporations and deciding that these independents look like employees and therefore the company should pay.

Worker’s Compensation Risk
Worker’s compensation risk is a little more complex, and one that hiring managers and HR professionals tend to forget. You may not know this, but with independent contractors, you may be liable for injuries they suffer on the job, particularly if those injuries take place at your workplace. State laws vary widely, and some are ambiguous, but frequently the recipient of the service (that’s you) is held liable for injuries. While employees give up their right to sue for damages in exchange for the benefit of worker’s compensation insurance, independent contractors aren’t covered, and therefore not bound by these statutes. They are just an individual walking down your hall who trips, sues, is not required to have insurance, so guess what –you pay!

Mitigating this risk is tricky, but it can be done through the use of contract indemnity clauses or simply by payrolling all independent contractors who will be covered by your agency’s workers compensation insurance. With supplier-sourced contract labor, the contingent worker’s primary employer – the supplier– carries this risk and the burden of worker’s compensation insurance. Bottom line is you get the talent you need for the assignment AND your risk is mitigated, while the contractor is satisfied.

Thumbnail courtesy of victoriapeckham

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