We are seeing an interesting trend developing in the marketplace that reflects the uncertainty plaguing the economy. Executives are seeing their compensation cut and there have been high-profile layoffs of thousands of employees. Some tech companies have cut their workforce by 10% or more. A survey by ResumeBuilder of 1000 business executives from companies with 50 or more employees show that 62% have taken a pay cut to minimize layoffs due to economic uncertainty. Companies are scrambling to stay afloat and are trimming budgets, with labor costs under scrutiny!
What does all this mean for the search and staffing industry? It means that companies are cautiously readjusting their salary and staffing strategies to position themselves for possible further economic uncertainty. Increasingly companies are looking at independent contractors to fill in for laid off workers. This phenomenon is nothing new: It comes and goes with the normal business cycle. Adjusting a company’s labor force to adapt to economic conditions has been with us for a long while. Stacie Haller, chief career advisor at ResumeBuilder.com notes that:
“The practice of hiring contract workers has been used for 50 years to weather economic conditions. It gives a company a more nimble workforce without the impact of layoffs.”
Payroll and benefits provider Gusto, Inc. has found that payments to contractors have increased 23% in the last two years. As companies try to become more flexible and cost conscious, the practice of leaning on contractors is likely to become more common. Given this trend, close attention should be paid to how the contract labor is utilized. In many, or most, cases these workers should properly be classified as employees, but they are nominally treated as 1099 independent contractors instead of as W-2 employees. This is an important distinction that needs careful consideration. Andy Medici of The Playbook cited survey results that show 78% of companies are hiring more contract workers than in previous years, in part to save money. He warned that the Department of Labor is tightly monitoring the use of contract labor with new rules designed to crack down on misclassified workers. Independent contractors, sometimes known as 1099 contractors, typically are given an assignment and are then free to execute the work as they see fit. They typically have other clients and other income streams. They need to have their own insurances in place and are not covered by the client company’s Workers Comp.
Mark Kluger of Kluger Healy LLC notes that for a business to classify a worker as an independent contractor there are several questions that need to be asked, including: Is the worker performing an integral function of the business? Do they have a company email? Do they appear like an employee? Do they supervise other workers? If any of the answers to the above are “yes” you should tread cautiously so you do not misclassify the worker.
So, what do you as a recruiter do to defend your client from potential trouble with the IRS? You should carefully review the job description for the temp or contract placement you are making to see if the criteria for a 1099 independent contractor are met. If there is any doubt, you should do the placement through an Employer-of-Record (EOR) back-office provider who will become the worker’s employer. Then the worker will truly be classified as a W-2 employee. This trend to contractor labor is likely to accelerate until the economy cycles back to a more robust growth mode. In the meantime, you must help keep your client out of trouble and steer them in the right direction. You can do this if you FOLLOW THE MONEY.