The implementation of the UK’s IR35 off-payroll working rules in April 2021 had many corporations around the world that do business in the UK critically assessing the classification of any worker engagement that had a personal service company in its chain. A personal service company is a limited company used by a contingent worker to provide their services to the end client.
Just recently, the off-payroll working rules appeared to be on the chopping block but, at least for the time being, they remain. But in the months leading up to their implementation, it became apparent to me and my colleagues through numerous discussions with procurement, HR and talent acquisition professionals that organizations have too many worker categories, which often leads to confusion and the wrong engagement behavior by hiring managers. And this statement applies to any contingent workforce program, not just those concerned about IR35.
I wrote a CWS 3.0 article on the topic at the time, asserting that organizations really needed only three worker categories. Here, I would like to expand on that to include a critical worker category.
The four types of worker engagement are:
- Permanent employees of the end client (sometimes referred to as FTEs).
- Staff augmentation (typically time-and-material, named resources under the end client’s supervision and control).
- Outsourced workers assigned by the statement-of-work solution provider (as part of an outsourced project or service awarded by the end client) who are under the supervision and control of the SOW solution provider.
- Independent contractors (sometimes referred to as freelancers).
Permanent and staff augmentation are perceived to be straightforward; however, I often see worker types that belong in staff augmentation incorrectly categorized under SOW.
Permanent employees. These are workers engaged on a permanent or fixed-term basis and who enjoy all the contractual benefits associated with permanent employment. This is probably the most straightforward worker type, although there is sometimes confusion as to what constitutes a fixed-term employee. Put simply, this is an engagement under the same terms as a full-time employee except that the employee has a defined start and end date.
Staff augmentation workers. Typically, these workers are named individuals who work under the supervision and control of the end client. A classic engagement — such as an IT contractor engaged for six months and paid an hourly rate — belongs within this worker type.
This worker type can also include other short-term engagements, such as scientists and other industry professionals who are engaged on an ad hoc basis for a one-off time such as an hour lecture or a two-day training course. The time period is irrelevant — the key thing is that regardless of the piece of work, these individuals (assuming they are named resources) are being paid on a time-and-material basis under the supervision and control of the end client. This worker type is sometimes miscategorized under SOW or, worse still, not categorized at all because the purchase is made locally by the hiring manager — sometimes even billed on expenses.
Outsourced workers. Typically, we refer to this category as SOW consultants, but for the purposes of this article, I am using the term outsourced workers because the term consultant can often be misunderstood, leading organizations to categorize any (generally highly paid) professional external consultants within statements of work.
The statement/scope of work is a document outlining the work to be done and any necessary additional terms and conditions that determine the acceptable standard of the product or service. It does not refer to the workers themselves. Outsourced workers are those individuals engaged by the SOW solution provider (which may be delivering on a fixed-price project or providing an ongoing service such as catering, cleaning or call center) as part of their B2B contractual arrangement to deliver preidentified outcomes, usually with associated milestones, fixed-term deliverables and penalty conditions. These workers are generally not listed by name nor supervised or controlled by the end client. The end client may require knowing details of the individual workers for such things as access to buildings and systems, but otherwise, this worker type should be under the supervision and control of the SOW solution provider.
It is possible for individuals to be provided under a time-and-material-based SOW. For example, a firm of accountants might be engaged to provide revised audits going back several years, and the work effort to deliver this task is an unknown. There is still a fixed outcome (audited accounts) within a timeframe with elements of time and materials billed according to the work effort required. In fact, staff augmentation workers can also be provided with an associated SOW because the SOW is not an indicator of the contractual relationship.
Another example could be where the end client has a B2B SOW framework agreement to deliver training services (maybe with a value or time-based cap) with an external provider that fulfills its obligations with resources of its choosing, logging the time and material expenses incurred against that framework agreement.
Independent contractors. Independent contractors actually form a subcategory, as they can be engaged to deliver under staff augmentation on a time-and-material basis or under outsourced workers where there is a fixed outcome. Clearly, independent contractors must meet the IC classification criteria within the country in which they are delivering their services to the end client.
Regardless, every worker type within the organization can be placed in one of the first three overarching buckets, including independent contractors. However, if you feel that further classification is needed for your contingent workforce, you may create any number of subcategories (including ICs) underneath the three primary worker types.