What is a contingent worker, and how can they help your small business?
Learn about our editorial policies
Leveraging the gig economy can save your business money and help you find contingent workers with more specialized skill sets. They can also deliver fresh perspectives on new projects and business initiatives. Bringing new professionals into the mix does involve some risk, so contingent liability insurance coverage could be something you request.
In this article, we’ll explain the different types of contingent workers, how contingent employees can benefit small businesses, what the drawbacks are, and how to protect your business against the legal risks associated with a contingent workforce.
What is a contingent worker?
A contingent worker is any employee who's employed temporarily. Some examples of contingent workers include:
- Independent contractors
- Freelancers
- Consultants
- Seasonal workers
Typically, contingent employees work on a project basis and are paid hourly or receive commissions, rather than making a salary. Additionally, most contingent workers aren't eligible for employee benefits, like health insurance, paid leave, or short-term disability.
There are many ways to hire contingent employees. You can interview individual workers and hire them directly, or you can work with a staffing agency or procurement firm that represents many independent contractors. You can also hire contingent workers on-demand through websites with large talent pools, like Upwork, Fiverr, and MediaBistro.
Benefits of hiring contingent workers
Hiring contingent workers can have many benefits for small businesses. Here are some of the advantages of a contingent worker vs. full-time employee:
- Potentially more cost-effective than permanent workers: A contingent workforce sometimes offers cost savings compared to a team of full-time employees. Because contingent workers don’t receive a salary and they handle their own taxes, you only pay them for the work they complete. Plus, most temporary employees don’t receive benefits, which reduces your overhead costs.
- Provides specialized skills and expertise: One of the biggest benefits of hiring contingent workers is that they provide specialized skills. For example, imagine you’re working on a specific project for marketing and you need to hire a graphic designer with expertise in package design. You can probably find a contingent worker to hire for the specific project rather than hiring a full-time graphic designer. Hiring contingent workers can also help you bridge a skills gap in your current workforce.
- Flexibility in staffing based on business needs: With contingent workers, you’re able to hire employees based on your business’s changing needs and work schedule. So, if you have an employee that goes on maternity leave, or you need to hire more workers during a busy season, you can use contingent workers on a temporary basis without spending the money to hire and onboard new full-time employees.
Challenges of contingent workforce management
Contingent workers come with several drawbacks that are important to consider. Some of the biggest downsides of a continent workforce include:
- Lack of long-term commitment: One of the biggest pros of contingent workers is also one of the biggest cons – the temporary nature of their employment. Contingent workers are usually employed for short-term engagements or on a project-by-project basis, which means they may not be as committed to the business over the long term.
- Potential difficulty integrating with full-time employees: When you have a mix of permanent employees and temporary workers on-site, it can sometimes be difficult to integrate the two groups. People doing contingent work might not be able to build strong working relationships with other colleagues, which can lead to inefficiencies.
- Legal and compliance issues: If your business hires contingent labor, you must pay close attention to proper employment practices to avoid compliance and legal issues. For example, you need to make sure your temporary workers are classified correctly and understand how your payroll taxes will change.
What legal risks are there for contingent workers?
Hiring contingent employees is different from hiring traditional employees. There are additional requirements and payroll tax implications you need to pay attention to, or your business could face financial or legal consequences. These are some of the biggest legal risks to understand when hiring temporary workers:
Differences between employees and independent contractors
To comply with the Fair Labor Standards Act (FLSA), businesses must correctly classify their workers as an employee or independent contractor. If you misclassify an employee as a temporary worker, even accidentally, your business can face fines.
One way to support compliance is to require contingent workers provide proof they're a registered business entity, such as a limited liability company (LLC), and that they possess their own contingent insurance, including workers' compensation insurance.
IRS guidelines on worker classification
When it comes to your business taxes, the IRS has its own guidelines for worker classification. When a business classifies an employee as an independent contractor, the business’s share of income taxes isn't paid, and the employee’s taxes aren't withheld. If the IRS finds out, the business would have to pay for the employee’s employment taxes.
Legal risks and implications of misclassification
Misclassifying a permanent employee as an independent contractor can also have legal implications and financial consequences.
An employee could sue your business for unpaid wages, self-employment taxes, or breach of contract, and you could face legal penalties for violating employment law. And because misclassified workers may not have the same legal protections as full-time employees, your business could get sued for discrimination or unfair labor practices.
If your business faces legal action, you will need to pay for your attorney fees, court costs, and a settlement with the employee, which could cost a significant amount of money.
Do contingent workers need insurance?
Most contingent workers are self-employed and not covered under their employer’s business insurance policies. To protect themselves, temporary workers must carry their own contingent coverage. In fact, some companies require contingent workers to have contingent insurance as part of their employment agreement. Some of the most common types of insurance that contingent workers may need include:
- Workers’ compensation insurance: Workers’ comp is required in most states. Legally, employers are required to cover workers’ compensation claims for all employees, including independent contractors. However, many companies require temporary employees to carry their own workers’ compensation coverage to limit risk and reduce their financial responsibility towards healthcare expenses due to an on-the-job injury or illness.
- General liability insurance: This policy covers third-party claims related to bodily injuries and property damage, as well as libel, slander, advertising injuries, and copyright infringement. This type of contingent coverage insurance can be beneficial for temporary workers who engage with clients or work in an office with other employees.
- Professional liability insurance: Also called errors and omissions (E&O) insurance, this policy covers claims of negligence, poor professional advice, work mistakes, and incomplete work that can contribute to financial loss. Gig workers, freelancers, and consultants can often benefit the most from E&O insurance, especially if they're hired for short-term engagements or projects.
Before you hire contingent workers, make sure to draft clear contracts and employment agreements. As part of the onboarding process, you should request proof of contingent insurance coverage to verify your temporary workers are adequately covered.
You might also need to purchase additional types of insurance for your business, like contingent business interruption insurance or employment practices liability insurance.
Get small business insurance with Insureon
Complete Insureon’s easy online application today to get insurance quotes from top-rated U.S. insurance carriers. You can also contact a licensed insurance agent about your business insurance needs.
Elizabeth Rivelli, Contributing Writer
Elizabeth is a freelance writer with extensive experience covering commercial insurance and personal insurance lines. Her work has been featured in dozens of online finance publications, including Forbes, Bankrate, and Investopedia. Elizabeth also writes for several insurance carriers.
