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The Costs of Independent Contractor Engagement

By MBO Partners | ,

Updated Friday, July 3, 2020

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Many organizations today recognize that the independent workforce is an increasingly essential part of their talent ecosystems. But order to realize cost savings from this valuable pool of talent, businesses need to evaluate their workforce strategies to ensure they are doing everything they can to accommodate these workers.

By becoming aware of the direct and indirect costs associated with various engagement methods, enterprises can develop smarter strategies for their independent workforce and realize a distinct competitive advantage among their peers.

The Independent Workforce is Diverse

When engaging independent professional talent, it is first important to truly understand the diversity of the independent workforce. Independent professionals have individual preferences and requirements as well as differing levels of self-employability. This means that some workers will clearly meet legal qualifications to be classified as an independent contractor, whereas others may better fit a standard, W-2 employment status.

But the most significant number of workers actually fall into the middle of the spectrum as gray-zone workers. These are people who wish to work independently, but do not fully meet the legal requirements of being classified as an independent contractor.

The Costs of Engaging Independent Contractors

Businesses tend to handle engagement by either leaving managers to their own devices to fill talent needs or by using strict, one-size fits all program. Unfortunately, both of these methods have high associated costs and risks. In order to successfully engage this gray-zone talent, organizations need to offer flexible engagement options that appeal to a broad range of independent work engagement and worker types.

Here are three costs associated with not having a comprehensive workforce management program for engaging independent workers.

1. Rogue engagement

Some businesses engage gray-zone workers as independent contractors even though they may not be fully qualified. This type of rogue engagement leads to high costs because this spend is not managed strategically as a category within the enterprise.

2. Restrictive engagement

To address the risk of misclassification, many companies engage gray-zone workers as a W-2 employee on a payroll program. This type of restrictive engagement also results in high costs, primarily due to the fact that payroll program markups range from 20-50%.

3. Gray-Zone engagement

The ideal solution is to provide flexible engagement options that appeal to a broad range of independent work engagements and worker types. This creates a win-win situation for the enterprise and for the talent: it mitigates misclassification risk and allows talent to work the way they want.

Learn more about the costs associated with these engagement methods and review a case study to see cost savings in action.