Independent Contractors: Engagement, Sourcing and Pricing

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By: Meghana Rustagi -- Senior Analyst-Category Specialization, HR Services

17 May, 2020

Independent Contractors: Engagement, Sourcing and Pricing
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independent contractors

 

Engagement Best Practices for Independent Contractors

  • Organizations have been hiring more of independent contractors due to changing work environment needs, business needs, and talent strategies for hiring and retaining workers.

  • It was observed that 41 million Americans work independently.

  • Engagement practices for ICs alienate the talent and increase the risk of misclassifications.

Engagement Model

  1. Proper Classification of Independent Contractors/Workers:
  • Employers should properly distinguish IC-category workers from employees (FTEs), as they operate on their own and are free to work wherever they want.

  • To avoid complexities, employers should complete internal audits on worker classifications.

  • Example: MBO Partners helps provide ICs with compliance programs to mitigate any unforeseen risks.

  1. Direct Engagement:
  • Employers tend to collect information for ICs, from outside parties, to understand whether a candidate will be suitable for the organization and the job roles.

  • This helps employers to directly engage with ICs and allows them to have a sense of flexibility while sourcing, without involving staffing agencies.

  1. Staffing Agencies:
  • Generally, agencies place temps, contract workers, and direct hires. Many ICs work on a project basis.

  • The advantage is that the agency knows the worker’s talent and capabilities, which helps them suggest a good fit for the organization.

  • Employers receive help from agencies for sourcing workers, as managing ICs is highly risk driven if they are not classified properly.

Sourcing Industry Practices

A freelance management system is the most preferred and adopted sourcing model by organizations, followed by direct sourcing, for hiring highly talented professionals with complete visibility, reporting, and analytical skills.

  • Companies use four sourcing models, including leveraging the freelance marketplace, government websites, freelance management systems, and direct sourcing.

  • Technology integration, for sourcing independent contractors, has many benefits, such as increasing hiring efficiencies, saving money, reducing recruiting costs, ensuring compliant engagement, and allowing companies to collect better data and to make more strategic hiring decisions.

Sourcing Model

  1. Leveraging Freelance Marketplaces:
  • Online platforms help connect independent contractors with projects.

  • Help match the demand-supply of labor, reduce time to fill, lower recruiting costs, etc.

  • Eliminate the need for third parties, as clients and workers transact directly.

  • Help to automate tasks, such as onboarding, payments, and engagement documentation.

  1. Government Websites:
  • The local chamber of commerce’s business directory could help employers source talent.

  • Workers would be classified under the appropriate area category.

  1. Freelance Management Systems:
  • They allow companies to hire and source highly skilled professionals.

  • Added visibility, assignment tracking, valuable reporting, and analytics make these systems a great resource for finding suitable and quality talent.

  1. Direct Sourcing:
  • Is considered a very common option for sourcing ICs, as it allows companies to discover their own candidates to fill contractor roles.

  • Works best when staffing firms are not able to source the ideal/right fit.

  • By establishing a direct sourcing network, companies have primary access to independent professionals and are able to establish more effective relationships.

Pricing

An hourly-based pricing model is highly preferred and adopted by organizations in the U.S. and other parts of the world. An outcome-based model is the second most preferred model and adopted by Fortune 500 companies.

Pricing Models

  1. Hourly-Based Pricing Model
  • Employers pay an independent contractor per the number of hours the IC spent working on a project or a task.
  1. Outcome-Based Pricing Model
  • The employer pays for the service once it has been completely executed or pays once the work is deemed complete, as agreed in the SLA.
  1. Subscription-Based Model

Depending on service requirements, firms can use multiple services together for a pre-quoted price from the vendor. Packages vary due to the number of services and value adds.An hourly-based pricing model is highly preferred and adopted across the world, with more than 50% of employers paying ICs based on their number of hours worked.

Negotiation Opportunities for Employers

Steps on How an Independent Contractor Bills himself/herself 

  1. Calculate Hourly Rate
  • Achieved by determining his/her annual salary.

  • Compute annual overheads.

  • Analyze the profit margin.

  • Determine billable hours

  1. Investigate the Marketplace
  • This involves external market data for understanding what other IC workers charge for similar services and what clients are wiling to pay.
  1. Make Written Fee Agreement
  • Once the fee is decided, make sure the IC enters into a written agreement with the client.

 




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