What is contingent employment? (examples, benefits, challenges)

What is contingent employment?

Contingent employment is a temporary work arrangement where individuals are hired for a specific time, project, or task, ending once the contract term or project is complete.

People hired this way are called contingent workers. They include freelancers, independent contractors, consultants, temporary workers, and on-call workers.

Unlike traditional full-time employees, contingent workers are not permanent staff members and typically work under flexible terms. 

Why hire contingent employees?

Companies hire contingent workforce for three main reasons:

• It offers flexibility to scale the workforce up or down based on business needs.
• It saves money since businesses don't have to provide employee benefits like health insurance or paid time off.
• It provides quick access to specialized skills and expertise for specific projects without the commitment of long-term employment.

For startups or growing companies that need expert talent but aren’t ready for full-time hires, onboarding contingent workers can be a great solution.

Who can be classified as a contingent worker?

Under the Fair Labor Standards Act (FLSA), workers can be classified as either employees or contingent workers based on six key factors:

1. How much control they have over their profit or loss.
2. The level of control over their work.
3. How permanent their work relationship is.
4. Whether their work is essential to the company's business.
5. Their specialized skills and initiative.
6. How much they invest in their work compared to the employer.

Contingent workers usually have more control over their earnings, work independently, and have temporary roles. They bring specialized skills, take initiative, and might invest in their own tools. In most cases, their work isn't central to the company's main operations. This sets them apart from regular employees or permanent workers who have less control and are more integrated into daily operations.

Note: Misclassification of workers can lead to legal issues and penalties, so please consult a lawyer for additional guidance. 

Contingent employment vs. contingent offer of employment

Contingent employment and contingent offer of employment may sound similar but they are different.

Contingent employment means hiring someone temporarily for a specific period of time or project. For example, hiring a graphic designer for a 3-month website redesign project.

A contingent offer of employment, on the other hand, is when you offer someone a full-time job, but they should first meet certain conditions like passing a background check or reference check. For example, offering a full-time position to a software developer after they pass a background check.

Examples of contingent employees

Freelancers

These are self-employed professionals who work for multiple clients on specific projects. They control their schedule, rates, and clients. Examples include writers, designers, or photographers who take up projects from various companies simultaneously.

Contractors and consultants

These professionals provide specialized expertise for specific business needs. They might work on-site or remotely for fixed periods. Examples include an IT consultant implementing a new cloud system, a UX designer brought in for a mobile app launch, or a social media manager hired to run a 6-month brand awareness program.

Fractional employees

Fractional employees serve in leadership or executive roles on a part-time basis. They split their time between multiple companies, offering high-level expertise without the cost of a full-time executive. Common positions include fractional CFOs, CMOs, or CTOs.

Part-time workers

Part-time workers work fewer hours (usually less than 40 hours per week) compared to full-time workers. They might work set schedules or flexible hours based on business needs. For example, a customer service rep working 4 hours a day, an office assistant working 3 days a week, or a salesperson working only on weekends.

Benefits of contingent employment

For employers

• Cost-effective: Employers save money by not paying for benefits like health insurance, retirement plans, or paid time off. They generally also avoid costs related to training, office space, and equipment.
• Workforce flexibility: Companies can quickly scale their workforce up or down based on business needs, seasonal demands, or project requirements without long-term commitments.
• Access to expertise: Businesses can access an expert talent pool with specific skills for particular projects without having to hire full-time employees.
• Fast hiring: Hiring contingent workers is quicker and involves less paperwork than hiring permanent employees.

For employees

• Work freedom: Workers can choose when, where, and how they work with better control over their schedule.

• Higher earning potential: Contingent workers can take up projects from different companies at the same time, potentially earning more money. They can also set competitive rates based on expertise.

• More experience: Workers gain diverse experience by working on various projects across different industries and companies.

• Career autonomy: Workers can try different roles and industries without a long-term commitment.

Challenges associated with contingent work

For employers

• Less control: Employers can't decide when and how contingent workers do their tasks since they operate on flexible work schedules.
• Security risks: Contingent workers may have access to sensitive company data, raising the risk of information leaks.
• Classification risks: Incorrect classification of workers can lead to hefty fines and penalties for companies.
• Administrative complexity: Handling various contracts, payments, expense management, and compliance for different workers can be complicated.

For employees

• Unstable work: Workers don't have job security and might face fluctuations like sudden contract terminations or gaps between projects.
• Inconsistent income: Pay can be irregular since work isn't always steady, and there might be periods without any income between projects.
• Lack of benefits: Contingent workers typically don't receive health insurance, retirement plans, or paid time off that traditional employees get.
• Self-tax management: Workers need to handle their own tax calculations and payments, which can be complicated and time-consuming.

How to pay contingent workers

Paying contingent workers involves understanding specific tax forms, withholding rules, and invoice processing.

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Please consider consulting with a tax or payroll professional for additional guidance.

IRS forms needed

• Form W-9: Collects the tax information and identification number of contingent workers. Make sure they complete this form before starting work.
• Form 1099-NEC: Required for any contingent worker earning $600 or more annually. Provide the 1099-NEC form by January 31 of the following year to report their earnings to the IRS.
• Form W-8BEN or W-8BEN-E: International contract workers can use these forms to confirm their foreign status and avoid specific tax withholdings.

Tax withholding

Unlike regular employees, you don't withhold taxes for contingent workers. 

They're responsible for calculating and paying their own taxes, including self-employment tax and estimated quarterly payments. 

This means you pay them the full amount agreed upon without deducting Social Security, Medicare, or income taxes.

Invoice and hours management

Set up a clear system to track invoices and hours using software that helps with payroll taxes. Have workers submit detailed invoices showing work hours or project milestones completed.

Establish regular payment schedules (weekly, bi-weekly, or monthly) and specify acceptable payment methods.

Create a simple approval process for invoices and timesheets for prompt payment. This helps you with cost accounting.

Many companies choose to outsource accounts payable to manage these processes efficiently.

FAQs about contingent employment

What is contingent employment?

Contingent employment means hiring workers on a short-term or project basis instead of permanent positions. These workers include freelancers, contractors, temporary employees, and on-demand workers. For example, hiring a graphic designer for a marketing campaign or a retail worker only for the holiday season. The work arrangement ends when the project completes or the contract expires. This model offers flexibility for both businesses and workers.

What is an example of a contingent worker?

The following are a few examples of a contingent worker:

• A freelance writer creating content for multiple clients.
• An IT consultant implementing software systems.
• An administrative assistant helping during busy periods.
• A fractional CFO managing finances for multiple small businesses.

What is the difference between a contingent worker and a regular employee?

Regular employees have ongoing employment relationships with set schedules, benefits, and tax withholdings. Contingent workers typically work on specific projects, set their own schedules, handle their own taxes, and don't receive company benefits. They often work with multiple clients and have more control over their work arrangements.

Why do companies use contingent workers?

Companies hire contingent labor to reduce costs, access specialized skills, and maintain workforce flexibility. This approach helps businesses scale quickly for projects, handle seasonal demands, and bring in expertise without long-term commitments. It's particularly valuable for startups and growing companies managing variable workloads.

What is another name for a contingent worker?

Contingent workers go by various names in different industries. They're commonly known as freelancers, independent contractors, consultants, temporary workers, or gig workers. Some industries refer to them as 1099 workers (based on their tax form), contract employees, or project-based workers. Fractional employees and interim executives are other common terms for specialized contingent roles. These terms all describe professionals hired for specific periods or projects.

How are contingent workers paid?

Contingent workers typically receive payment based on submitted invoices for completed work or hours logged. They're paid through various methods including direct deposit, checks, or digital payment platforms. Unlike regular employees, taxes aren't withheld from their payments, and they're responsible for their own tax obligations.

Wrap up

Contingent employment allows you to hire skilled workers while keeping costs low. As a result, you are able to scale your business as needed without making any long-term commitments. 

Before you hire contingent workers, it’s important to thoroughly understand how to classify, pay, and manage them properly.

That said, paying contingent workers doesn’t have to be complicated. With Rho’s business banking platform, you can streamline the entire process with automated invoice processing and integrated accounting features for accurate classification. 

Book a demo with a Rho expert today!

Pia Mikhael is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.

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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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