May 12, 2020

Is Taxonomy the Unknown Evil Behind All of Your Problems?

Towards the end of 2018 we saw a spate of walkouts and demonstrations by various categories of workers at a number of tech companies. They were short-lived but they took everyone by surprise, nonetheless. They had a variety of underlying causes, but it became clear that there was a structural problem at many companies: pay disparity, both between contingent workers and full-time employees, and between contingent workers sourced from different external suppliers.

But it’s not just the high-profile events like walkouts that have financial and reputational costs. The cost of individual lawsuits can be high, for example when an independent contractor sues a company by claiming that he/she was actually a working as a full-time employee and therefore had certain entitlements such as holiday and sick pay. “While some of these cases are being appealed to the higher courts, the direction of travel seems pretty clear. And there is focus on similar issues in France, Germany and other European countries,” wrote international legal specialists Osborne Clarke in a 2017 report.

So why do companies have such trouble getting this under control? Why do pay rates and job descriptions become so incoherent?

The challenge of worker (mis-)classification is extremely complicated, for a number of reasons. Typically, organizations have a workforce taxonomy that has ballooned into a loose catalog of job titles applied in various approaches by internal users of external talent. It is inevitable that in such a scenario, all kinds of inconsistencies emerge: different job titles are used to source talent for identical roles, and identical job titles are used to source people with widely varying levels of skill and experience. In general, worker classification rules remain difficult to apply correctly.

On top of this, there can be different criteria among various governmental agencies and across different levels of government (federal, state, local). At the federal level, there are different rules applied by the Internal Revenue Service (IRS) and the Office of Workers’ Compensation Programs (OWCP). And of course, internationally active companies face further complications. European countries such as Germany apply very strict regulations on who qualifies as a contingent worker and who does not. But it would be foolish to assume that workers for the same company in different countries don’t compare notes.

The reality is that the world of work is changing. Already, about 30% of workers are part of the extended workforce, and the number will increase further. Many people now choose to work as independents, either as freelances or through third-party vendors. Market rates are then largely informed by these suppliers and the company’s control over cost is reduced. This can be bad both for the employer and the worker. It is not uncommon for HR departments to be sourcing “apples” and then paying them at the market rate of “oranges”. Most of these workers are highly educated and are very confident about the particular skill they have. They often do project-orientated work that lasts three to six months. And they expect to be paid at a fair market rate. But how they fit into the overall workforce mix is still something of a challenge.

What are the consequences? Actually, they are potentially manifold. Poor rate compliance leads to overpayment (chiefly to third-party suppliers) in many cases, and underpayment in others, which in turn means poor talent attraction and retention. For talent procurement, this presents an increased risk of “rogue” spend, i.e. managers circumventing sourcing processes. Workers who are doing essentially the same work find out not only that they are being paid differently but have different job titles – which may have a lasting effect on their future career development. Finally, relationships with managed services providers (MSPs) and other third-party suppliers may become strained.

Given all this, Gartner has concluded that, “HR leaders need a new lens on workforce planning to leverage the rise of gig and other nontraditional work and drive organizational productivity.”

These are trying times for all of us and not least for anyone in talent management. Most organizations are under pressure to refocus. Many have had to take tough decisions, such as putting staff on furlough or releasing them altogether. If these decisions are to be the right ones, then it is vital to get your workforce taxonomy up to date and aligned to the needs of the business.

Now more than ever. Getting on top of all this is hugely challenging unless you have the right technology in place to create a workforce taxonomy that reflects current market realities and legal requirements. We’ll look at how to solve the challenges in the next article.

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