Experts across the HR industry are predicting that contract labor will become just as common as regular employment. In countries such as South Korea, contract workers make up about 40% of the workforce. Current trends and statistics confirm that contract labor is on the rise and that there is no letting up on it. It won’t be too long before the United States sees contract workers taking up a large portion of the workforce.
It isn’t much of a surprise that is is occurring as the traditional form of employment enjoyed in the 50s and 60s is no longer what we see today. Some argue that the old standards that we glorify in fireside chats with others (lifetime employment with company pension and ample benefits) were somewhat of a fluke and was enjoyed in times of extreme prosperity never to be seen again in the near future.
What is apparent is that employment practices are evolving at a faster rate than expected. Much of this is due to the proliferation of technology and new services which make it easy for businesses to employ people on a short term basis for more favorable terms. In this article, we will explore some of the favorable terms and help you decide if contract work is something your organization needs.
Before we get into the details, here are a few things to consider. The size of your organization, budget, and needs will dictate how much and what type of contract work will be best for you. There is hardly a single organization out there that can’t benefit from contract labor. To see my point, consider a startup company. They are typically at low revenue generation, only have a few people for managing, and have little money to devote to hiring. While this might seem like a terrible scenario for using contract work, startups usually experience the best returns on investing in contract labor. The route to hiring is a bit different than the larger organizations as we will explain in further detail below.
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Cost reductions
This is the biggest reason why organizations will prefer contract labor over employment. At first glance, this usually seems the case. Hiring employees is a long expensive process and all the logistical, operational, and legal procedures expose the company to excessive expenses, strain on management, and legal and financial risk. Contract labor can be usually done on a short term notice and agents will take care of much of the legal work, initial interviews, and ancillary services, saving companies money from having in-house recruiters. Contractors can also be hired for short term periods as well which makes a company more efficient when they need work on a temporary or seasonal basis.
There are hidden risks however which might cost a company more than it thinks its saving. Certainly, contract agencies are profiting off this scheme either from the hiring organization or the contractor side. This is usually a well defined model that is supposedly understood when it is on paper. The hidden costs arise from contractor turnover, misalignment, and waste from management deficiencies.
Contractor turnover is a lot higher than the normal work force. It isn’t surprising when contractors will leave in the middle or even start of their contract period. After all, their overall job security is very low which forces them to seek permanent employment from other employers in many cases. Organizations can lose big when they are paying big fees to agencies just to see their contractor leave immediately after getting hired for a real job. Also, the lost productivity experienced once the contractor leaves and needs a replacement is a big loss for the organization and becomes added stress for managers who will need to hire another person once again.
Many contractors are also misaligned with the interests of the organization. This is a natural occurrence. They typically experience a shorter onboarding session and are excluded from many of the employee events that promote business culture and teamwork and have little information about the organization’s vision and mission which is vital for motivating the workforce. They are cogs in the machine and their impact is relatively low in the organization which makes their work just as valuable.
Also, organizations can lose big when contractors are mismanaged. When the overall workforce rises temporarily without proportional increases in management, there is more work to be done by managers which takes away their focus from vital business affairs and places it on training and managing extra staff on a cyclical basis.
Despite all these downsides, if the strategy and plan for contract work is well thought out, there are significant savings to be made. A lot of the roles which are for low-level tasks that need little training, roles for short term projects, or even expert consulting gigs are some ways in which contract work can be profitable.
For startups, they can get a boost from people with more expertise in different areas when they are low on time and experience. There are a lot of ways in which a couple of hours at a small price will multiply the efforts of a growing company.
Flexibility
Many organizations have periods in which they will experience greater or lesser demand for their products or services. Also, many growing companies are in need of labor but don’t want to be put at risk by hiring additional employees which they might need to let go if things don’t work out. Contract work becomes a big bonus for these situations. Seasonally dependent companies like retailers and tourism companies also benefit from the flexibility when they have increased demand. The prediction for labor demand increases make it easy for them to plan ahead as well.
One of the downsides is that demand tends to rise equally among employers in the same industry which makes competition high for getting good temp workers. Also, a lot of the best contract workers will not prefer extremely short term contracts especially during the holiday seasons where reemployment chances become slim. Contract work can be financially unstable for many, so expect there to be higher levels of anxiety.
On a high note though, a lot of independent contractors will welcome the added opportunities for business when they have multiple sources of income from multiple contracts. These contractors can even work on an hourly basis which makes them affordable for small companies. A lot of contracted knowledge workers can work on flexible hours.
Workforce quality
Hiring employees can also be done through contracting agencies. Many organizations will operate on a temp-to-hire scheme where a contracted worker will have a trial for several months before they have the option of being hired permanently. It is becoming increasingly more difficult to let people go and this option allows an organization to retain talent and not have to “fire” low performers. This is a great option for organizations that lack human resource expertise. Otherwise, this situation can be considered a “shooting from the hip” method or “trial and error” approach to hiring.
Without job benchmarking and advanced candidate selection techniques, it is hard for employers to know what they are getting into when they hire someone. A temp-to-hire plan can be put in place. It isn’t as efficient but it can work if monetary resources are low or the job isn’t really defined properly.
In order for this method to work, the temp contractor will need to be on the job for a significant period of time, usually over six months. Also, the contractor will need to have the same onboarding procedure as any other employee. This will reduce any chances of making bad judgements on a contractor when they haven’t been properly aligned to the organization and introduced to the resources needed for them to succeed. Overall cost savings for long term, high level jobs using this method can be a hit or miss. It takes a bit of effort on the management side for a temp-to-hire to be properly installed within the organization. On a large scale, this method becomes difficult to maintain, but for smaller purposes might work out fine.
Millennials love their flexibility as a contract worker
Yes and no. Flexibility is and short term hires are favored by millennials if it works for them. If the employment levels are high, millennials become very selective over which projects they involve themselves with.
For many of this generation, there is low hope in finding long term employment that will also be personally rewarding. The dreams of high job security and retirement benefits have been wiped out by the recent recession and the changing job environment where companies are becoming more reluctant to support employees beyond their tenure. A sense of disillusionment makes job loyalty very low and many millennials won’t find a sense of satisfaction for a lot of jobs out there.
Trends have it where millennials are changing jobs every couple of years. Contract work seems to be a good trade off for employees where they can enjoy higher salaries while companies can offset their costs of providing benefits. Potentially this can be a win-win situation. Only, it usually isn’t in the long run.
Real wages for contract work in the United States for a lot of professional jobs aren’t much better than what employees get. In fact, with the missing benefits, many millennials are getting ripped off. This makes them a very fickle employee and their loyalty to the contract changes with the health of the jobs market.
For this system to work, contracted millennials will need to be paid well and have the right motivational practices in place. If these can be provided, their value to the organization can exceed expectations. Personal rewards through job satisfaction and fulfillment of their behavioral needs make contract work favorable for both the organization and the worker.
Legal benefits
Organizations not only save money, but enjoy the right to choose who gets to stay in their workforce. Labor laws have become increasing less friendly to businesses who employ people and as such, the ability for companies to get rid of low performers becomes increasingly diminished every year. Government agencies do their best to protect workers while many businesses look into loopholes and alternatives.
It’s hard to determine who is right and who is wrong when the livelihood of employees and organizations are at stake. This debate is heavily politicized and covered in the media. Failing teachers are often cited as an example of where labor laws and powerful union groups interfere with an organization’s right to let people go. On the other side of the table, you have some corporations who are trying to squeeze the life out of their employees just to make an extra buck.
Regardless to what side of the political spectrum you belong to, contract workers provide less risk to organizations. This undisputed fact makes them highly desired. Outsourced labor to other countries can only be done to a certain extent. Contracted labor fills in a lot of gaps.
The law has yet to catch up to current trends and a lot of contract agencies are experiencing considerable profits. What is even more, is the “sharing economy” which allows individuals to become “self-employed contractors.” Uber, Lyft, Upwork, GetMaid, among other platforms transforms the contract agency into something beneficial for all. The widespread effects are still not well understood and a lot of municipal districts place restrictions while they consider the implications. This makes a seemingly lucrative idea become unstable while courts have yet to call any shots. One thing to consider is that the markets will correct themselves and regulations will be overcome when new loopholes are found or innovations are made.
At a legal standpoint, contract work has yet to prove long-term legal benefits in this changing environment and careful consideration should be made when planning a workforce for the future. The law will eventually catch up and could have a negative impact on your organization. Alternatively, contract work could be the dominant model of the future with benefits for all.