Temp vs SOW: Why Contingent Workforce Classifications are Essential

One thing we hear all the time from our users (and broadly, in our industry) is “What is temp work?” versus “What is SOW work?”. There’s a tendency to categorize these two types of work, and therefore workers, together, but they are distinctly different. Understanding the difference plays a key role in controlling your Statement of Work (SOW) costs, but more importantly, it can save you significant legal headaches.

The Contingent Workforce and the Gig Economy Continue to Grow

The rapid growth and popularity of using a contingent workforce means that understanding the difference between temporary workers and Independent Contractors (ICs) who require an SOW has never been more important.

The US gig economy has grown by 15% since 2010. That’s an astonishing increase of 6 million people in the last decade. While firms have well-established HR and procurement procedures in place to handle full-time employees, the same cannot always be said for the contingent workforce. This isn’t helped by the language and phrasing in the industry—it’s not uncommon to misclassify Independent Contractors as ‘temporary’ workers or to put ‘temporary’ workers through on SOW bids.

Let’s explore some of the key differentiators, and look at ways that you can make sure you know your ‘temp’ from your ‘IC’.

Related reading: ‘How to Get the Most Out of Your Strategic Sourcing Partners’

What Is a Temp Worker?

A temp (temporary) worker will typically come in on an hourly rate, on a fixed contract, with a requirement to track their time through weekly, bi-weekly or monthly timesheet submissions. They may be considered an augmentation to your staff, brought in to provide extra support to meet demand at peak times.

Temporary hires, also known as contract workers, will typically be sourced through staffing suppliers, often at standardized rates according to their classification. This means they will often be on W-2 tax status, technically employed by the vendor or staffing agency that has supplied them. This means that they will be paid on regular terms by the vendor for the work performed.

What Is an Independent Contractor?

Independent Contractors are considered to be self-employed, with services paid to an entity (that they have set up), rather than to the individual. As such, they aren’t subject to the same payment terms or tax requirements as temporary workers outlined above.

ICs will typically be brought in for a set period of time, usually for the lifespan of a project or job they’re completing. The nature of their role will vary, but they’re often high-skilled, specialist roles that will help an organization meet a short-term need that may not warrant a full-time role in the business.

This form of contingent hiring typically happens through SOW. The SOW defines specific project deliverables and timelines, and can also include acceptance standards/criteria, contract type, and a payment schedule for the project.

Skills shortages in certain industries and niche roles, combined with an increased global demand for rapid reskilling, has led to a surge in the use of Independent Contractors. This has meant that sourcing reliable ICs has led to businesses looking beyond their typical vendors and staff augmentation programs. Freelance management technologies and referrals are increasingly valuable pathways to landing the right person for the role.

Why Is It Important to Differentiate Between a Temp Worker and an Independent Contractor?

The two vary greatly, both in terms of costs and, crucially, in their classification status. So get the two mixed up and you risk not only facing maverick SOW spend, but you also may be denying them rights afforded to full-time workers and opening yourself up to potential lawsuits.

Misclassifications can happen easily when multiple vendors and hiring business units are involved. An effective vendor management system (VMS) can safeguard against this, allowing you to clearly delineate where you track and monitor each type of labor.

It’s also recommended to use a worker classification system like Engagent, that will help you to vet who’s actually an Independent Contractor and reduce your liability.

Here are two main reasons to differentiate.

1) Controlling Your SOW Spend

One key business driver to classify correctly is to effectively manage your costs. A misclassification that charges temp workers at IC rates can lead to significant overspend. And it can happen more often than you’d think, with line or department managers focused on delivering projects and meeting goals. As long as their contingent staff are performing in their role, their classification may not be the manager’s primary concern. Additionally, they may not realize the legal implications of using misclassified labor.

More from the blog: ‘6 Ways to Control SOW Maverick Spend’

2) Understanding the Legal Implications

The difference in workers’ rights between the two roles is significant, as detailed in the sections above. If a worker is misclassified and loses out on their rights, then they have a case to sue for any missed benefits, such as sick pay.

As well as this, it’s worth noting that any misclassification picked up by the IRS will also lead to a greater examination of recent contingent hires made, which can be a time-consuming and costly process.

You may also like: ‘5 Benefits of Incorporating Learning Into Contingent Workforce Management’

How to Identify Temp Work Assigned as SOW

When looking to identify SOW work, you’ll normally be looking at project work that has set milestones and timelines, usually with set project budgets or fixed monthly payments.

If you identify blocks of hourly pay, this can be an indication that temp workers may have been charged through your SOW module, and is cause for further investigation.

It’s worth noting that even if they are classified correctly, it’s unusual for ICs to be paid an hourly rate, and you may want to consider whether this role should in future be allocated to staff augmentation and temporary hires instead.

This point leads us neatly onto one final consideration.

Should I Be Tracking an Independent Contractors’ Time?

In short, yes you should.

It can help assess whether or not a temporary hire, charged at an hourly rate, may be a more cost-effective or efficient choice in the future. So while projects are normally measured on deliverables, it’s important to decide upfront whether tracking time should be built into your SOW program.

An additional benefit of measuring time taken is that you can gauge the efficiency of your contractor. Given the rising demand for high-skilled contractors in niche or specialized roles, it’s a great time to maintain an awareness of those who you may want to call back into the business for future projects.

Want to discover how to effectively manage your SOW program and spend? Get in touch to talk to an expert or request a product demo.