The Emerging Post Recession Workplace

By Rick Dacri, Dacri & Associates LLC

Published in HRTimes Third Quarter 2010

The post-recession workplace will look different from what we have seen before and its make-up will pose tremendous challenges to managers. How managers address them will determine their success or failure in this new emerging economy.

As employers spring from this painful recession, they will be faced with significant workforce tests including the need to keep labor costs low, pressures to increase productivity further, a battered and disengaged employee population, and government agencies scrutinizing employers who seek cost savings at the expense of workers, while avoiding their tax obligations. Employers must prepare now for this new emerging workforce.

Consistent with what we have seen in past recessions, the temporary employment industry is a leading indicator of the current economic conditions and a reliable predictor of future employment trends. Cautious employers hire temps first, hedging their bets on the recovery, realizing that if a downturn occurs it is easier to lay off these workers. This year is no different. Temporary staffing agencies report that business is strong as employers once again turn to “temps” before hiring full-time workers. However, unlike previous post recession periods, this year we can expect to see two new trends evolving.

Employers will replace permanent full time employees with contingent workers—external labor who are temporary employees, independent contractors, or outsourced workers. Rather than bringing these “temps” on as a hedge, more and more employers will see them as a permanent solution, changing the face of the workplace. Secondly, there will be an increased use of contingent labor for professional positions rather than exclusively for office/clerical and industrial workers. One recent study indicated that more than half of all money spent in temporary labor will be for professional skills.

Employers understand that outsourcing professional positions worked effectively in the past. Expect to see an increased reliance on outsourced labor for positions that are outside of the company’s core functions. Information technology, marketing, advertising, payroll and human resources will become targets for outsourcing.

The new American reality is the belief that both the company and the worker benefit from this paradigm. Companies believe they can increase efficiency and productivity by utilizing “just-in-time” employment practices that allow companies to hire quickly to meet production needs and to lay off just as quickly when demand drops. In addition, contingent workers do not carry the usual burdensome costs of regular “permanent” workers such as health care and time off. The new worker also enjoys the benefits of a workplace that will be dominated by project-based assignments, flexible hours, career mobility, and often higher rates of pay.

While this model may appear to be new, it has been used successfully for decades within the construction and film-making industry. To make a movie, skilled labor is hired making up a crew to produce a film and, when completed, the crew is laid off, free to make another film elsewhere. Workers become free agents who can ply their skills with different companies—often offering their services to the highest bidder.

While the recession was painful, employers gained some valuable knowledge during this period. Successful companies learned to refocus on their core business, discarding non-essential services and staff. Secondly, many embraced technology and the productivity gains that came with it. And lastly, they realized that a smaller workforce that was well trained and technologically savvy was more effective and nimble than their pre-recession staff.

Having survived the recession, these leaner, meaner companies and managers understand they cannot now revert back to the old ways. Growth and profits require that they continue to embrace this new model. Laid-off workers will not be brought back. Those jobs are gone. New, totally different positions essential to the core business will now be added. Workforce staffing needs will be supplemented by highly skilled temporary workers who will be engaged on an as-need basis.

While employers may embrace the use of contingent workers, significant challenges must be addressed to make it work effectively. A number of legal hurdles must be jumped. The mixing of freelancers, temporary employment staff, and regular employees will muddy the water, create confusion within the workplace, and force the question of who is and who is not an employee of the organization. Pushed one step farther, who will bear the legal and tax obligations for each of these workers? The line is not as blurry when workers come from staffing agencies. The agency generally has been recognized as the employer, assuming all the obligations as the employer. But when workers are classified as “independent contractors” problems often arise and this is when the government begins to take notice.

Both the federal government and nearly all state governments are closely scrutinizing the use of independent contractors. Government has a selfish role in wanting to maintain the flow of payroll taxes into their coffers as tax dollars are often lost when the employment relationship blurs. Government also has the purpose of providing workers a safety net via labor laws and unemployment and workers compensation protections—protections and benefits self-employed independent contractors do not enjoy.

It is very difficult to determine if one is an employee or a contractor. Even the courts have had difficulty with it. To make matters worse, the IRS, DOL, MHRC, DHS, Bureau of Employment Security, Workers’ Comp Board and the courts have different determination tests. One thing is clear, the responsibility for making the correct call falls squarely on the employer—and a wrong decision can be very costly. The U.S. Department of Labor has added $25 million to their budget to beef up enforcement of misclassifications; the IRS has announced 6,000 random audits of employers that will take place over the next 3 years; and the state has increased their enforcement mechanisms. And thanks to technology, each of these agencies is now able to communicate with one another, ensuring that violators can expect visits from multiple agencies.

Prior to the economic downturn, employers were focused on recruitment and retention. Fully engaging the workforce ensured motivated and stable workers, and that meant high productivity and solid bottom lines. Now with this new workforce filled with nomadic workers, how do you engage this staff? Longevity, loyalty and integration into the corporate culture are either being discarded or at least displaced by a need for agility, speed and efficiency. Microsoft may serve as a model for engagement as well a red flag on what can happen when hiring independent contractors.

Back in the 1980s and ‘90s, Microsoft hired thousands of independent contractors for ongoing projects. Often times these skilled workers stayed on for successive projects. Microsoft realized that in order to get maximum productivity from them, workers needed to be engaged and fully integrated into the culture of their organization. These independent contractors were highly compensated and enjoyed many of the perks of working for Microsoft while still enjoying their self-employment status. Microsoft made them “part of the team” and everything was fine until the IRS happened to audit the workplace. The IRS ruled that these contractors were in fact employees, not independent contractors. Microsoft was ordered to pay the government overdue taxes and issue these “new” employees retroactive W-2s. Realizing that they were now employees, these once content independent contractors filed a class action suit against Microsoft demanding back benefits, including health, retirement and stock options—and they won, costing Microsoft billions. What happened to Microsoft could be a bellwether of what other employers may soon be facing.

There is another group lurking on the sidelines watching as this new workplace emerges. Unions see the misclassification of workers as a ripe issue to exploit. Pushing security, benefits, and protections to a shell-shocked post-recession workforce gets workers listening and the unions know that. Though unions have not yet made their move, employers must be prepared to defend themselves against this potential onslaught.

The challenges of the post-recession economy are great. However, the attractiveness of supplementing an existing workforce with skilled contingent workers cannot be ignored. The economics work and employers would be foolish to not move in this direction. Armed with a nimble, agile and talented workforce that can quickly expand and contract depending on production demands, organizations are able to effectively compete in a manner that they have never been able to do in the past.

As we emerge into this new world, managers must take the critical steps to forge a strategy to address these challenges and overcome the obstacles. Employers, government and workers will all have a role. The rules are changing quickly. We have to be ready to compete.
 

Rick Dacri is a human resource consultant, featured speaker at regional and national conferences, and author of the book “Uncomplicating Management: Focus On Your Stars & Your Company Will Soar.” Since 1995 his firm, Dacri & Associates has helped organizations improve individual and organizational performance. Rick connects with people in a positive and challenging way to offer practical solutions. He can be reached at 207-967-0837, or via email at rick@dacri.com