A brief account of a Forbes article by Pavel Shynkarenko, co-founder and CEO of Solar Staff
Fine line between employees and contractors
There are significant differences between internal employees and external contractors, including their legal relationship with the company, degree of responsibility, the benefits they receive, and the amount of information they can access. In principle, this seems simple. But because there are so many nuances, if you use the same HR tools to handle your internal and external workforce, you might start having issues down the line.
For instance, external contractors who have been with a company for a while are often added to Slack so they can collaborate with multiple teams. While this practice is well-intended and convenient, it exposes the company to the risk of a sensitive information leak.
What could go wrong?
The U.S. Department of Labor’s most recent independent contractor rule is set to introduce new requirements for determining employee and independent contractor classification. When it comes into effect, it could convert millions of freelancers into employees.
This means that auditors could come in and determine that part of your team that had previously been classified as contractors actually falls under the full-time employee category. This could leave the company owing significant back taxes.
Another problem is internal risks. Suppose you have hired a freelancer who manages ad campaigns. One of their tasks is to manage the advertising budget, but from a financial reporting perspective, this is a problem. It is not clear which costs are fixed and which ones are variable.
Why aren’t companies being more proactive?
Some companies might not be aware of these risks. Many businesses first find out thanks to audits by their people management solutions. It can also be a matter of priorities. If sourcing talent is a more pressing issue, a firm might focus entirely on that and deal with the rest later.
Best practices to address the problem
Ideally, a company should have two sets of HR tools: one that deals with the internal team and one that is focused on the external team. Barriers should be created so that people don’t “flow over” from one side to the other. This could involve implementing specific access controls within the HR systems.
To make things easier for top management, you also need to ensure that your software solutions are compatible and that data exchange protocols are standardized. This makes it possible for the CFO to receive transparent reports that provide full visibility of how much is being invested in both internal and external talent.
Finally, regular audits are a must. They will help identify whether a contractor should now be classified as an employee, and spotting this on time could save a lot of money in potential fines.
To read the full text, go to Forbes.
