EOR and Contingent Labor – Knowing When the Risks Outweigh the Rewards

When it comes to any business decision, weighing the risks of any strategy against the potential rewards is critical to the process. This is true as well for the decision between using any non-employee labor strategy – employer of record (EOR) services, contingent workers, workforce management solution providers etc. – and relying on a workforce comprised solely of W2 wage earners. This post will examine the risks and rewards commonly associated with fielding a contingent workforce so readers considering such strategies may gauge whether or not the risk-to-reward ratio is favorable or not.

Rewards of Leveraging Contingent Labor and/or an EOR
The most obvious benefit of outsourcing employer-related duties to an EOR or simply sourcing your own contingent workforce is the significant cost savings incurred by such a strategy. Employment tax savings, unemployment and workers’ compensation insurance savings, administrative savings and savings on employee benefits are chief among these.

Also a key point in favor of a contingent workforce management program is the strategic flexibility enabled by easy access to pools of highly skilled contractors and consultants in almost every skill set. Especially for important but finite projects, being able to leverage expertise on demand adds a layer of competitive advantage to any organization. Plus this activity can act as a great proving ground for sourcing top talent to fill full time roles. 

Risks Inherent in Leveraging Contingent Labor and/or an EOR
The potential risks associated with contingent workforce management should not be understated. This blog has reported regularly on such potentially costly mistakes in such areas as worker misclassification which has increasingly been a high profile concern in today’s quickly evolving labor markets. The IRS has been stepping up its efforts to reign in the worst abusers of the rules surrounding the proper use of independent contractors.

Also an ever-present concern when populating a portion of your overall labor force with contingent workers is the protection of intellectual property; confidential, proprietary and other sensitive trade secrets which can be purloined from your organization if operations grows overly-reliant on non-employee labor in core job functions.

For EOR users, there are also compliance concerns regarding joint employment liability which we’ve covered in more detail in this post.

Unfortunately, you’ll have to weigh the risks against the rewards according to the contours of your own organization and draw your own conclusions. To help provide some more detailed context, there is a wealth of useful information in this document, “Best Practices and Guidelines For Effectively Using a Contract Workforce”, produced by the Texas State Auditor’s office. The document is not new, but there is still plenty of good information contained within.

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