Heady Debate

Rely on temps or hire staff?

By Rita Zeidner Feb 1, 2010
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0210cover.jpgIn the aftermath of a tornado that peeled the roof from Collins Industries’ Hutchinson, Kan., school bus factory last June, officials assured the plant’s 240 workers that they wouldn’t lose pay while the plant was closed for repairs. Still, some managers worried that the decision to pay people to stay home, including 80 temps helping with the annual school-season crunch, could create headaches.

“Employers walk a bizarre tightrope,” says John Dreasher, Collins’ vice president of human resources, who hashed out the risks of paying employees and temps with a lawyer before making the final call. On the one hand, he wanted to avoid legal tangles that could arise from treating temps the same as regular employees. But paying just the regular employees seemed unfair and had the potential to breed resentment on the shop floor. Besides, Collins needed the temps as soon as repairs were completed. “It was the second week of our busiest season. We knew that if we didn’t pay for the shutdown, they might find other jobs,” he says.

Few employers are threatened by the kind of storm that wreaked havoc on Hutchinson. But another kind of tempest is brewing in U.S. workplaces. Employers are increasingly reliant on a blended workforce where longtime employees work side by side with—or one cubicle, hospital bed or classroom away from—a temp who has a different boss. Employers that ignore the following legal and cultural implications of this situation put their businesses at risk.

Temporary Upswing

It has been 15 years since best-selling author Charles Handy made what seemed an outlandish prediction: “The challenge for tomorrow’s leaders is to manage an organization that is not there in any sense in which we are used to,” he wrote in The Age of Paradox (Harvard University Press, 1995). “Organizations will organize, but to do so they will no longer need to employ.”

He wasn’t the only one forecasting a seismic change in the way work gets done. Around the same time, researchers at MIT’s Sloan School of Management posited that by 2015, large corporations such as General Motors and Microsoft will be dinosaurs. Nearly every task, they said, will be “performed by autonomous teams of one to 10 people, set up as independent contractors or small firms, linked by networks, coming together in temporary combinations for various projects, and dissolving once the work is done.”

Today, these predictions aren’t as far-fetched. Even as the economy continued to shed traditional jobs, 117,000 temporary positions were added during the last six months of 2009. Half of all post-recession job growth will be contractors, consultants and other temps, predicts employment attorney Garry Mathiason of Littler Mendelson in San Francisco.

The U.S. Bureau of Labor Statistics (BLS) is making a similar call, predicting in its December 2009 forecast that employment services will be among the fastest-growing segments of the economy, adding 637,000 jobs over the next 10 years—twice the growth rate for the overall economy during the same period. Blue-collar and lower-level office jobs will continue to make up the majority of temporary work, although demand for short-term managers, financiers, computer experts, engineers, teachers and nurses also is expected to increase.

Hire Authority

With the economy still in flux and many organizations still reeling from mass layoffs, taking on new long-term employees represents an unnecessary risk, says Mathiason, head of a new department specializing in contingent-worker issues.

Other factors also are driving demand: For short-term assignments, temporary workers are almost always a bargain compared to regular employees, mostly because benefits aren’t part of the line item costs, says Joseph P. Broschak, a University of Arizona management professor whose research focuses on the implications of temporary and other alternative employment arrangements. In 2005, when BLS last did a head-to-head comparison, less than 8 percent of agency temps and about 18 percent of all contingent workers had employer-provided health benefits. Less than 4 percent of agency temps and 12.4 percent of all contingents were included in pension plans. By comparison, 56 percent of regular workers had employer health benefits, and 48 percent were included in a pension plan.

Competitive pressure, particularly the need for speed to market, means employers have little time to train employees and need access to workers on an on-call basis who are ready to hit the ground running, says John Sullivan, a management professor at San Francisco State University and a consultant who says it won’t be long before companies rely on temps to fill half their staffing needs—double the current ratio.

The futuristic scenarios predicted by Handy and at MIT are already in play in some industries. Like many hospitals, St. Mary’s Mercy Medical Center in Grand Rapids, Mich., maintains its own temporary nursing pool. The arrangement permits managers to quickly staff up in the event of an H1N1 flu outbreak or other emergency. And, it provides an option for nurses who don’t want structured schedules, says Tom Karel, SPHR, Mercy’s vice president for organizational and talent effectiveness.

Minitab Inc., a software developer in State College, Pa., recently began leasing engineers from a neighboring company experiencing a workload slump. If not for the arrangement, the workers would have been laid off or transferred out of state, according to Todd Hershbine, Minitab’s HR director. Under a contractual agreement, when business picks up, the engineers will go back to their old jobs.

Verigy, a semiconductor manufacturer in Cupertino, Calif., serves as a poster child for companies that rely on temporary staffing to manage fluctuating product demand. Its strategy is different from other companies, whose HR professionals typically focus “on bringing in workers for the long haul,” says Teressa Harnois, SPHR, Verigy’s staffing manager. At those companies, “You hire like gangbusters when the economy is up, and then you have layoffs.”

Instead, to accommodate the semiconductor industry’s predictable three-year cycles, Verigy employs only a skeleton crew “to turn on the lights,” she says. Nonessential duties are farmed out. When demand kicks in, engineers and other high-tech workers are hired through industry-specific staffing companies or as independent contractors.

“We don’t want to be in the position where we are hiring people and then laying them off,” she says. “It’s a strategic issue.”

It may be an appealing model for executives bent on keeping headcount down and maximizing flexibility. But there are reasons to proceed with caution.

Two Employers, One Headache

For many employers, establishing a shared-employment relationship with a staffing company—a legal arrangement known as “co-employment”—is the single largest risk of bringing on temporary workers. There isn’t anything wrong with co-employment per se. But it could mean taking on unexpected employer responsibilities and costs, including:

  • Paying workers’ compensation if a temp is hurt on the job.
  • Providing pay and benefits on par with what employees receive.
  • Paying a share of employment taxes and unemployment insurance premiums.
  • In union workplaces, covering temps under the same labor contracts as bargaining-unit employees doing the same work.

Avoiding Co-Employment

Employers that jointly share control of temporary workers with a staffing agency may unwittingly establish a co-employment relationship, taking on unexpected responsibilities and costs. To limit co-employment risk, the American Staffing Association recommends assigning the following responsibilities to a staffing company:

  • Recruiting, screening, testing, training and interviewing workers.
  • Determining workers’ wages, benefits and expense reimbursements.
  • Hiring, firing, assigning and reassigning workers.
  • Handling workers’ complaints and discipline.
  • Distributing paychecks.

Other best practices:

  • Require distinctive badges for workers supplied by staffing companies.
  • Make separate reference to staffing company workers in customer communications.
  • Channel any customer social invitations through the staffing company.
  • Make appropriate distinctions between staffing company workers and regular employees in business cards, letterhead and so forth.
  • Maintain a staffing company presence at the worksite.

Ensuring that temps are productive and safe, while keeping the distance necessary to avoid establishing co-employment, is dicey, Dreasher concedes. To prevent a claim of co-employment from passing legal muster, he takes deliberate steps to distinguish the treatment of workers and temps, including limiting temp training and inviting only regular workers to off-hours company functions. “It really is a gray area,” he says.

Hiring workers who are their own bosses eliminates co-employment risk, but the arrangement presents its own challenges. If independent contractors are managed the same as regular employees, the organization hiring them may be required to pay employment taxes, unemployment insurance, workers’ compensation costs and overtime. In addition, these workers may be entitled to the same state and federal employment protection as regular employees. Employers found to have intentionally misclassified workers could face hefty fines from federal and state tax and labor agencies and, in some instances, jail time.

Laws governing independent contractors are so complex, and the stakes for businesses that misclassify workers are so high, that Verigy hires a contractor just to identify workers who can legally be considered contractors, says Harnois.

Government officials have long been wringing their hands about widespread misuse and perceived abuse of independent contractor status and are scrutinizing businesses more closely. In Massachusetts, an initiative involving 18 state agencies with oversight of independent contractors resulted in the recovery of nearly $1.5 million from employers that misclassified workers during 2008-09.

Federal officials also are stepping up enforcement. The U.S. Department of Labor is targeting industries such as garment manufacturers and construction businesses. During a 16-month investigation in 2007-08, officials detected 12,300 instances of misclassification just in New York.

IRS officials check for misuse of independent contractor status by matching data reported by employers on the Form 1099-MISC, the amount of pay workers report on tax returns and the portion of workers’ total income paid by employers.

In light of the huge legal risks posed by co-employment and misclassification, employers need to be sure they aren’t hiring temps for the wrong reasons, such as to skirt legal requirements or as an attempt to cut costs.

Despite widely held notions to the contrary, employers can’t rely on temporary hires to get around legal requirements, says Elaine Chaffee, SPHR, executive vice president of Career Transitions LLC, a staffing firm in Michawaka, Ind.

Chaffee occasionally hears from employers bent on keeping regular staff levels low specifically to avoid triggering Family and Medical Leave Act pay requirements or compliance with the Americans with Disabilities Act. “We have had to educate employers,” she says. “We are an agent of theirs. It’s not like they pass all their liability on to us.”

Nor is there a guarantee that temporary arrangements save money. It’s easy to compare costs looking only at hourly rates. But other factors also influence cost, says Broschak. They include the relative productivity of temps vs. regular workers, assignment length, labor supply and premiums for additional equipment.

In government, proposals to replace career civil servants with contractors or other temporary workers often turn political with businesses and existing workers each fighting for jobs. Spurred by scandals involving cost overruns and allegations of contract mismanagement, the Obama administration is reviewing the government’s long-standing approach to federal contracting and may determine that at least some jobs turned over to the private sector could be done less expensively in-house.

“I don’t endorse or encourage companies using contractors on an indefinite basis,” Chaffee says. Taking into account temp agency fees and the fact that many temps burn out on jobs that drag on for more than a few months, “after six months, you’re not saving money,” she says.

Broschak’s research suggests that temporary workers are less likely to burn out and are more invested in their work when they have a realistic expectation of being hired as an employee after the assignment ends. Some employers, however, forbid so-called temp-to-perm hiring because the practice blurs the line between contract workers and regular staff and could bolster a claim of co-employment. “You have to be very explicit that this is a short-term assignment,” says Craig Woolcott, human resources director for Quanex Building Products, a Houston-based building supply manufacturer. Even when a qualified temp is filling an interim position, when it comes time to hire a regular employee, “We need to go somewhere else.”

Audit Risk Rising

Federal and state labor and tax officials enforce independent contractor laws. But traditionally there has been little interagency communication about who they audit, why and the outcome. That is changing, according to an August 2009 report by the Government Accountability Office. And, an employer that undergoes an independent contractor audit by one agency is more likely to have officials from other agencies come knocking, says attorney Garry Mathiason of Littler Mendelson.

Managing Short-Term Workers Long Term

As the demand for short-term workers increases, HR professionals could see their jobs change dramatically.

While managers in procurement departments and line managers typically oversee temporary staffers, the responsibility should lie with HR, some say.

“I can think of no greater risk for an organization than to not know who is working for it,” says Mathiason.

HR professionals will no longer just be talent managers; they will be “talent brokers” expected to apply hard-nosed analytics to staffing decisions, according to Sullivan.

HR professionals must expand their views of risk, which are often limited to what will increase short-term costs, says Broschak. Temporary workers, his research shows, are most productive when they receive training, compensation on par with standard workers, job security and opportunities for advancement. The catch is that much of what makes a good temporary arrangement supports the co-employment relationship that many employers try to avoid.

“When standard and nonstandard workers interact socially more at work, on breaks or during lunches, attitudes toward co-workers and supervisors improve,” Broschak says.

HR professionals should be mindful of the risks of sharing legal liability with staffing companies without going overboard, says Memphis-based management consultant Brad Federman, author of Employee Engagement:A Roadmap for Creating Profits, Optimizing Performance, and Increasing Loyalty (Wiley & Sons, 2009).

Federman says he frequently hears about employers such as Collins that exclude temps from social events for fear that inviting them will bolster a claim of co-employment. In fact, HR knowledge advisors at the Society for Human Resource Management recommend this practice to members. Yet Federman believes that if managers already tell temps when to come to work and how to do their jobs, these factors are far more likely to support a claim of co-employment than party invitations.

Employers need better ways to ensure that their temporary workers are as connected to their jobs as regular workers are, according to Federman. That may require working more closely with staffing agencies, providing feedback, and ensuring that good temps are rewarded for good work and given opportunities to build their skills. Employers need not rule out going directly to a temp to offer praise or to ask for an opinion for fear of being sued, he says. “It’s all about building connections.”

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The author is a senior writer for HR Magazine.

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