Contractor Classification and Other Risks

20 July 2018

Contractor workforce management is a logistical challenge and given the increasing prevalence of the ‘gig economy,’ it’s becoming more important for you to optimize your contractor worker program. Safety managers must avoid numerous pitfalls when devising a strategy to manage contractors. One of the biggest risks is contractor classification. Getting it wrong can cost your company massive amounts of money. You have to oversee relationships with workers, suppliers, staffing partners, and regulatory bodies. Your primary job is to handle the broad range of legal, health, and security risks associated with contractors.

Failure to correctly manage risks, such as contractor classification, can have disastrous results for your business. Workforce issues, such as incompetence and on-site injuries, can lead to delays and cost overruns that put projects at risk. You can protect your company from a lot of these risks through efficient contractor workforce management and implementing a quality contractor onboarding system. Project delays and worker compensation are the two biggest cost risks for employers. If you manage these risks effectively you can reduce your overall project costs significantly.

Contractor Classification Management

Specific Risks Relating to Contractor Management Programs:

De Facto Employment –

This applies to contractor classification, where a worker is presumed to be an employee, not a contractor. This can happen for a variety of reasons including, a working relationship that resembles employer-employee, a breach in the strict regulations governing the provision of contingent workers, workers being engaged for longer than is legal, using contingent workers for reasons that are not permitted and a case where a supplier does not have a license to provide contingent workers.

The repercussions for employers in getting contractor classification wrong can be huge. Employees can claim for the rights and benefits associated with being an employee not a contractor, insurance liabilities, immigration non-compliance and potentially onerous fines and criminal penalties stemming from governmental investigations.

Contractor Classification –

We can’t overstate how important it is to classify workers correctly. The potential penalties for getting contractor classification wrong, or from cases of de facto employment, can severely a company and are one of the biggest financial risks in managing a contractor workforce.

Most countries examine the relationship between worker and employer to determine whether the worker is a contractor. In the UK, a contractor should be able to be ‘swapped out’ with another worker who could do the same task. Contractors are required to supply personal insurance and equipment. Contractor classification is something of a balancing act. Companies should audit themselves, ensuring they are compliant with the latest legislation and contractor classification systems. Types of workers include:

  • Contingent workers are defined as freelancers, independent contractors, consultants, or other outsourced and non-permanent workers who are hired on a per-project basis. The limited tenure of their employment is the primary defining characteristic of a contingent worker. Contingent workers can at any level of skill, including blue-collar work to office administration.
  • Statement of work (SOW) workers, like consultants, are also considered contractors by employers as the length of their employment is defined by the project they have been hired to do.
  • Self-employed workers should not be considered part of the contingent workforce unless they themselves provide themselves as contract workers or SOW workers.

contractor classification classroom

Occupational Health and Safety –

Employers have a duty of care to ensure that there is not an unsafe working environment. Legislation means that employers have to carry out a range of duties including risk assessments, supplying protective equipment and implementing risk reporting procedures. However, the burden of occupational health and safety is not solely on the employer. Workers have a duty of care, and it is also the responsibility of the staffing provider to pass on information to the worker. All the parties to the supply contract need to agree on who is responsible for training the worker and providing the equipment. The staffing agency provider often ends up the one responsible for providing safety equipment.

Data Privacy –

Managing a large number of workers and their personal information is a complicated process for companies. There are several laws that govern how this information can be used and stored. New European legislation, called General Data Protection Regulation (GDPR), has further tightened up regulations in this area. There must be a clearly defined legal basis for gathering data and GDPR makes it easier for consumers to sue businesses. GDPR introduced severe financial penalties for companies that lose data. Data privacy and protection has to be a priority for those involved in creating a contractor management program.

Contractor Classification Paperwork

Managing These Risks

Risk management is a large part of a safety manager’s job. It is good practice to be aware of the general process of risk management as well as be familiar with the risks that are specific to a contingent workforce. A suitable risk management framework has four components:

  • Risk Identification – Identifying risks is crucial when setting up a contractor management program. There are legal issues concerning the use of contractors, so you want to get clarity on this point at the beginning. It’s further complicated if you are setting up a program in a new country or territory where there may be different laws. There may be different restrictions concerning the length of time a contractor can work, or what sectors they can work in. After you have satisfied any questions regarding the legality of using contingent workers, you must handle the risks associated with the workers themselves. These include worker benefits; statutory expenses, such as tax and insurance employment rights; security and others. You need to be aware of all these risks to be prepared for any possible business implications.
  • Risk Assessment – This step is all about determining the level of risks and their possible impact. For example, if one risk concerns the legality of using contingent workers, the cost of getting it wrong could result in fines that would be massively detrimental to the company. You can prioritize risks using a risk assessment matrix to assess and plot potential hazards.
  • Risk Response – Now that you have assessed the risks, you should formulate a proper response. A risk response is made up of four main strategies:
    • Avoidance – Some risks can severely negatively impact a project. You should try and avoid these risks if at all possible.
    • Mitigation – It’s inevitable that sometimes a risk will occur. When this happens, your focus should be on reducing the impact, i.e., mitigation.
    • Transference – This means transferring the impact of the risk to a third party, i.e., an insurer.
    • Acceptance – Some problems you can’t solve! The response of doing nothing needs to be a well thought out response that comes after reviewing all possible options and deciding that this is the best course of action.
  • Control and Monitor – This is perhaps the most important part of a risk management strategy for managing a contractor workforce. This step involves ensuring you have the appropriate insurances; establishing policies for staff, managers, and suppliers to follow; assigning responsibility appropriately and clearly through contracts and SLA’s, and training contingent workers and suppliers so they are aware of their rights and obligations to help limit levels of risk.

Conclusion

Relying on a contractor workforce carries risks for employers, but proper training can mitigate many of these risks. Your safety orientation needs to be site-specific, and contain useful content relevant to a worker’s role. An online platform like Initiafy is the ideal solution for providing first-rate safety training to your workers and reduces your project’s risk. The platform was developed with contractors in mind and is incredibly flexible and customizable.

Contractor Classification Risk

Jenny Snook
Jenny Snook

Jenny Snook is content executive at Initiafy with the job of researching the latest health and safety trends in the heavy industry. Her past-experience includes the research of large museum collections such as the Louth County Museum, many from the industrial age.

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