For decades, businesses have relied on the contingent workforce to backfill labor gaps, access specialist skills and meet short-term labor shortages. Until recently, however, it has operated as an adjunct to the traditional full-time workforce.
In the EY Contingent Workforce Study survey, US employers reported that contingent workers comprise, on average, 17% of their total workforce.1 This is consistent with various other estimates that place current proportions of contingent workers in the US workforce at anywhere from 16% to 40%.
Although the definition of the contingent workforce, or gig economy, varies considerably, we can all agree that this is a substantial number — and that it’s growing fast. Research undertaken by Lawrence F. Katz of Harvard University and Alan B. Krueger of Princeton University indicates that, over the last 10 years, the number of workers employed in alternative work arrangements in the US has increased by more than 66%.2
The world is entering the fourth industrial revolution, a period of innovation and disruption that is upending business models and requiring organizations to rethink their workforce needs. In this context, the contingent workforce is expected to continue to emerge from the shadows and play a far more prominent role in the total workforce composition — turning many jobs for life into jobs for a day.
In doing so, it is important for both employers and workers to understand the implications — and to dispel the myths that could be stigmatizing the role that the contingent workforce can and will play in the future of business.
Five employer myths about the contingent workforce
1. It is just another workforce fad
The nature of when, how and where we work is constantly evolving. Nine-to-five jobs and 40-hour weeks have given way to roles based on utilization and productivity. Cubicle farms have morphed into open-concept work environments and then, more recently, into mobile offices where workers can work from anywhere, anytime. Now, full-time employment is giving way to jobs on demand.
EY recently surveyed both major employers and contingent workers in the US on the topic of the contingent workforce, where 50 percent of organizations reported an increase in their use of gig workers over the last five years.
This is consistent with other research that suggests that the contingent workforce could grow to be as much as 50% of the entire workforce by 2020.3
Although there are many reasons why the size and use of the contingent workforce is on the rise, there are two that stand out: the global recession and rapid advances in technology. The 2008 global financial crisis, which spawned the worst economic downturn globally since the Great Depression of the 1930s, set in motion a wave of organizational cost-cutting to address revenue shortfalls and eroding margins. Among the largest casualties of these cost-cutting measures were workers.
Between December 2007 and early 2010, the US shed approximately 8.7 million jobs.4 The US economy began creating jobs again in 2010. However, these new jobs often required skills that laid-off workers did not have.
This is, in large part, because rapid advances in new technology, when combined with migration of manufacturing and production to lower cost jurisdictions, made obsolete the more traditional manufacturing and other unskilled labor jobs upon which middle-class America had relied for decades. At the same time, technology has provided the tools for employers to reimagine their business models, creating something like the “digitization” of work.
In recent years, advances in automation, robotics, machine learning and artificial intelligence have, in some cases, made humans themselves obsolete. Organizations that are hiring want specialized skill sets to manage these new technologies. They are also breaking full-time roles into discrete tasks that they are increasingly looking for contingent workers to complete. The result is that as many as 47% of the total US employment is at high risk of being automated over the next decade or two.5
These trends and others mean that more than being a passing fad, the rise of the contingent workforce, and the disruption it represents, is here to stay.
2. The contingent workforce is evolving at the same pace around the world
The contingent workforce is not evolving at the same pace everywhere. Some countries are embracing it more rapidly and comprehensively than others.
In the EY US Contingent Workforce Study survey, US employers reported that their contingent workforce comprises, on average, 17% of their organization. In the UK, the number of self-employed workers has grown 28% over the 10 years to 2016, against only 6% growth in UK employees in the same time period. There are similar stories of rapid growth in the self-employed workforce in the Netherlands, Belgium, France and even Australia. The rise of the gig economy is increasingly a global phenomenon.
However, the contingent workforce is not evolving at the same pace everywhere. Some countries are embracing it more rapidly and comprehensively than others.
According to the 2016 Contingent Workforce Index, New Zealand ranks the highest for contingent workforce engagement globally. Singapore, the Philippines, Israel and India follow closely behind.6The US dropped in ranking from second in 2015 to sixth in 2016 largely because of higher labor costs.7
However, availability of workers in both the US and Canada (ranked seventh globally) is significantly higher than the majority of other countries, particularly in the Americas. In Europe, Middle East and Africa, the UK’s and Ireland’s talent pools and relatively moderate regulatory requirements make them among the most attractive options behind Israel for organizations looking for contingent workers.8
How the rise of the contingent workforce will progress country by country will depend largely on how governments, organizations and regulators balance availability and cost-efficiency with legislation and regulations to create a win-win work environment for employers and workers, while also considering the tax and legal implications associated with alternative work arrangements.
3. Organizations hire contingent workers solely to avoid payroll taxes and benefits
Increasingly, organizations appear to be hiring contingent workers as a means to achieve cost efficiencies. In the EY US Contingent Workforce Study, 55% of employers we surveyed say that the main reason for using contingent workers is to avoid labor costs.
However, for roughly the same percentage of survey respondents (56%), the primary reason for hiring contingent workers is to complete projects requiring specific expertise beyond their existing workforce. For 42%, it’s to respond to seasonal workforce requirements. And for 16% it’s to improve the existing workforce culture and productivity. Ultimately, employers hire workers for a number of reasons other than to solely avoid payroll taxes and benefits.
Obviously, there are benefits to paying for talent on an as-needed basis. But there are also tax- and classification-related risks that organizations need to be mindful of.
Typically, organizations in the US don’t have to pay employment taxes on a 1099-classifiedicontingent worker. However, if a local, state or federal government, or IRS (US Internal Revenue Service) determines that the contingent worker is, in fact, a full-time employee, the financial risks can be substantial. In January 2016, three subsidiaries of a global supply chain company were sued in California for misclassifying drivers as contractors. In May 2016, a class-action lawsuit was filed on behalf of the drivers of a ride sharing company in Florida and Illinois to reclassify them as employees in order to recover tips.
Similarly, in November 2015, drivers of a ride sharing company in the UK filed an employee misclassification claim that seeks to change their status so that they are employees of the company. More recently, in February 2016, UK drivers of a transportation company sued the company for workers’ rights and compensation for lost earnings. The previous year, in July 2015, a cleaning services company was forced to shut down its operations amid a lawsuit over worker misclassification.
Red flags that the government or the IRS will look for in determining whether an individual is a contingent worker or a full-time employee may include: how the contingent worker is paid; what levels of access the worker has to internal systems; how the worker is embedded into a team; and whether the worker is enrolled in any reward and recognition programs.
Although avoiding payroll taxes and benefits may be a by-product of hiring contingent workers, it is rarely an organization’s sole strategic driver for using the contingent workforce — nor should it be.
i As defined by the US Inland Revenue Service, a 1099 job is a job that is performed by a self-employed contractor or business owner as opposed to one of your employees.
56% of employers surveyed use contingent workers to complete projects requiring specific expertise / capability beyond their existing workforce.
4. Contingent workers compromise the cultural fabric of an organization
In the EY US Contingent Workforce Study, employers raised a concern relating to the impact of contingent workers on the culture of the existing workforce. One in five employer survey respondents indicate that they see a negative impact of contingent workers on the culture of the existing workforce. Respondents also raised questions over whether using contingent workers impedes the skills development of the existing workforce, with 37% suggesting it does.
On the flip side, however, almost one-third of respondents see contingent workers as having a positive impact on their full-time employees. Half of respondents suggest that using contingent workers can be a good way to overcome resistance to change within a legacy workforce; 43% say that existing workforces benefit from skills transfer from contingent workers; and 36% acknowledge that contingent workers are the workforce of the future. In addition, 16% say their main reason for using contingent workers is, in fact, to improve the existing workforce culture and productivity.
Although 37% of organizations say they lack the confidence in their ability to address the impact of contingent workers on organizational culture, they need to try, particularly as the benefits and opportunities that contingent workers offer to the full-time workforce often will outweigh the risks of compromising the existing culture.
5. Regulations will kill the contingent workforce
According to the EY US Contingent Workforce Study, 44% of organizations expect more regulation in relation to contingent workers. However, it is not so much an increase in regulations that could impede the growth of the contingent workforce, but organizations’ ability to implement policies and procedures to remain compliant.
Currently, many human resource departments have a poor grasp of the issues and risks relating to the contingent workforce. As a result, they have not yet implemented the programs and policies necessary to adhere to even existing, let alone new, workforce regulations.
Awareness of the risks is key not only to address compliance issues and avoid unexpected liabilities and costs, but also to facilitate the growth of a workforce demographic that organizations arguably see as the workforce of the future.
The reality is that the contingent workforce has to work for everyone
Disruption is fundamentally altering how the world works. As shifting demographics, consumer demands and disruptive technologies continue to alter the business landscape, organizations have to shift their legacy workforce model to one that equitably balances traditional permanent employees with contingent workers, innovation and automation with human interaction and collaboration, and efficiency with fairness.
Organizations cannot choose one at the expense of the other, without both raising the specter of regulatory intervention and economic collapse.
The future of work includes a contingent workforce. It is time to dispel the myths that it raises and focus on how to make the proliferation of contingent work a win-win for everyone.
1 Is the gig economy a fleeting fad, or an enduring legacy?, EY, 2016.
2 Lawrence F. Katz and Alan B. Krueger, The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015, 29 March 2016. (Note: the contingent workforce is taken to be equivalent to employees in alternative employment arrangements.)
3 Ardent Partners, The State of Contingent Workforce Management 2015-2016, 2015, © 2015 Ardent Partners Ltd.
4 “Chart Book: The Legacy of the Great Recession,” Center on Budget and Policy Priorities, http://www.cbpp.org/research/economy/chart-book-the-legacy-of-the-great-recession, 8 November 2016.
5 Carl Benedikt Frey and Michael A. Osborne, The Future of Employment: How Susceptible Are Jobs to Computerisation?, 17 September 2013. Accessed at http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf.
6 Contingent Workforce Index 2016 Global Analysis, ManpowerGroup ©2016.