What Is a Contingent Worker? Meaning + Examples

A contingent worker is someone who performs tasks for an organization without being formally hired as the organization’s permanent employee.

Contingent workers may offer services through contracts, for a temporary period, or on an as-needed basis.

Employers often hire contingent workers to complete a specific project rather than an ongoing workload like a permanent employee. Contingent employees may have more flexible schedules and independence than full-time employees and not be expected to adhere to a traditional nine-to-five workday.

Contingent employees generally do not receive the same benefits as full-time employees, such as retirement plans, health insurance, or paid time off. Contingent workers are expected to pay self-employment taxes and submit estimated quarterly income tax payments.

Contingent worker vs. contractor

"Contingent worker" and "contract worker" are often used interchangeably, but they can have slightly different meanings depending on the context.

By definition, contingent workers are often associated with a more flexible and open-ended arrangement, while contract workers typically have a more defined timeline.

Other main differences usually lie in whether or not the relationship is governed by an official contract, the duration of work, taxes, and compensation.

Contracts

While both contingent workers and contractors are generally temporary hires, the most significant difference is a contract worker's employment relationship is outlined by a contractual agreement. The contract summarizes the terms and conditions of the engagement, including scope of work, duration, compensation, and other key details.

Examples of contract workers who work under a contract are consultants, seasonal employees, and freelancers.

Employment timeline

Contingent workers may not have a predetermined end date and work ad hoc, depending on the company's needs. On the other hand, contract workers often have a prearranged end date outlined in their contract.

Taxes

Contingent workers and contractors may have different income tax requirements. An organization may place a contingent worker on the payroll to ensure it deducts any income taxes to pay the government. If the organization uses a staffing agency, this responsibility lies with the agency.

Independent contractors are responsible for tax obligations, including self-employment taxes. In the U.S., they may submit 1099 forms to confirm their status as an independent contractor.

Compensation

Contingent workers and contract workers do not earn a salary from the employer. Contingent workers receive hourly pay, commissions, or an agreed-upon amount for a complete project. Contract employees get hourly pay and receive payment on a set schedule.

Additionally, the company is not entitled to offer contingent workers and contract workers the same benefits they provide to their full-time employees, such as group health insurance and paid time off.

Contract workers hired through a staffing agency receive pay from that agency. This agency may also offer them benefits, such as insurance or 401(k) plans.

Contingent worker vs. employee

The main contrasts between contingent workers and full-time employees are their employment relationship and timeline, benefits, and level of commitment.

Employment timeline

While companies hire contingent workers on a temporary or as-needed basis, full-time employees have a more permanent and ongoing relationship with the employer.

Full-time employees are permanent workers, assigned ongoing tasks with the expectation of continuous employment. They typically follow a regular work schedule, often 40 hours per week, and may be required to work specific hours.

Benefits

Contingent workers often do not receive the same benefits as full-time employees. They may not access health insurance, retirement plans, or other perks commonly offered to full-time staff.

Conversely, permanent employees are entitled to a comprehensive benefits package, including health insurance, retirement plans, paid time off, and other perks. Employers withhold income and payroll taxes from a full-time employee's compensation.

Commitment

Since employers typically hire contingent workers temporarily, they may invest less in training and professional development for their contingent workers than full-time employees.

Hiring full-time employees or converting temporary talent into full-time employees represents a more substantial commitment by the employer, involving ongoing investment in training, development, and long-term relationships. Permanent employees also have legal protections associated with employment and generally have more job security than contingent workers.

Examples of contingent workers

Contingent workers are found in almost any industry, from marketing to education, health services, and retail. Examples of contingent workers include:

Independent contractors
Freelancers
Consultants
Interns
Temporary workers employed by a third party, such as a staffing agency

How are contingent workers paid?

Contingent workers receive pay per hour worked or commissions—as opposed to a salary. Pay frequency varies by contingent worker type and may be stated in a contract.

For example, a contract IT specialist may work for an hourly rate of $60 and get paid bi-monthly on a set schedule.

Benefits of hiring talent for contingent work

The following are key benefits that businesses reap when engaging contingent workers for short-term projects and needs:

Workforce flexibility

Hiring people for contingent work allows organizations to quickly adjust the size of their team as needs change. Businesses may use contractors, freelancers, and other contingent workers for seasonal or temporary support or help manage workload variations throughout the year without needing permanent staff additions.

Specialized skills

Contingent labor also fills skill gaps that a workforce currently needs to improve. For example, organizations may hire contingent workers for specific projects that require website design, content writing, business consulting, or project management.

Reduced costs and resources

Organizations are only required to pay contingent workers the agreed-upon amount. They are not obligated to pay overtime or offer employee benefits such as healthcare coverage or paid time off. Plus, businesses often hire contingent workers for their existing advanced knowledge and skills, which can eliminate or minimize resources needed for training and onboarding.

Fewer tax responsibilities

Contingent workers are responsible for their own taxes. This means organizations don't have to withhold and deposit payroll taxes, nor do they match employee contributions for schemes like Social Security.

In the U.S., companies issue IRS Form 1099-NEC at the end of each year to contingent workers who earn more than $600. This form reports payments the company made to each of their non-employees.

Classification risks of hiring contingent workers

Recruiting contingent workers can pose various classification risks for companies. It's crucial to carefully navigate these risks by ensuring proper worker classification, understanding and adhering to relevant labor laws, and implementing consistent and fair treatment of contingent workers. Seeking legal advice and having clear policies can help mitigate these risks.

Misclassification as independent contractors

Misclassification occurs when companies purposely or inadvertently classify their talent as contractors on paper but treat them in such a way that legally classifies them as full-time employees.

Here are examples of misclassifying employees as contractors:

Exclusivity and non-compete agreements. Companies should be careful not to require exclusivity or non-compete agreements, such as preventing workers from performing tasks for other companies, with workers treated as independent contractors.
Indeterminate employment timeline. A misclassification pitfall of treating workers as independent contractors when the relationship is long-term and lacks a clear end date.
Furnishing tools and equipment. A common misclassification where employers treat workers as independent contractors when the employer provides the equipment necessary to perform the job, resembling an employer-employee relationship.

Misclassification could lead to legal and financial repercussions, including fines and damaged business reputation.

Regulatory compliance issues

Not complying with labor laws and regulations applicable to contingent workers means a company could be responsible for legal liabilities, fines, and reputational damage for noncompliance.

Lack of employment protections

Contingent workers may not receive the same employment protections as regular employees. This puts an organization at risk for exploitation and potential legal issues.

Inconsistent treatment

Companies that treat contingent workers differently from one another without a clear rationale could face legal challenges and see a negative impact on morale and productivity.

Converting your contingent workers to full-time employees helps you avoid classification issues, stay on the right side of labor laws, and invest in the long-term success of your business.

Learn how Velocity Global helps you level up your workforce and mitigate classification risk by converting your contractors into employees.

Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.