7 Hidden Costs of Contingent Workforce Management

By: TAPFIN April 29, 2022

The workforce was already changing before COVID captured headlines, but the pandemic accelerated trends faster than expected. As more workers embrace side hustles, gig jobs, contract work, and freelance positions, companies need to reevaluate their goals and practices for contingent workforce management.

The number of people working independently has seen a massive increase. In 2021, the U.S. reported 23.9 million independent workers. In 2017, that number was only 12.9 million.

Many workers, especially younger generations, are shifting away from the traditional long-term career model in favor of flexible employment options.

But employees aren’t the only ones seeing the benefits of flexibility. Employers are embracing the work shift, too. Managing a contingent workforce allows businesses to fill roles when demand fluctuates and cut unnecessary labor during slow periods to save costs.

A contingent workforce is quickly becoming a normal part of today’s society. However, there are hidden expenses with this work model, and employers need to understand how to measure certain metrics if they want their contingent workforce to be profitable.

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Pros and Cons: Here's Why a Contingent Workforce Costs More Than You Think

Hiring a contingent workforce comes with many benefits for companies, including:

  • Expanding the labor force during seasonal demands and short-term needs

  • Reducing the labor force during slower periods without firing or furloughing employees

  • Accessing a larger talent pool

  • Utilizing a cost-effective employment strategy

  • Saving benefit-related expenses for employees, including social security, healthcare coverage, unemployment insurance, sick leave, vacation time, etc.

  • Freeing up permanent employees to work on more critical tasks while contingent workers handle less sensitive jobs

With these benefits, it’s no surprise that the majority of big businesses intend to substantially increase their dependence on a flexible workforce. Intuit reported that 80% of large corporations plan to accelerate this long-term trend and continue hiring contingent workers on the heels of the pandemic.

But is a contingent workforce really a perfect solution?

The truth is, while the arrangement seems to be a win-win for workers and employers, there are hidden costs below the surface. In many cases, these costs are not tracked, so they could be eating away at profits if left unmanaged.

Companies need to fully understand these costs if they’re going to implement proper contingent workforce management strategies.

7 Unseen Challenges of a Contingent Workforce

At a glance, the most obvious cost associated with contingent workforce management is labor. However, other variables are at play. To truly maximize the effectiveness of a contingent workforce, you must account for these seven hidden costs.

1. Control and Oversight 

If you like to be in absolute control of your business, hiring contingent workers and contract employees may not be the best solution for you. Overseeing these types of workers presents a new set of challenges, including:

  • Abnormal schedules: Not all contingent workers have traditional hours. Depending on the job and arrangement, they may work at different times and on different days. Many contingent workers, especially if they’re working remotely, abhor being micromanaged and prefer to operate on their own schedule as long as they meet their deadlines.

  • Loss of authority: A contingent worker may have a formal agreement with you, but that worker is not technically your employee even if they represent your business. When it comes to legal measures, disciplinary actions, security, and privacy, you surrender a certain degree of your authority.

  • Communication: A lack of communication and understanding between the two parties is a recipe for trouble. Contingent workers aren’t bound to the same employee handbook as permanent workers, but the rules, guidelines, code of conduct, and job expectations should be clear.

  • Lack of management consistency: Too many organizations pass the task of overseeing contingent workers off to department managers without a unified company protocol to follow. This strategy (or lack thereof) usually leads to fragmented management, unsupervised workers, and inconsistent reporting and payments.

Adding contingent workers into your organization creates more complexity in your management system. Adapting to these changes will cost time, planning, training, and administrative work, all of which adds up to dollars that you probably didn’t factor into your budget for contingent workforce management.

2. Recruiting and Screening

As many businesses learned the hard way in 2021, recruiting isn’t always easy, and it’s certainly not cheap. For many small businesses, overworked HR teams try to fit recruiting in between their other duties. Simply posting an opening on job boards and waiting for applications to roll in isn’t going to attract the best talent to your organization. Recruiting the right candidates is a big job.

Surely it’s just easier to hire 1099 contract employees then, right?

Well… not necessarily. Contract employees can be even harder to recruit. Their rates might cost more since they have to pay taxes and healthcare costs out of their hourly rate. Talented contractors with in-demand skills could easily get a full-time job with benefits, but they choose contingent work for the freedom and flexibility. With that in mind, they’re not likely to settle for less-than-ideal conditions and pay.

Contingent workforce agencies usually promise that they vetted their temp workers. Many companies have lower screening rates for contingent workers than permanent workers because they believe that the agency has already taken care of the screening process.

But are you ready to put your organization’s security on the line? Contingent workers typically have access to the same information as permanent employees, including worksites, equipment, computer systems, data, and other company information.

To err on the side of caution, you should invest in your own background checks on contingent workers. You are absorbing the risk when you bring temporary employees into your business. Any gaps in your screening process can open the door for theft, fraud, security breaches, legal costs, and damage to your business’s reputation.

3. Compliance and Legality

Classification laws set in place to protect contingent workers vary per state and even per city. Employers need to ensure that their information is up to date and contracts are as detailed as possible to clearly define the job description, exemption status, pay rate, and time frame.

In-house HR teams can quickly become overwhelmed with the long list of ever-changing compliance factors such as:

  • Immigration

  • Employment status

  • Civil and criminal liabilities

  • Data privacy

  • Health and safety

  • Diversity and inclusion

  • Taxes

  • Overtime

  • Workers’ compensation

Misclassifying contingent workers can result in harsh penalties, not to mention impact the company culture, reputation, consistency, and team morale. Even Google has run into compliance issues with whistleblower accusations about underpaying the “shadow work force that now outnumbers the company’s full-time employees.”

4. Turnover

A contingent workforce can be a solution for turnover among permanent employees, but it can also be a hidden cost if a company fails to properly manage its temporary workers.

In too many cases, contingent workers are treated as outsiders. They don’t feel welcomed into the company culture, and managers expect them to work quickly and quietly until their contracted time is over. Coworkers don’t bother to get to know them since they won’t be staying permanently.

This isn’t a healthy work environment, and it sets the stage for high turnover and poor contingent workforce management. Unlike full-time employees, contingent workers have the freedom to terminate their agreement and move on to the next job with few consequences. They don’t have a long-term obligation to stick around if they don’t feel like they’re being treated well.

High turnover results in higher recruitment and training costs, regardless of whether the lost worker was permanent or temporary.

But, if properly welcomed into the company, contingent workers can become a long-term investment. They sometimes end up in a temp-to-hire job. Or, if your work is seasonal, former contingent employees might have a keen interest in returning, which brings experienced workers back each year and minimizes screening, onboarding, and training.

5. Onboarding

Onboarding new employees, whether they’re permanent hires or contingent workers, costs time and money. On average, U.S. employers spend $4,000 and 24 days to hire a new worker.

When considering the costs of a contingent workforce, employers often forget to factor in the repeating expense to onboard temp workers for each project or season, depending on the demand.

A permanent employee goes through onboarding once. A revolving door of contingent workers coming and going requires constant onboarding demands.

To further complicate the onboarding cost factor, only 12% of U.S. employees say their company does a good job onboarding. A poor onboarding experience can impact other factors on our list, including turnover.

6. Competition

For decades, companies held the power over workers who desperately needed a paycheck and healthcare benefits. Employees didn’t “shop around” too much and were willing to accept low pay and less-than-optimal working conditions to get by. The burden was placed almost solely on workers to introduce creative elements into their job search and stand apart from the competition.

But now, as evidenced by the labor shortage of 2021, workers are taking some of that power back by demanding more from their employers.

What does this mean for the contingent workforce?

For businesses, it means the competition to attract new workers is getting fiercer. Contingent workers don’t get benefits, which takes an extra bargaining chip off the table for employers. How can companies attract contingent workers who have the flexibility to work wherever they want?

You might have already guessed it – businesses need to invest in their culture and work environment to compete for workers. This could mean extra expenses that are rarely calculated into the contingent workforce budget, such as:

  • Higher hourly pay

  • Sign-on bonuses

  • Facility renovations

  • Employee perks such as snacks, lunches, team merchandise, etc.

  • Technology upgrades

  • Heating and cooling systems in warehouses

  • On-site breakrooms, restroom improvements, workout facilities, etc.

  • Training and mentorship programs

  • Temp-to-hire programs

Workers have been competing with each other for jobs. Now, companies are the ones feeling the competitive pressure to win over employees. How will those costs factor into your workforce management budget?

7. Cultural Fit

Company culture can be difficult to define. Essentially, the culture is an organization’s shared ethos made up of values, goals, practices, and attitudes.

A variety of factors add up to create an organizational culture. How do colleagues treat each other? What type of behavior does management reward or punish? Is the hierarchy set in a way that allows people to challenge authority? Do employees have a healthy work-life balance? How does the company measure success?

These are just a small sample of the questions that help to define workplace culture. In a recent PwC global survey, almost 70% of organizations that adapted during the pandemic reported that their culture gave them a competitive advantage. 67% said that culture was more important than strategy or operations.

But can companies maintain their culture initiatives when relying predominantly on a contingent workforce?

This is one of the greatest challenges and hidden costs of contingent workforce management. Organizations often treat temporary employees as an afterthought rather than part of the team. In many cases, contingent workers lack essential onboarding, training, and support.

If contingent workers don’t fit in with the established culture, or if they feel excluded from the culture entirely, they’re likely to suffer from burnout and job dissatisfaction. They may even become actively disengaged employees and contribute to an increasingly toxic work environment.

Many businesses are investing in their company culture to stay competitive. If you’re hiring a contingent workforce, you’ll likely face additional challenges and investments to create a healthy workplace culture that is capable of supporting permanent and temporary workers alike.

Managed Service Providers and TAPFIN

How do you ensure you’re finding the best contingent workforce management solution for your organization?

Here’s the bad news–most workforce management solutions are one-dimensional. They typically prioritize having a pool of talent without taking your organization’s objectives into account.

That doesn’t sound like the best solution, does it?

We didn’t think so, either. That’s why TAPFIN created a holistic management strategy that not only prioritizes your organization’s goals, challenges, and objectives but also addresses the hidden costs of contingent workforce management.

We take a targeted approach based on your business’s unique insights and vision. A contingent workforce is complex. There’s no one-size-fits-all solution, especially in today’s volatile and ever-changing job market. Make sure you partner with an expert to adapt your workforce for whatever the future holds.

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