What is a contingent worker? Definition and benefits

Explore the benefits of hiring contingent workers

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Contingent workers, such as independent contractors, freelancers, and consultants, have grown in popularity in recent years, contributing to the rise of the "gig economy." They provide organizations with specialized skills on a flexible basis, reducing long-term labor costs and commitments, and enabling swift adaptation to market changes. 

However, before hiring contingent workers, business leaders must thoroughly understand how their integration might affect operational dynamics, legal obligations, workforce management, and company culture overall.

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What is a contingent worker?

Contingent workers, also known as 1099 workers in the U.S., are typically hired on a temporary basis to perform specific, well-defined tasks. Unlike salaried employees who may have ongoing, full-time roles that evolve and encompass a broad range of duties not necessarily specified at the start, contingent workers have clear and limited objectives.

Common contingent worker examples include:

  • Independent contractors: These specialists in particular fields often serve multiple clients simultaneously and maintain considerable control over their work schedules and conditions.
  • Freelancers: Similar to independent contractors, freelancers typically juggle several short-term projects simultaneously, and their varying workloads can change significantly from month to month.
  • Consultants: These professionals focus on areas such as management, operations, or finance, offering strategic solutions to help businesses achieve their goals.

Contingent workers vs. employees

If you're considering expanding your business with more full-time employees or by hiring contingent workers, it's important to understand the differences between the two:

Financial relationship

While employees are fully integrated into a company's structure and receive their salaries through its payroll system with taxes withheld by the employer, contingent workers operate more autonomously. They are paid a gross amount directly by clients and are responsible for managing and paying their own taxes rather than having them automatically deducted and paid by an employer.

Benefits

Employees typically receive benefits like retirement fund contributions, health insurance, and paid leave from their employers. In contrast, contingent workers don’t usually enjoy such benefits and must cover these expenses on their own. This lack of employer-provided benefits is one reason why contingent workers might charge higher rates than their full-time counterparts.

Work autonomy

Employees usually work under the supervision of a manager, with specific working hours set by the company, while contingent workers have more flexibility in choosing when, where, and how they complete their tasks. This allows them greater control over their work environment and schedule.

Pros and cons of hiring a contingent workforce

Every business is unique, and there's no universal solution for whether expanding an in-house team or relying on contingent staff is best. Many organizations find a hybrid approach to be optimal, maintaining a core group of full-time employees for essential functions while utilizing a flexible contingent workforce for more experimental or growth-oriented tasks. This blended strategy allows businesses to scale up or down and adapt quickly to changes.

Let's look at some potential benefits of contingent workers and possible drawbacks.

Pros

  • Flexibility: Many companies experience fluctuations in workload due to seasonal variations, project demands, or economic changes. Hiring contingent workers offers the flexibility to scale the workforce up or down according to changing needs and venture into new markets without the administrative responsibilities associated with full-time employees. This flexibility enables businesses to remain agile and responsive to shifting market conditions.
  • Cost savings: By using contingent workers, companies can manage their expenses more effectively. These workers are not on the regular payroll, so employers aren’t obligated to cover costs typically associated with full-time employees, such as health benefits, retirement plans, and other perks. Additionally, companies needn’t navigate the complexities of withholding income taxes, which simplifies financial and administrative processes.
  • Filling skills gaps: Contingent workers often bring specialized skills that may not be available in-house. Employing these workers on a temporary or project basis makes sense when their expertise is needed only briefly, eliminating the need to hire a full-time salaried employee. This approach allows companies to promptly address skills shortages or undertake projects that require niche know-how, enhancing flexibility and efficiency.

Cons

  • Less control: Businesses using contingent workers may feel they lose some control over work processes, which can be challenging for organizations with strict oversight and standardized procedures. 
  • Compliance and misclassification risks: Businesses that accidentally misclassify an individual as a contingent worker when they should, in fact, be considered an employee may risk legal and financial consequences.
  • Security and IP risks: Even with nondisclosure agreements (NDAs) in place, some organizations might be concerned that contingent workers could leak sensitive information or intellectual property.

Can any worker be classified as contingent?

Specific legal criteria determine whether an individual can be classified as a contingent worker, and these criteria can vary depending on the location of both the worker and the company. When assessing the nature of the role and the working relationship, consider these key factors:

  • Degree of control: A worker who maintains significant autonomy over their work methods, hours, and location is more likely to be classified as a contingent worker.
  • Permanence of relationship: If the employment is intended for a specific project or a set duration rather than ongoing, this suggests a contingent classification.
  • Worker investment: Unlike employees who typically use employer-provided equipment and supplies, contingent workers often supply their own.
  • One or multiple clients: While employees usually work for a single employer, those serving multiple clients simultaneously are more likely to be considered contingent workers.

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