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The Blended Workforce

The Blended Workforce

Businesses hire customers to fill short-term gaps and save labor costs, but it can be challenging to effectively manage employees and freelancers who have different statuses and legal standing.

Jessica Lukensow has a distinct perspective on the gig economy.

“The team I work with is hired by other companies to complete due diligence work for companies my client is interested in acquiring,” she says. “My specialty is in the human capital space. I assess any risks the client may have specific to people-related aspects of the acquisition.” Her work includes reviewing outstanding litigation, benefits costs and organizational structure issues. That way, the Grant Thornton client can get a deeper understanding of the acquiree’s financial situation.

Throughout her career, Lukensow has seen an increase in the hiring of contractors and freelancers in the business world, for multiple reasons. When she was an HR manager at Wayzata-based Cargill Inc., she found herself needing experts in change management. She hired contractors to help her company implement a SAP (systems, applications and products) software project. Recalling the scenario, she notes, “I can hire somebody who’s an expert in this subject. But I don’t have to pay their salary, I don’t have to pay vacation, benefits, unemployment insurance.”

She is well aware of the advantages of such short-timers, but also the pitfalls. In the past decade-and-a half, there has been an expansion in the portion of workers not tied to one employer. These freelancers often provide companies with flexibility and access to expertise that they can, in effect, rent for particular projects.

The use of freelancers will continue to increase, because it offers cost savings for employers. “Even though you’re paying a premium for that subject-matter expertise, it’s short-lived and the deliverable is defined before that person sets foot on the job,” Lukensow says.

But how does a company manage a person who is, in essence, a separate company? And how does it get freelancers and full-timers to work together as a team? As the gig economy grows, these issues will become more crucial for business of all sizes. And there’s another dimension here—as Microsoft and other companies have discovered, there can be a financial and legal penalty if businesses blend freelancers and full-timers too well.

Labor savings and flexibility

Why are more companies tapping freelance talent? They can save money on labor costs and get the subject-matter experts they need. A contractor with a specific expertise can come in and address particular needs, notes Larry Bourgerie, a senior lecturer in the Department of Work and Organizations at the University of Minnesota’s Carlson School of Management. In contrast, he says, a manager might conclude that she would have to get her staff members more training to get them up to speed.

Another factor Bourgerie cites is availability. For some people, freelancing is a “career choice,” he says. Bourgerie joined the school after a 25-year career in HR roles for finance, manufacturing and health care companies. “It used to be that you didn’t have much choice,” he says. “You were laid off, you couldn’t find a job—you went off and did some contract work.” Now, he says, some baby boomers in their later career stages elect to work on projects during the bulk of the year and then spend three to four months in Florida or Arizona. Some of their younger counterparts who have financial flexibility also opt to work part of the year, and then take time for travel or other pursuits the remainder of the year.

The Great Recession also accelerated the contractor trend. “Some people thought that working as an independent contractor actually offered more job security,” Bourgerie says. “I have heard people tell me this: ‘If I work at a company, I can be let go at any time. But if I’m building my own business by contracting, I have a little more control.’ ”

Contractors also give companies some added control. “It allows organizations access to highly specialized skill sets on a just-in-time basis,” says Angela Lurie, Minneapolis-based senior regional vice president for staffing firm Robert Half. “It allows them to utilize a strategic staffing plan” that allows companies to “flex their workforce on demand.”

Lurie and her firm also have benefitted from the demand for contractors. She places senior-level consultants in accounting, finance, human resources and project management at a growing number of client firms. These higher-level consultants “are very used to being dropped into an organization on a project or contract basis,” she says. That means they can function well with limited direction. “They’re extremely resourceful by nature,” Lurie says. “They’re also pretty savvy when it comes to the use of different technologies.”

Employee vs. contractor

But as Bourgerie notes, contractors aren’t employees. They are, in many cases, individuals who operate their own contracting businesses. That’s the challenge for the companies that employ them. Based on his background in performance management, Bourgerie argues contractors often want to feel “like they’re a part of the team.”

How could a company accommodate that need? Bourgerie recommends that businesses make clear the project’s mission and provide feedback, offer accolades when appropriate and treat contractors civilly. Yet, Lurie says, “There are certain privileges that employees receive that contractors don’t.” Paid benefits and perks are obvious examples. Some experts maintain that contractors shouldn’t attend company outings or team-building events. In addition, contractors don’t undergo formal employee job reviews.

That doesn’t mean businesses shouldn’t stay in regular touch with freelancers. One of the services Robert Half offers is frequent check-ins with consultants and clients. “[It’s] just to make sure everyone is on the same page,” Lurie says. Businesses that hire contractors directly, without an intermediary agency like Robert Half, also can connect regularly to make sure milestones are being met.

There’s another angle managers need to consider in this era. They need to do a good job of managing employees who work full time. “Employees need to understand their role, too,” says Melissa Goodson, an assistant professor of management at the College of St. Scholastica.

“If you’re looking at the skills and talents of your staff and you see gaps, perhaps you see room to train the employees,” Goodson notes. If not, she emphasizes that managers can help employees understand that an outside expert can assist the team in meeting its goals. She stresses that a manager should nurture a good working relationship between insiders and outsiders—while still recognizing the lines separating the two.

Legal risks in contracting

While businesses need to be cognizant of how to manage blended workforces, they also must understand the legal issues associated with hiring contractors.

Although the gig economy is booming, Michael Miller has seen instances in which the gig economy creates legal quagmires. He’s a member of the employment law counseling practice group at Minneapolis-based Briggs and Morgan.

His clients are employers who need advice on complying with labor laws and regulations. Many “are reducing the number of independent contractors they have on staff,” Miller says. “They’re trying to avoid being accused of misclassifying independent contractors when you might actually determine that they are employees.”

Why? Many of Miller’s clients can point to the problems that Microsoft had starting about 20 years ago, when a federal court determined that the Washington-based IT giant blended employees and freelancers too well. In many senses, the freelancers “looked just like Microsoft employees,” Miller notes.

Both groups performed work on company premises on company equipment, and worked side by side and reported to the same supervisors. After learning that the IRS had told Microsoft that thousands of temporaries should have been classified as permanent employees, a large group of freelancers filed suit against the company. In 2000, after nearly eight years of legal wrangling, Microsoft paid out $97 million in penalties.

The Microsoft case, as Miller observes, demonstrates that the danger of blending employees and contractors is “potentially blurring that line as to classification.”

So how does a business determine a classification? In July 2015, the U.S. Department of Labor (DoL) released guidelines that summarize how employees and contractors are determined in the Fair Labor Standards Act. The DoL test, Miller says, seeks to determine whether the worker is “economically dependent” on the employer “or really in business for himself.” This occurs by applying the economic realities test. Generally speaking, if a business mandates when a contractor should do her work and how to do it, Miller says, “those are the earmarks of an employee rather than an independent contractor.”

Businesses can do a great deal to avoid running afoul of federal guidelines by actually having a contract for its contractors. An independent-contractor agreement should make clear that the contractor “is primarily responsible for the means and manner by which the work is performed,” Miller says. “If the freelancer is allowed flexibility in hours or schedule, that should be noted in the agreement.” It should also be made clear that the individual is not being offered participation in any of the company’s benefits programs.

“Whether a worker is an independent contractor or an employee is not a choice left up to the company,” Miller says. That determination is based on applicable legal factors.

A primary factor is whether the company has the right to control the means and manner by which the work is being performed. “If they feel the answer to that is yes, more likely than not they have an employee,” Miller says. “And by calling them a freelancer, they’re taking a risk.”

Those risks, as Microsoft discovered, can be expensive. A business might have to pay catch-up taxes on a misclassified individual, including both withholding and penalties. Also, a misclassified worker could come back and say that he or she legally should have been a participant in the 401(k) program or health care coverage.

While many companies want blended workforces, management and legal experts say there also needs to be a clear dividing line between employees and contractors.

Grant Thornton’s Lukensow has taken that reality to heart in her work as a consultant. Looking back on her experience as a human resources manager, she says, “I would have been more articulate to the consultant about what their deliverable was.” She’d also share only specific communication from the full-time employees as necessary for the consultant to follow through on that deliverable work product. She wouldn’t feel obligated to include them in team meetings and other activities that didn’t provide value.

The issue of blending full-timers and contractors “will become more and more of an issue as companies’ bottom lines continue to get tighter and tighter, because the expense of hiring a full-time employee is far higher than hiring a consultant,” Lukensow says.

As a result, she notes, “we’ll see more and more issues like the Microsoft situation. HR and managers need to be aware of that continuing pressure and have ways to mitigate some of the risks of not following IRS or DoL rules.”

How Big Is the Gig Economy?

here’s strong evidence that the gig economy—comprising freelancers, contractors and other short-term workers—is growing.

A survey released in October by the New York City-based Freelancers Union estimated the number of U.S. freelancers hit 55 million, up from 53.7 million in 2015. Based on that survey’s findings, freelancers make up about 35 percent of the U.S. workforce.

The McKinsey Global Institute published a 2016 report, Independent Work: Choice, Necessity, and the Gig Economy, which estimates that freelancers comprise 20 percent to 30 percent of all workers in the U.S. and European Union.

The U.S. Bureau of Labor Statistics (BLS) performed an official count of independent and contingent workers—a group that includes contractors, temporary workers and the self-employed—in 2006. BLS numbered those workers at 42.6 million, about 30 percent of the total U.S. workforce.

What’s driving this phenomenon? “Digital platforms are transforming independent work, building on the ubiquity of mobile devices, the enormous pools of workers and customers they can reach, and the ability to harness rich real-time information to make more efficient matches,” McKinsey reports. “The rapid growth of the largest platforms suggests we have only just begun to see their impact.” —G.R.

Following Contractor Rules

The line between full-time employee and contractor sometimes can be difficult to draw. But it can be costly not to make the distinction. The IRS and the U.S. Department of Labor (DoL) both provide guidance—as well as penalties for businesses that blend their freelance and full-time workers without paying attention to labor laws.

Here’s how Michael Miller, a member of the employment law counseling practice group at Minneapolis-based law firm Briggs and Morgan, summarizes the DoL guidelines:

  • Is the work being performed an “integral part of the employer’s business”? If so, it’s likely that the worker is “economically dependent on the company and therefore an employee.”
  • Consider whether the worker’s managerial skill affects the worker’s opportunity for a profit or loss.

For instance, the independent contractor might be purchasing tools or equipment to perform the work, investing in advertising and other overhead. But that overhead might allow for a profit or loss for the individual from the contracting engagement.

  • How do the contractor’s investments compare to the employer’s investment? The greater the former, the more likely the contractor is correctly classified as independent, and not as an employee.
  • Does the work performed require special skill and initiative?
  • Is the relationship indefinite?
  • How much control does the employer have over how and when the contractor’s work is performed?

Businesses also should pay attention to state and local government regulations. In May, New York City implemented the Freelance Isn’t Free Act, which provides a number of protections for people who perform freelance work for any company. Other cities could follow New York’s lead.

For companies seeking to draw a clear line between contractors and employees, these two websites can provide additional federal guidance:

  • dol.gov/featured/misclassification
  • irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined —G.R.

Gene Rebeck is a Duluth-based freelance journalist who writes monthly for Twin Cities Business.