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Nurturing Relationships with Contract Workers

Hiring external contractors is the “talent as a service” approach to staffing, and like any other shift to an “as a service” model, it takes careful planning to do right.

By Steven T. Hunt, Lauren Park, Fawn Fitter | 14 min read

As technology has become sophisticated and powerful enough to let people work productively from anywhere at any time, work has become increasingly untethered from the workplace. That has also made it easier for companies to bring in more contractors to provide necessary skills on an as-needed basis. In 2010, 80% of major U.S. companies said they planned to significantly increase their use of contractors. By 2020, 90% of companies said they believed a workplace that blends full-timers and freelancers provides a competitive advantage.

 

External workers have never been in more demand, both to supplement full-time staff and to replace the 41% of people who say they intend to leave their current jobs in the imminent future. And with the number of self-employed people currently at a six-year high, companies have a deep pool of talent to dip into. But while companies may be ready to hire more contractors, the managers who will be responsible for them aren’t as well prepared. According to a survey by SAP SuccessFactors and the Society for Human Resource Management (SHRM), one in three managers don’t feel sufficiently trained to manage external workers.

 

To realize the full flexibility, agility, and value of an external workforce with minimal risk to the organization, leaders need to get better at managing people who work for the company but are not employed by the company. That means tackling the challenges of integrating contractors into a team and the broader corporate culture without crossing the complicated regulatory lines that prohibit treating them the same as employees – a line that the new normal of distributed teams and remote or hybrid work environments has made blurrier than ever.

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The growing independent workforce

Companies that want to rent specific skills by the hour or project instead of hiring a full-time employee increasingly have their pick of talent. That wasn’t always the case, particularly in the U.S., where as recently as 2014, only 17% of the workforce was full-time freelance. However, by 2021, that had more than doubled to 35%, an increase driven in no small part by skilled professionals who are deliberately opting for more flexible alternatives to traditional employment.

 

MBO Partners, which helps large companies find the right independent professionals, has tracked trends in the freelance marketplace for the last decade, issuing its findings in an annual State of Independence survey. By its most recent count, there are now 51 million independent workers in the U.S. Miles Everson, CEO of MBO Partners, estimates that 7.6 million – or nearly 14% – of these workers provide services full-time to enterprise organizations, and he predicts this will grow as large companies increasingly see using contractors as a strategic choice.

 

“Enterprises that are reimagining productivity are by necessity moving from hiring for head count to hiring for outcomes,” he says. “So they’re turning to more specialized consultants to drive growth, reduce costs, and increase agility.”

 

Working with contractors is essentially taking a “talent as a service” approach to staffing: paying for only the skills you need when you need them, without having to invest in training, benefits, and other overhead. But like any other shift to an “as a service” model, adding external talent to your internal teams takes planning to avoid common pitfalls.

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Understanding different types of external talent

In the context of this article, gig workers (e.g., Uber drivers, Instacart delivery drivers) are in a different category from external employees. Gig workers are contractors in a broad sense, but they’re more like part-time employees who can set their own schedules but are required to work under the platform provider’s brand. They must use the required tools and processes to get paid. This article will not address the challenges of managing them; it will focus on contract employees who fall into one of the following categories.

 

Short-term project contractors: People who consistently work 20 hours or more per week on a contract ranging from one to three months. Generally, they’re hired for a specific purpose, then move on when their part of the work is done. A typical example is a software developer with a distinct skill set that’s only needed for one task in a longer-term project.

 

Long-term project contractors: People who consistently work 20 hours or more per week on a contract of up to a year. They’re often brought in because the company needs their skills for multiple short-term projects or because they’re needed to lead a team through a significant transition. However, this is sometimes a way to circumvent hiring freezes.

 

Independent freelance contractors: People who provide services simultaneously to multiple clients, all of whom need their specialized skills regularly, but not on a full-time basis. This is the classic consultant model, commonly used for accounting, legal advice, and other specialized skills.

 

Project contractors often work full-time, are typically treated as nonpayroll members of the workforce, and even have company e-mail addresses. Other employees and customers may not even realize they’re contractors. By contrast, freelance contractors tend to maintain a strong corporate identity separate from the company that employs them. People know they are consultants. They still need to be integrated into the broader team but not in the same way or to the same extent as project contractors.

Challenges in managing external workers

From the time you start considering whether to bring in a contractor to the day you issue their final check, you need to be cognizant that they need to be managed differently from your in-house staffers to avoid legal, logistic, and cultural risks.

 

Many companies struggle with the most basic question: when to hire a contractor instead of an employee. This became an especially urgent issue as pandemic-related employee hiring freezes created or exacerbated skills gaps. To get people into empty positions quickly, managers have invested in contractors who are already qualified and need no training. However, this requires managers to understand how to establish and maintain clear guidelines for engaging these workers.

 

Without a clear understanding of the legal line between contractor and employee – a line that varies from one region to the next – it’s easy to stumble over it, as some of the world’s leading companies have notoriously done. Under U.S. law, for example, duration of employment is a significant factor in whether someone is considered an employee. A company cannot treat someone as a temp or contractor for years at a time as a strategy for avoiding the costs of providing them with the benefits and protections of employment. Indeed, Microsoft settled the famous 2000 lawsuit against it that coined the word “permatemp” by agreeing to pay US$97 million to employees it had classified as contractors on a long-term basis to deny them benefits. Yet despite this cautionary tale, Google’s global workforce in 2019 consisted of more freelancers (54%) than full-timers (46%), and contractors complained that even though they made up the majority of the workforce, they were shut out of meetings and denied the information they needed to perform their jobs.

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To be fair, while many freelancers are committed to their independence, others see a contract job as an audition for in-house work. But if someone doesn’t volunteer that information early in the engagement, a manager needs to tease it out to clarify both sides’ expectations, responsibilities, and risks. Committing to a freelancer’s professional development – for example, not just offering them the option of taking a training course but requiring them to take it – puts you at risk of crossing that blurred legal line between contractor and employee. Employees also need to understand that contractors will be leaving after their contracts end. Even if a manager wants to extend a contract, the company may be legally prevented from doing so. That means it’s critical that managers plan for the transition of contractor responsibilities to permanent employees.

 

It’s also important to make sure contractors have a positive experience during their contract assignment. This includes providing the tools needed to do their work and helping them establish the work relationships needed to be effective in their roles.

 

But even companies that have been using external workers for some time are inconsistent about who is responsible for them. Some managers bring in freelancers on their own initiative, creating the HR equivalent of “shadow IT.” Some go through HR or procurement. Some use a talent agency as an intermediary. And many companies do all of these at once, with different contractors managed by different people, depending on what they’re doing and whose team they’re on. This mixed bag of approaches can leave an organization unclear on how large its external workforce actually is, with disastrous results for staffing levels, budgeting, project management, provisioning, and other areas.

 

“We hear stories about independent workers not getting access to the technology they need for 30 days or more, which is something no manager would tolerate for full-time staffers,” Everson says, noting that since this prevents the contractors from starting work, it delays the projects they’re needed for, which amplifies the need for companies to have a strategy to onboard independent workers efficiently.

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Even HR departments are unclear on how to handle contractors. Legal classification and compliance are HR areas of expertise, yet 25% of HR professionals told SAP/SHRM researchers that managers who hire and work with external workers also have primary responsibility for legal compliance. This exposes companies to significant legal risk by placing compliance with local, national, and possibly international employment laws in the hands of managers who aren’t trained to address it and may not even realize that they’re expected to do so.

 

The SAP/SHRM survey also found that most managers have teams that blend external and internal workers. This is unsurprising; contracting isn’t appropriate for every job or every person, so few companies or teams are made up entirely of contractors. But since one in three managers say they haven’t been enabled to manage blended teams effectively, it’s critical for leaders to plan for and prepare managers for friction between different types of employees who have different relationships with the organization.

 

For example, if managers don’t point out that internal compensation packages include benefits that contractors don’t receive, in-house employees may bristle at having smaller paychecks than contractors on the same team. Leaders should also develop strategies to include freelancers appropriately in their team without crossing the contractor/employee line, including checking regularly with the legal department to understand what is and isn’t allowable. For example, it may be fine to give external employees a corporate e-mail address and access to the company’s shared workspace but not to other corporate systems.

 

Finally, the same flexibility that makes working with contractors desirable can also create challenges for long-term planning, particularly by making it difficult to maintain consistent, predictable funding as they come and go.

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Six steps for building a blended workforce

  1. Clarify external workers’ relationships with the organization.

    transactional relationship is defined by a worker’s deliverables. Managers must articulate clear expectations and goals, identify the limits of the contractor’s responsibilities, and conduct regular check-ins to assess their progress. In addition to providing the information, connections, and tools that contractors need to meet their goals, team leaders must respond to questions and provide regular feedback. This ensures that the contract is successful and that both sides get what they want: timely, quality work performed under reasonable terms and conditions, delivered at a fair price.

    relational relationship is defined by the time spent on the project. Contractors who are likely to spend an extended period of time on a project (for example, helping to produce a series of webinars) are as reliant on their relationships as they are on information and tools. They need to be integrated fully into the team, with steps such as giving them internal e-mail addresses, including them in meetings, and encouraging in-house colleagues to treat them as peers. Yet managers must also provide defined timelines with outcomes and clear completion dates. In addition, they must avoid interfering with the contractors’ responsibilities to other clients in order to protect their legal status as a nonemployee.

  2. Ensure that managers understand the risks and requirements.

    Offer training and leadership management courses about the legal landscape to help managers feel more confident about building and managing blended teams. Establish official policies about when to use a contractor and when to hire in-house to avoid “shadow HR.” Clarify the start and end dates of every contract (and projects, if those differ) to emphasize that external workers aren’t employees and will not be classified as such.

    Consider using an onboarding system to provide a standardized, self-guided onboarding process for contractors. This protects managers and the organization by automating the process of providing necessary information such as nondisclosure agreements, relevant contacts, billing and payment processes, and applicable policies and procedures for safety and compliance.

  3. Use tools that support your contractors’ specific needs.

    When you deploy productivity tools for internal staff, make sure they’re fit for purpose for external workers, too. Integrate your contractors into your messaging, videoconferencing, and other communication tools to facilitate regular check-ins and teamwork. Set up workflows that accommodate project-based work with the ability to track progress against performance goals.

  4. Give contractors a way to fill your needs proactively.

    Many organizations set up a talent marketplace for internal openings, including not just full-time positions but also part-time roles, fellowships, volunteer opportunities, and other possibilities for career advancement. Opening this marketplace to external workers is a proactive way to connect them with additional projects that match their skills. However, the platform should require managers to specify whether each listing is open to freelancers – or even show contractors only the opportunities for which they’re eligible, such as an opening for a full-time short-term contract position that could not be considered an extension of their current contract. Providing the option to browse other openings saves you from having to recruit more contractors down the line. And because many contractors take on projects to test-drive a potential employer or get their foot in the door at a place they’d like to be on staff, showing them what’s available in your talent market also expands your pool for internal positions.

  5. Treat external workers as a critical part of your staffing strategy.

    Support planning and budgeting by maintaining data about how many contractors are being hired and for what projects. Keep track of current and past freelancers (and the agencies you hired them from, if relevant) so you can rate their performance, decide whether or not to work with them again, and justify why. Then make this information accessible across the organization to create a database of talent to draw on for future projects or open positions.

  6. Solicit honest feedback.

    If you’re building a formal strategy for expanding your external workforce, you need continuous feedback on how well it’s working – both whether you get what you need from them and whether they get what they need from you – so you can adapt accordingly. Use employee listening tools to measure the experiences that contractors have in your organization. Applying the same exit interview and survey tools you use with internal employees to explore external workers’ experiences at the end of their contracts will help you understand how to get more value from your strategy and build your external worker employment brand.
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Nurturing the relationship with your contract workforce 

Even in transactional relationships, you can increase the chances of getting what you need from your contractors by making sure they get what they need from you. When you make onboarding and technology provisioning easy, invite them to meetings and off-sites, and include them in celebrations and announcements so that they aren’t surprised by promotions and other changes, you’ll help them feel like a valued part of the team, even if only for a few months.

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This also includes inviting them to social and team-building events when appropriate. Everson says he’s aware of one company with an explicit policy barring contractors from attending employee birthday celebrations because it believes this would violate legal restrictions. This is almost certainly legally inaccurate, he notes – and it’s insulting to individuals whose time and knowledge are supporting the company. “Treating contractors as valued team members is not the same as treating contractors like employees,” he emphasizes. “Notifying them of company events isn’t going to get you in trouble.”

 

Indeed, 90% of independent professionals in the MBO Partners State of Independence survey say that being treated as part of the team is important or very important in their choice of whom to work with. Nurturing your external workers also creates opportunities to get cream-of-the-crop expertise and drive significant change. Everson points out that it’s increasingly common for companies to bring in contractors for keystone positions such as directors and department heads, especially at times of major disruption. While their tenure in these plum positions may be brief, making it a rewarding experience may encourage them to cycle through repeatedly, adding more expertise and value as their knowledge of the company deepens.

 

Ultimately, the goal of better managing your contractors is to have access to the best talent when you have a skills gap to fill. Do it well, and you’ll be the company that independents choose to work with on an ongoing basis, refer other talent to, or even give up freelancing for.

Meet the Authors

Steven T. Hunt, Ph.D.
Chief Expert, SAP Innovation Office | SAP

Lauren Park
Human Resources Research Scientist | SAP

Fawn Fitter
Independent Writer | Business and Technology

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