What is a contingent worker? Definitions, examples, and benefits

Today, a greater number of professionals than ever are working outside of traditional PAYE payrolls, as changes that were already evident in 2019 have accelerated. Recent figures indicate that around 14% of UK workers are now self-employed, and the number choosing contingent work continues to grow.

Non-permanent workers will often be critical to your talent strategy, particularly when talent is scarce, or when you need specialist skills or more flexibility. But what does ‘contingent worker’ actually mean? And what are the benefits of engaging with non-permanent talent?

If you’re just starting out in your contingent workforce management journey, and don’t yet have a full understanding of the breadth of available options, here’s all you need to know to get started.

What is a contingent worker?

The word ‘contingent’ is used as a catch-all phrase for any worker who is not on the company’s permanent payroll. The contingent workforce includes:

• agency workers drafted in on a temporary basis to manage seasonal demand
• highly skilled specialists to work on specific projects
• gig-workers
• freelancers, and
• professionals working through a personal services company (PSC).

Types of contingent worker

Broadly speaking, contingent workers fall into one of four categories.

1) Independent contractors

Those that fall into the self-employed category legally are sole traders, PSCs, freelancers, and independent workers (including the self-employed). The definition of these individuals covers anyone that is in business for themselves who has entered into a contract with clients to provide work or services.

Employment law doesn’t cover the self-employed in most cases because they are in business for themselves. The individuals are not personally subject to supervision, direction or control by the end client, and the client has the right to control or direct only the result of the work (the ends); not what will be done and how it will be done (the means).

Independent contractors (often referred to as ‘IC’s’) are responsible for their own taxes and the self-employed individual is obliged to register with HMRC and submit annual returns to pay income tax and National Insurance Contributions (NICs). PSCs are also required to pay corporation tax.

2) Dependent workers

Gig-workers are classified as ‘dependent’ contractors who are registered as self-employed but provide a service through someone else’s company. Usually, they carry out the work themselves rather than substituting another individual for the project and their contract is not usually with the ‘end user’ client, but another party (such as a staffing agency).

Their tax obligations are the same as for the self-employed (see above), however they are entitled to statutory worker rights under employment law.

3) Temp and agency staff

Essentially, PAYE (pay-as-you-earn) temps have a contract with an agency, but work temporarily for a ‘hirer’ – a person or company with employees. Under Agency Worker Regulations, they are entitled to the same employment rights as employees of the hiring company after 12 weeks. However, the agency is responsible for their pay and administering statutory employment rights.

There is also no distinction between an agency worker and an employee for tax purposes, and the employer is responsible for paying NICs on behalf of the employee.

4) Services providers (SoW)

Statement of Work (SoW) engagements have risen in popularity in recent years, particularly in the UK since the introduction of IR35 rules in the private sector. Here, a business engages a third-party professional services company (for example, consulting, tax, clinical or legal services) to deliver services or perform a specific scope of work, typically for a predefined price and timeframe.

The individuals delivering services under a SoW may be employed by a services company or directly via their Limited Company. These agreements are usually billed at a fixed price deliverable or for reaching specific milestones, which are agreed before the project starts. Work location and payment terms and conditions may also be laid out in advance. A performance-based SoW clearly defines the project’s purpose and deliverables, but does not necessarily provide details about how the work needs to be performed.

SoW offers flexibility, focuses on project outcomes, and shares risk between parties. SoWs are most effective when managed through a Managed Service Provider (MSP) due to the transparency and organisational efficiencies that these specialists, and their vendor management systems (VMSs), provide.

Is a contingent worker an employee?

Contingent workers are not traditional employees. However, it is important to take the same care in managing these workers that you would with permanent staff. This means they should be onboarded effectively, be made to feel welcome and part of the team, and be immersed in your company culture as much as possible.

Depending on how contingent workers are engaged, they may also be eligible to receive the same benefits as full-time employees. For example, dependent contractors are entitled to statutory worker rights under employment law and PAYE temps are protected by Agency Worker Regulations (AWR).

There is also no distinction between an agency worker and an employee for tax purposes, and the employer is responsible for paying NICs on behalf of these workers.

Temporary vs. contingent worker

Temporary workers are very much part of your contingent workforce mix. Agency temps can be drafted in on short notice, even when hiring at scale, to enable businesses to fill talent gaps, manage an unexpected boom in business, or meet seasonal fluctuations in demand.

Contractor vs. contingent worker

Professional contractors are classed as contingent workers. These individuals usually have specialised experience and may be brought in to work on or lead a specific project where niche skills are required, manage a period of change, or as an interim to cover a period of absence, such as maternity or paternity leave.

Is an intern a contingent worker?

Interns are not usually classed as contingent workers. If interns are actually doing work for your organisation, rather than just shadowing staff, they are classed as a worker and have the same legal status as full-time employees on a fixed term contract. They are also liable for tax in the same way as other employees.

Interns will, by the very nature of the role, almost always be under the supervision, direction and control of the employer and so can’t be deemed as being in business for themselves.

How are contingent workers used?

In the new world of work, businesses need to be able to quickly expand and contract workforces in response to fluctuating demand, bring on board specialist skills on a project basis, and ensure that they have the technological capabilities to thrive in the digital age. Talent acquisition strategies that don’t enable this are no longer up to the job.

Today, contingent workers are used to not only plug immediate skills gaps, but also to bring fresh skills and expertise into a business which will remain long after the contingent worker has finished their assignment.

The benefits of using contingent workers

Temp and agency staff enable businesses to adapt in response to market demand. Tapping into the power of the contingent workforce not only helps get work done, but can also mitigate risk, improve cash flow and, ultimately, increase the value of the business. However, without effective management and a slick talent management strategy, the full benefits of the contingent workforce simply can’t be realised.

Options for contingent workforce management

The gig economy and the use of contingent workers have grown exponentially in recent years – a trend which has certainly been accelerated by the global pandemic. In line with this evolution, the need for an efficient contingent workforce management (CWM) programme has become more critical than ever before.

While there can be challenges when it comes to managing your contingent workforce, the simple fact is, it is a necessity. With the gig economy growing and reliance on contingent workers increasing, businesses that don’t have an effective CWM program will soon find their competitive talent pools shrink.

Options for contingent workforce management include:

Business Process Outsourcing (BPO)

We mentioned SoW above as a segment of the contingent workforce, but it is possible to drive elements of your CWM through this employment model. In essence, any business process outsourcing is when you engage a third-party professional services company to deliver specific work for a defined cost and period.

The people who deliver the work will likely be employed by a services company or operate through a Limited Company, so you would have an agreed contract in place with the company itself to deliver the work.

Utilising a Vendor Management System (VMS)

This is software that facilitates contingent workforce management. It’s often cloud-based and hosts a wealth of data that informs your CWM, but it will require management either internally or through a specialist workforce solutions provider. As with all other tech platforms, it is only as good as the data going into it and the processes and governance that surround it.

Engaging a Managed Service Provider (MSP)

This is an outsourced provider (such as Guidant Global) that manages all or part of your contingent workforce recruitment – including the VMS. This is often the preferred choice for effective CWM due to the access it grants businesses to expert knowledge and experience of compliance, vendor management, and technology platforms.

A word on contingent worker compliance

How contingent workers are classified, and the terms they’re engaged under, impact your business’s responsibilities towards them and also how they are taxed. There are risks associated with each category of worker that you need to be aware of, regardless of where responsibility lies.

In the UK, the extension of off-payroll working rules (commonly referred to as IR35 legislation) into the private sector in 2021 means that medium and large businesses are now responsible for determining an individual’s employment status for tax purposes – and are liable if this classification is later found to be incorrect by HMRC.

Similarly, in the United States, employers must determine if workers are ‘1099’ contractors or ‘W-2’ employees for tax purposes each year. Any employee who earns at least $600 from an employer is required to receive a Form W-2. Since 2020 the IRS has required employers to use Form 1099-NEC to report any non-employee compensation to individuals who have provided work or services but were not employees. Failure to submit the correct form can result in hefty fines.

In both territories, the biggest challenge in correctly classifying contingent workers is determining the degree of direction and control the ‘employer’ has over the individual, as well as recording the process that was undertaken to come to this decision. An MSP will be able to provide expert advice to ensure that you are compliant in this area, which is crucial for avoiding costly fines and penalties for non-compliance, while you continue to enjoy the benefits that using contingent workers bring.

Making the most of contingent workers

The days when a business’s talent amounted to little more than a list of permanent, full-time employees are now well and truly behind us. Today, in order to ensure access to the right skills, at the right time, strategic workforce plans call on the expertise of agency workers, PSC contractors and other specialists engaged through SoW contracts.

Getting your head around the options available when it comes to engaging contingent workers can be tricky, but getting it right means gaining access to the entire spectrum of talent out there at your disposal. And here at Guidant Global, we are always available to discuss the best options for your business’s unique needs. Contact us to arrange an exploratory call.