Unintended Consequences Along the Compliance Continuum

105943231Never before has there been an environment like the one our Fortune company clients are facing today. The long-heralded “perfect storm” was mostly marketing hype and fear selling as it never came nor went. In reality, the United States and other countries among the G20 are at a tipping point where enforcement measures are no longer single, isolated events but a pervasive collective; and this collective landscape is continually evolving and expanding like a moving target.

An increasing number of businesses rely on a contingent workforce, and yet the rules of engagement surrounding nonemployee labor have become more complicated and ambiguous creating a dichotomous reality for business operations. Nonemployee labor — particularly freelancers, consultants and independent contractors — have a bull’s eye on their classification as more initiatives are set in motion to address an ever-growing talent deficit. Not only are federal agencies staffing up and cracking down on employee misclassification, tax evasion and the like, but state agencies are as active in audits — if not more so — than their federal counterparts.

Added requirements and check points among different states only adds to the confusion over compliance in the workforce. For example, 12 states have new hire reporting requirements that are used by various agencies in determining or enforcing child support orders and/or verifying unemployment and worker’s compensation benefits. The new hire information is then shared within a national database. Think about this: If you are required to disclose all new hires in these states in order to comply with the regulation but you don’t have visibility into this part of your talent pool, then you are out of compliance before the work even starts!

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The landscape isn’t just evolving domestically. As Fortune companies advance along the maturity curve of multinational expansion and pursue opportunities that arise via BPO, R&D and joint go-to-market strategies, they must address compliance. Ignorance and avoidance are no longer options.

Companies and their corporate leaders are trying to do the right thing, but oftentimes are at a loss for what to do first, or without specific expertise within their legal, risk and human resource functions as to how to protect their interests properly. Hiring managers are left to their own devices, or worse, using the system to their advantage under the auspices of getting work done on time and on budget. Unfortunately, this creates a huge “Butterfly Effect” in the nonemployee talent-based equation where companies that are without guidance, tools and protection, are caught totally off guard, flapping their proverbial “wings” and fueling things negatively, despite best intensions.

After 18 years in the space of contingent work, advising hundreds of large companies and working directly with and for both boutique and global staffing firms, I am now seeing what I was once asked to predict for the future of contingent labor in the year 2020 beginning to take shape. What I didn’t anticipate was that the lens would widen so broadly as to include a vast array of the types of independents; from contractors to small entities and every flavor of outsourced service provider, the evolution of nonemployee staffing includes all types of non W-2’d workers who visit, perform “work” at and extend corporations reach into the cloud to get things done.

What’s a Contingent Workforce Manager to do?
First, I’d advise you to determine your risk tolerance, especially if your company is publicly traded or has a workforce mix of 10 percent or greater coming from the nonemployee workforce.

Next, shore up your policies and create a governance map. When ICon performs gap analyses and risk assessments, the first thing we notice is that most corporations do not have contingent work policies, and if they do, they do not call out or specify how the independent contractors and outsourced services are to be vetted or validated.

Trust but verify. Raw data is not enough. Despite the most valiant attempts to pour through Accounts Payable data to find and “type” your contingents, this data is not enough. There’s a huge assumption (and you know what they say about those) that the most trained eye can perform a “pre-audit” and build a necessary paper trail by combing through hundreds or thousands of worker/ company names to ensure that these are in the appropriate classification buckets. What is missed by doing this adds up to hundreds of millions in payout dollars against claims, and an even greater number in cost avoidance opportunities lost forever.

Being at the tipping point doesn’t mean the snowball effect is inevitable. With some proactive measures, companies can stay ahead of the storm. Stay tuned…next time I’ll unravel how other audit triggers are a gift in disguise.

MORE: Choosing the right IC compliance provider

Dana Look-Arimoto

Dana Look-Arimoto
Dana Look-Arimoto, founder and CEO of Phoenix5 LLC, is an executive and leadership team coach, Talent Eco advisor, speaker and author of Stop Settling, Settle Smart: Rethinking Work-life Balance, Redesign Your Busy Life. She can be reached at dana (at) phoenix5th (dot) com.

Dana Look-Arimoto

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2 Responses to “Unintended Consequences Along the Compliance Continuum”

  1. […] a previous post, I discussed the basics of the compliance environment and some proactive measures that can be taken […]

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