Overcoming the 3 biggest misconceptions about ICs versus W-2 employees

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Most companies have two basic options when it comes to their workforce; either hire traditional W-2 employees or contract with contingent workers, also known as independent contractors (ICs).

Both choices have benefits and drawbacks. For example, working with in-house staff often allows managers more control over a project’s workflow and processes, whereas a contingent workforce offers greater staffing flexibility.

There are a few major misconceptions about choosing a contingent workforce that can dissuade some companies from using this model. However, a modern, cloud-based IC management platform can overcome these misconceptions, which may explain the increasing trend toward contract work. In fact, ICs made up anywhere from 10-20% of the total U.S. workforce before the COVID-19 pandemic, and that number has likely grown since. If you have misgivings about working with ICs, below are the truths to some of the frequent misconceptions about leveraging this work model.

1. Does better tech equal higher costs?

Everyone knows that working with ICs can reduce staffing expenses, which is perhaps the most obvious advantage of a contingent workforce. In fact, research indicates that a workforce composed primarily of W-2 employees may incur payroll costs 20-30% higher than their staff’s regular compensation, with costs typically including:

In contrast, working with ICs eliminates these expenses and opens the door to other cost-saving solutions. For example, most ICs carry the burden of any incidental costs associated with performing their work. Since ICs only receive compensation for time spent working, employers are not responsible for sick or vacation pay. Moreover, ICs are paid according to the negotiated terms of their contract and are not usually entitled to overtime.

However, the up-front costs of working with independent contractors may seem steeper than those associated with W-2 employees, and that includes acquiring a system to manage those ICs, because you increase your liabilities by housing your independent contractors in the HRIS system you use for your employees. However, a modern platform like Openforce allows you to manage these costs by simply deducting a percentage from IC settlements for the platform usage, which can be set up and automated with ease. When you factor this in, along with the above points, enlisting the services of ICs is almost always the most cost-effective option.

2. Flexibility or control?

Each time you hire a full-time employee, you’re making a major investment in this new worker. Your company takes on all the costs incurred during the employee’s onboarding process as well as everything thereafter. If an employee decides to leave your company at any point, you are forced to incur even higher costs as you search for their replacement and must provide an additional round of training. You also lose the flexibility that if your business slows down and workloads are reduced, you can reduce your workforce quickly to mirror. Either the employee remains on your payroll, or you are forced to lay them off, which can incur other costs, such as severance, extended or paid out benefits among other expenses.

On the other hand, one of the key advantages of utilizing a contingent workforce is the freedom to scale your workforce according to current business needs. Two major reasons ICs make up an exceptionally flexible workforce include:

Previous experience and specialized skills. Many ICs already have the qualifications and skills needed to provide services, so once contracted, can ramp up quickly to meet increased demand.

Contractual terms that allow contracting companies to move on. In many cases, independent contractor agreements (ICAs) give companies the freedom to terminate their contingent workers contracts at any time—a huge advantage when scaling back quickly during slow periods.

All in all, a contingent workforce offers unsurpassed flexibility for contracting companies that must adapt to fluctuating business needs. That said, a dynamic cloud platform for onboarding, payments, insurance, compliance and more can give you everything you need to utilize an IC workforce efficiently, available whenever you need it. With an end-to-end IC platform, getting the tools you need really is that simple.

3. Do ICs have a clear path to compliance?

Over the years, traditional W-2 employees have gained many legal rights and protections. For example, employees in the transportation industry are protected by wage and hour laws, workplace safety regulations and anti-discrimination statutes.

While companies that still rely on a traditional workforce must navigate a myriad of legal challenges and pitfalls to stay compliant, businesses that pivot to a contingent workforce avoid much of the headache wrought by these changes. Since ICs are not employees of your company, many of the provisions above do not apply to them. As such, legislation has also emerged to assist in identifying whether a worker is an employee or an IC, and these classifications can be difficult to navigate. Unless you have a reliable IC management platform, that is. 

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