Employers are always looking for the best ways to engage employees. They know a highly engaged workforce means good morale, enhanced productivity, high retention of talented workers, an environment conducive to innovation and creativity, and the list goes on. Recently, some experts have even advocated extending engagement efforts beyond an employer’s regular employees. With contingent workers, such as temps, vendors, outsourcing partners, and freelancers, making up an increasingly important segment of the workforce, some researchers say employers risk losing the talent war if they fail to focus on engagement of contingent workers. 
But employers also have to look at the downsides of treating contingents too much like they treat their permanent employees. For example, recognition and even perks extended to employees of an outsourcing partner may spark resentment from an employer’s regular employees. Also, employers have to be careful how they treat contingent workers who are independent contractors. Employers can legally use contractors for a variety of purposes, but legal considerations have to be taken into account. If contractors too closely resemble an employer’s regular employees, the employer risks veering into misclassification territory, a zone heavily patrolled by state and federal agencies.
Changing workforce
There’s no doubt, though, that contingent workers occupy an increasingly important place in the workforce, and employers need to understand the opportunities contingents can provide.
“It’s the end of work as we know it,” declares a 2013 report from management consultancy Accenture’s Institute for High Performance. “In the future, organizations’ competitive success will hinge on a highly unlikely suspect: workers who aren’t employees at all.”
The report says the new extended workforce made up of various types of nontraditional talent forms “a complex and intricate web of cross-organizational relationships that form a new ‘supply chain’ of talent.” The 2013 report noted that various estimates put the number of independent workers – freelancers, contractors, and temps – at 20 to 33 percent of the U.S. workforce, a huge jump from 6 percent in 1989.
The Accenture report explains that today’s contingent workers choose their situation because of their need for flexibility, their desire to work on a variety of projects, and their wish to develop new skills.
Red flags
But what happens if a contingent employee who is an independent contractor isn’t an independent contractor in the eyes of the law and instead fits the definition of employee? The U.S. Department of Labor and the Internal Revenue Service both have criteria establishing if workers are properly classified as independent contractors.
It’s sometimes unclear whether a contractor is misclassified, but in general the more a worker is treated the way employees are, the more likely he or she is to be misclassified. So when employers start considering how to engage contingent workers, Calvin L. Keith, a partner with the Perkins Coie law firm in Portland, Oregon, sees some red flags.
Many contingent workers are improperly classified as independent contractors when the law sees them as employees, either part time or full time. If a person working as an independent contractor is doing the same work as an employer’s permanent employees, that worker probably should be classified as an employee rather than a contractor, Keith says. Independent contractors most likely have their own businesses, do something that isn’t the focus of the employer’s business, and work for multiple businesses.
Besides contractors, Keith says employers need to be careful about how they treat part-time and temporary employees. If those employees aren’t going to be eligible for benefits, they need to be clearly excluded in hire agreements and in benefit plans. Also, to limit wrongful termination claims, the hire agreement should set a limit to the term of a temporary employee’s employment.
“In general, leasing employees is probably safer,” Keith says. “They are clearly employed by another company with pay and benefits provided by that company. For many state and federal laws, such as discrimination law, they will probably be considered joint employees.”
Changing a contingent’s status
Often, employers will bring in temps and then hire them as permanent employees if they like the way the temp assignment was handled. Keith says there’s “no harm in using a temp-to-hire program as long as the rules are clear.” He says a hiring letter should set forth the terms of the temp relationship with no promise of hire. The worker can then be offered a permanent position with a clear statement of terms at the employer’s discretion.
“One risk I have seen is that if there is a pretty clear record of temps moving into a full-time position, every temp not hired has a potential claim of discrimination,” Keith says. That’s why all parties need to understand each other’s expectations.
Employers trying to hire independent contractors present more of a problem, Keith says, “particularly if they perform the same work they did as a contractor.” In that case, it’s likely the worker was never an independent contractor, but always an employee.
But it may be OK to hire a contractor for a permanent position that differs from the work he or she did as a contractor. For example, Keith says, it’s possible that a company brings in an accountant for a contract position and then is so taken with the accountant’s skills that it decides to hire him or her to head the payroll department. In that case, the accountant is hired for a job that’s different from the job he or she did as a contractor.
On the other hand, if a computer programmer works for a company on a freelance basis and then is hired as a permanent employee doing the same work he or she did as a freelancer, there may be more potential for misclassification.