After three long years of recession and bouncing on the bottom of economic indicators, even the Bears are looking at this year positively. As the economy recovers, many businesses are seeing sales improve without returning to the full headcount they had previously associated with such numbers. Often, they were able to become even more productive with fewer employees. So how are businesses operating with fewer people while making more money? Did we stumble upon a better way to get work done?
Prior to the internet bubble and the economic boom of the 1990s, corporate America was built on management structures that required huge numbers of employees dedicated to a single employer for most of their lives. Security and growth, two central elements of human satisfaction, were basic requirements of employment. Businesses grew, workers slowly climbed the corporate ladder, and the government thrived on employees’ income tax withholdings. The system worked.
Then everything changed. The aftermath of 9/11 saw an economic chaos that forced businesses to rethink how they did business and how they used workers. While companies that did not adjust fell by the wayside, others took advantage of this forced financial introspection to find more efficient ways to get work done. And changing the way they engaged and used their labor force grabbed the spotlight.
Over the next several years, businesses began to rely more heavily than ever on a workforce based on contractors and consultants rather than full-time employees. Carrying large numbers of employees meant higher fixed costs and the shackles of long-term obligations. The new business giants of the 2000s were growing with an employment model much different from the corporate behemoths of previous decades. Businesses that relied on contractors for flexibility, specialized skills, and to weather the peaks and troughs became more nimble and better situated to withstand whatever economic turmoil lay ahead.
Fortunately, the needs of these newly nimble companies dovetailed with the needs of a changing workforce. “The Freelance Nation,” as author Daniel Pink called it, took hold and independent contractors became the fastest growing segment of the workforce.
All of this became the underpinnings of a “perfect storm” for workforce change. For younger workers coming of age during this period, the new business models were Facebook, MySpace, YouTube, Twitter, and a host of others – innovative, creative companies that seemed to appear out of thin air. They watched as their parents lost their long-term jobs at Enron, Citicorp, and GM, and had little to show for their decades of dedicated employment. To up-and-coming members of the workforce, job security was based on skill, knowledge, and creativity. These younger workers saw the lucrative, entrepreneurial value of selling their services an hour at a time, project by project.
Meanwhile, for the older generation, the employment paradigm was changing right before their eyes. Their jobs were dissolving. Their old-guard employers were struggling and laying off long-term employees in huge numbers. Once the crushing recession stripped them of the possibility of a comfortable retirement, these older workers came to an unsettling realization: they had to keep working. Their old jobs no longer existed, but their companies and customers still needed them. So they became consultants in massive numbers and sold their knowledge in small installments, project by project.
The Rise of Independent Contractors
Global market forces, decreased home values, the wavering dollar, general deflation – it all adds up to a very different economic landscape than we enjoyed just five years ago. This confluence of financial turmoil spawned the deepest recession of our generation and created substantial changes in nearly all aspects of business operations. Some say that the storm is passing and that the skies are clearing; others are hedging their bets. Time will tell which camp is right. But one thing is certain: we can confidently say the way work gets done will never be the same.
At the heart of this change are individuals with non-traditional work engagements. Call them freelancers, independent consultants, self-employed, temps, contract workers or even non-employee resources – they all define what are known as independent contractors (ICs). Littler Mendelson, a large employment law firm, predicted in 2009 that 50-percent of jobs created in the recession’s recovery would be contract-based. This stunning prediction, as it turns out, was wrong – but not in the direction you might expect. According to Bureau of Labor Statistics, an astounding 68-percent of hiring in the last year has been contract-based. Not surprisingly, the largest growth segment of the contingent workforce is ICs. Demand for temporary and contract help is expected to remain strong as businesses expand their commitment to a flexible workforce to improve efficiency and productivity. The result is new terminology and a new business paradigm: “The Project Economy.”
Instead of building a large and expensive management infrastructure that previously comprised most growing corporations, work is now sliced and diced into bits of work called “projects.” Projects can be outsourced, traded, and performed anywhere, by any number of resources, many of whom may not be employees. Technology enables endless configurations of contributors to collaborate and produce work output.
Meanwhile, freelancing is becoming a more popular career choice. While many workers are forced unwillingly into a freelance situation, more and more professionals are embracing the risks, rewards, and responsibilities that go with life as an IC.
While the Project Economy is already changing the way work gets done, the implications go farther. With all of the political and media emphasis on job creation, what if “jobs” no longer took the form of full-time positions that implied permanency? What if only a few savvy workers can figure out how to engage as project workers? What if most of the new jobs in the recovery were, in a sense, temporary?
Issues and Challenges in the Project Economy
Companies that engage ICs face a wide variety of complications and challenges unique to such engagements. The biggest, of course, is reclassification – this risks of which can be daunting. If a worker is engaged as an independent but should have been classified as an employee (based on regulatory criteria for working independently), the worker is reclassified and the client faces penalties, back taxes, and other liabilities. Reclassification may also prompt co-employment lawsuits, such as the infamous Microsoft case (Vizcaino v. Microsoft).
Reclassified workers have employment rights, like back benefits and insurance coverage while clients are suddenly strapped with employer responsibilities, such as immigration requirements, wage and hour, and overtime laws. In fact, 2009 saw more employment-related class-action lawsuits than ever – nearly 5,800 for wage and hour violations alone. When it comes to engaging ICs, the law is not on the side of business.
Independent workers also face challenges. While key employment laws generally protect contingent workers who are employees, certain categories of contingent workers—such as ICs—may be excluded from coverage under these laws. ICs are considered businesses; as such, they are not entitled to worker’s compensation insurance, unemployment, overtime, family leave, or protection from discrimination. It is also often difficult for ICs to carry their own insurance and benefits, and accept extended payment terms like their large vendor counterparts. All of this may make it difficult for ICs to work with large corporate clients –the very companies that can benefit most from their services.
A Solution for Improving Independent Contractor Compliance and Engagement
The Independent Contractor Engagement Specialist (ICES) has emerged as an aggregator of ICs and small consulting firms. An ICES serves as a form of Managed Services Provider for ICs, often working alongside those engaged to manage staffing agencies and their workers. Aberdeen Group reported in June, 2010 that companies using an ICES have an 80 percent better compliance rate and gain benefit similar to what they derive from their staffing counterparts, such as Managed Service Providers (MSP) and Vendor Managed Services (VMS). The ICES is quickly emerging as a proven category of business process outsourcing for the engagement of the high-end consultants, small boutique services firms, and similar individual businesses.
The ICES also offers ICs engagement options based on the individual IC’s structure and client relationship. If the client is treating the IC like a micro-business, the ICES makes sure the IC meets regulatory requirements (such as having multiple clients, working under a defined Statement of Work, being paid on a deliverable basis, assuming financial risk, etc.) If the client treats the IC like a temporary employee, the ICES engages the IC as a W-2 employee. If the IC wishes to function independently but fails to qualify as an IC, the ICES must offer an engagement model that maintains the IC’s autonomy within a reclassification-safe W-2 infrastructure.
These options enable ICs to stay focused on their work without worrying about achieving or maintaining compliance. The ICES also takes care of managing the worker’s business expenses, retirement plan (such as a self-matching 401(k)), eliminating paperwork, and providing billing and collections services. Not only is an ICES a “win” for the worker and the company, but it is a win for government as well.
As the Project Economy solidifies, we are likely to see more and more workers choose independent engagement over traditional career employment. Companies with a model to engage this talent pool efficiently and without risk are best positioned to thrive. Simultaneously, workers in the Project Economy need a portable business with a financial and legal infrastructure that gives them the same credibility and legitimacy as working for a big consulting firm. And of course, the government needs reliable tax collection while ensuring that the social safety net is extended to all citizens, even those who operate independently. The ICES may just be the operating model that gives all parties what they need to succeed in the Project Economy.