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HCMWorks Insights

Independent contractors: 5 reasons NOT to pay them!

Posted by HCM Works on 5 Apr 2016

Don’t get me wrong. I’m not implying that you should have them work for free. Indentured servitude is still illegal last time I looked. As a matter of fact, Independent contractors, often referred to as ICs, in the form of consultants, freelancers, SOW workers and more are a growing part of the workforce. One that is far from free.

My point is simply that your organization shouldn’t pay your independent contractors directly. Instead, you should consider setting up an independent contractor payment program that would take on the administrative burden of the relationship and manage the contract lifecycle in order to simplify and streamline your independent contractor management.

Here’s why:

The high cost of processing and paying their invoices

It may sound trivial, but several accounts payable benchmark studies show that it costs organizations anywhere from $4 to $26 to process and pay an invoice. And even a mid-sized business has dozens, if not hundreds of independent contractors, consultants, freelancers working for them in some capacity or another. So imagine the direct cost to your organization to process and pay their invoices, week after week, month after month, year after year.

Surprised by the numbers? Many business leaders are. But when you think about it, it’s easy to see why. In addition to the high cost of cutting a check that banks charge of late, there’s a lot of manpower needed to verify, codify, assign and post each individual invoice to the proper GL, department, etc. And that manpower translates directly into significant costs.

The AP workers tasked with this processing invoices could be re-assigned to more productive and important work. Like helping to get the financial reporting and quarterly results out more quickly. Or work to improving cash flow and collections.

The huge amount of time it takes to manage them properly

The process of retaining the services of an IC require a large amount of time and energy on the part of your team.

It starts with managing the entire contract lifecycle, from on-boarding to off-boarding or termination. A key, yet time consuming area is ensuring the the worker is qualified to be classified as an IC. Then you have all the paperwork associated with managing timesheets and tracking tenure.

All of these are a huge time waster when you have other things to worry about.

The lack of visibility and control

One of the main challenges of dealing with ICs, consultants and freelancers is that their services are often retained directly by line managers in many departments, divisions and locations throughout the organization. They’re set up as vendors (more paperwork) and their invoices are often assigned to various projects.

When you treat and pay your ICs like vendors, you lose your line of sight on a number of key dimensions. How many ICs do you actually have? What’s the nature of the work they are doing? How long have they been working for you? So many questions unanswered. So many opportunities for wasted resources, excess costs and heightened risks.

That’s why many organizations that make extensive use of consultants and ICs turn to an independent contractor payment program, to gain valuable insights that allow them to control and contain their costs far more effectively.


The hourly rates they’re charging

Part and parcel of the lack of visibility is that there is no clear understanding of pay rates charged by ICs. Without a clear line of sight, plus a general understanding of fair market rates for the various classes of workers you retain, chances are you’re paying to much.

The complexity of working with a fragmented and disparate IC base means it’s increasingly difficult to find answers to the key questions: How much are they charging? Is their hourly rate at fair market value? Is their pay rate consistent from one worker to the next within a given class? So many loose ends not being fully and consistently managed: loose ends that can land you in a world of trouble.

The very real risk of worker misclassification

The main and most compelling reason of all, of course, is that by paying your ICs directly, you don’t have an arm’s length relationship between you and them.

As a result, the nature of the relationship can be called into question by the IRS and the Department of labor and state workforce agencies. A direct relationship with your  workers can be called into question by investigators looking to recover back taxes and lost revenue.

Are they truly independent contractors? Or are they simply employees in disguise? Should there be an audit, a whole range of factors will be considered, some of them so broad and sweeping that it’s hard not to see how at least some of your contractors would appear improperly classified.

The arm’s length relationship provides you with a layer of protection against misclassifications lawsuits, which are more and more frequent.

So you see that without a payment program, you’re probably paying too much, spending too much time, and running the risk of independent contractor misclassification challenges. With a well structured payment program, you’ll gain a clear line of sight on your spend, better manage pay rates, reduce the administrative burden and costs, and most important of all, protect yourself against worker misclassification challenges.

To learn more about the benefits of an independent contractor payment solution, contact one of our IC payment solution consultants.


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Tags: Independent Contractors, Misclassification

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