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On-demand work: piecing together the tax puzzle

As corporations increasingly shift to a new labor model — the contingent workforce — workers and employers are faced with new challenges as well as benefits.

This article was produced in conjunction with the March 2016 issue of Tax Insights, focused on talent and tax.

By Fergal Byrne

In today’s dynamic and volatile business environment, businesses are increasingly relying on a wide range of non-traditional forms of labor such as seasonal and on-call workers, agency temps, freelancers and consultants.

The so-called gig economy may be “the most fundamental shift in how employers engage with workers since the 1980s,” David Autor, Professor of Economics at Massachusetts Institute of Technology (MIT), said at a recent symposium.

Together with other major changes in the workplace, including key skill shortages and the emergence of an increasingly diverse and mobile labor pool, managing today’s workforce has become much more complex and challenging.

Rapid growth

Many organizations are unprepared for the rapid rise in the contingent workforce. Much of this growth has taken place with limited involvement of human resources. Few businesses have established policies to ensure compliance with complex contingent workforce legislation, and may find themselves exposed to a range of tax, brand, financial or legal risks.

“83% of CEOs will increase the use of contingent workers over the next three years.“

Workforce 2020 — Oxford Economics & SAP


“Not many companies are thinking about this in a systematic way,” says Anna Kahn, EY Global New Services Leader. “For those that are, there is no consistently applied guidance or operating procedures. A few are experimenting with new operating models for managing this type of labor force (as part of their total workforce) from a governance and accountability perspective — and the services and the technology required to support them.”

Different sources place the number of contingent workers already working in large corporations at 20%–35%. Regardless of the exact number, the main issue to understand, according to David Storey, EY People Advisory Services Talent Leader, is that “the numbers are growing rapidly and workforce data trends suggest it will continue to grow over the coming years, potentially becoming the majority of the workforce in many companies in the near future.”

Storey notes that there is little existing data about contingent workers and how they are being managed. “This is a relatively new and not well understood phenomenon. EY is currently conducting global research surveying both contingent workers, and the companies that employ them. One of the first questions we want to answer is how many contingent workers do companies currently employ, and how many they expect to be employing in five years from now,” he explains.

“We are also exploring how companies are managing the contingent workforce: the business models, processes and systems. And crucially, how they are dealing with compliance and risk.”

The big trade-off

This new model offers a few benefits for workers. It opens up a broader range of work options, for example. Many workers are looking for greater flexibility, particularly those with family commitments. Their skills may not lend themselves to a career within one specific organization, or they may be older workers who are entering different life phases, according to Storey.

But this shift to an increasingly contingent workforce is not without controversy. Critics say it is merely a way for companies to reduce their fixed labor costs, with workers trading in a fixed salary and benefits for greater freedom that also brings much more uncertainty.

Many say that reforms are needed to protect contingent workers. Indeed, US Senator Elizabeth Warren has just proposed a new framework to “rethink the basic bargain for workers who produce much of the value” in the US economy.

A win-win for business

For businesses, the contingent workforce brings manifold benefits. Acute skills shortages are driving many organizations to look at new ways they can source “best in class” talent. For example, many employers are looking for more flexibility to apply specialized labor to specialized tasks.  

“By hiring talent on a freelance basis as opposed to hiring directly, companies can reduce costs associated with recruitment and training, and make their costs more variable,” says Tony Steadman, EY Americas Leader for Total Talent Supply Chain.

Legislation is also an important consideration, according to Steadman, and can either be a catalyst or a barrier. “Right now, the legislative environment in many countries makes it difficult for employers to use people on a contingent basis,” he explains. “However, I think we are going to see new legislation coming through to make it easier to employ non-permanent staff (as well as providing protection to these workers).”

Low visibility

The use of a flexible workforce presents several challenges for businesses. Many corporations have little visibility with regard to how the contingent workforce is performing. Often, there are no easy answers to key questions:

  • How long have contingent workers been on site?
  • What systems do they have access to? Who is actually managing workers’ performance or their deliverables?

Bifurcated talent management systems are part of the problem. Many organizations have a traditional human resources function that looks after talent acquisition and the management of direct hires, with technology that supports their workflow.

The contingent workforce, on the other hand, can be run by HR, finance, procurement or sometimes directly by the business, and each function has its own technologies and workflow.

“As a result, there is usually no consolidated view integrating internal and external talent; different systems are looking at different processes and different talent pools,” says Kahn.

Although businesses avoid some fixed costs associated with traditional hires, Kahn points out that the use of contingent workers can be an expensive option in the longer term. “The additional costs associated with going through an agency, for example, can amount to as much as 30% of a temporary worker’s annual salary,” she says. “When a business has thousands of contingent workers at any given time, we are talking about substantial sums.”

Storey also highlights tax and HR/legal challenges. Many businesses need contingent workers to travel and work in multiple jurisdictions — in some cases where they may not have a legal entity. “This poses tax issues around permanent establishment,” Storey says.

“We not only need to understand how contingent workers impact the company’s taxation, but there are also a whole series of questions from a business traveler’s perspective that need to be addressed. Many companies may be exposed to financial, legal or reputation risk.”

Managing a vital resource

The sheer scale and growth of the contingent workforce is drawing increased attention within corporations as to how this resource can be best utilized. However, Steadman, EY Americas Leader for Total Talent Supply Chain, is concerned that most corporations are still dealing with it incrementally, by simply adding people to an existing contingent workforce, rather than looking forward to find new solutions.

“Companies are not gaining optimum value from contingent employees,” Steadman says. “Many lack the ability to match accurately their need for talent with the availability of talent.

“This, in turn, impacts their overall level of operational performance and their speed to market, and will directly impact their profitability because companies need to really understand labor costs — and labor’s ability to add value to the business.”

Steadman believes that over time more companies are moving toward a total workforce solution that integrates direct hires and contingent workers in a consolidated operating model, with a common technology platform.

“We know that companies are at various stages on this journey,” he says. “This new talent paradigm will allow us to fill in the details — and help companies understand and manage this vital resource.”

The growing importance of the contingent workforce raises many questions

  • What is the most appropriate operating model to deal with the contingent workforce?
  • Who should be responsible for the contingent workforce? Should it be procurement? Should it be human resources? Or the actual division where contingent employees work? Or a hybrid model?
  • What are the right technology systems to manage the contingent workforce?
  • How should analytics be integrated?
  • How should contingent workers be managed?
  • How should the contingent workforce be paid?

Endnotes

[1] http://blogs.wsj.com/cio/2016/05/18/the-gig-economy-benefits-superstar-employees-says-mit-panelist.

[2] https://www.warren.senate.gov/files/documents/2016-5-19_Warren_New_America_Remarks.pdf.

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