Taming The Temporary Services Monster

Author(s):

Kurt Hornbecker, C.P.M.
Kurt Hornbecker, C.P.M. Senior Contract Administrator KN Energy, Lakewood, CO 80228, 303-914-7734, kurt_hornbecker@kne.com
Jennifer Fowler, C.P.M.
Jennifer Fowler, C.P.M., Contract Administrator KN Energy, Lakewood, CO 80228, 303-914-7735, jennifer_fowler@kne.com

84th Annual International Conference Proceedings - 1999 

Abstract. Companies require temporary services in office, manufacturing, and operational environments. Various internal events drive the need for these services; for example, coverage while employees are on vacation, projects of specified term, or managing the supply of labor for products with cyclical market demands. The National Association of Temporary and Staffing Services (NATSS) says that temporary help services reached unprecedented levels in 1997 with the average daily employment of temporary workers rising by 9.7 percent from the previous year. Companies are using more contingent workers and Purchasing, Human Resources, and Resource Managers all play a key role in an effective strategy for procuring temporary services while achieving cost and quality objectives and legal protection. Purchasing, in contracting for these services, must insure that they properly:

I. Research and assess the needs of the company
II. Prepare clear requirements for bid packages and evaluate the bid
III. Implement effective procedures for managing temporary services
IV. Understand the legal and IRS issues around using temporary workers or independent contractors

The purpose of this paper is to present the process which KN Energy, a natural gas utility with offices in 16 states, went through to manage temporary services expenditures. Temporary service expenditures at KN Energy had never been managed before. Consequently, there were over 50 suppliers, with a wide range of markups, working under a variety of different contracts or working under no contracts at all. This was clearly an opportunity for Purchasing and Human Resources to clean up the process of acquiring temporary services, consolidate suppliers and reduce costs without sacrificing the quality of the temporary workforce.

I. Research the Needs of The Organization. In researching how the organization procures temporary services, Purchasing should:

  1. Do personal interviews with Resource Managers
  2. Collect financial data
  3. Review supplier data
  4. Identify high volume users of temporary services for inclusion on the evaluation team


  1. Personal Interviews. If you want to find out what managers are doing, it is important to talk to them. The interview phase uncovered the many different ways that Resource Managers request temporary help. They may call up a supplier and ask for a temporary worker using a verbal contract. They may sign supplier paper themselves to contract for the service. They may ask Purchasing to write a contract as needed. They may utilize a supplier with a current company approved contract. In the absence of knowledge about preferred corporate suppliers, it was common for managers to utilize a company they may have used before or to use an individual they knew personally but who may not meet the legal requirements of an independent contractor. This multitude of processes was an indicator about the confusion in acquiring temporary services.

    Purchasing developed a series of set questions to ask managers, so that the data could be consistently compiled. Questions included; How many temporary workers do you utilize in a given year, and for what duration? What types of temporary workers do you hire?, What job skills are required for these different types of workers?, In what states will these workers be needed? Do you like to hire temporary workers after a trial period? During the interview the concept of a corporate preferred supplier was introduced. The concern of most managers was that one, two or even three preferred suppliers would limit their access to quality temporary workers, especially in the Information Technology (IT) area.

    Payrolling also emerged as an important need, particularly in the field locations. Payrolling is the process finding a temporary worker through personal contacts and then referring that individual to a temporary service agency. The agency then bills the company for the worker's wage and the administration of taxes plus a small profit for the agency. No benefits are paid to the temporary worker. This is extremely effective for summer students or cyclical help where duration is very short. It was important to survey all of the Resource Managers, so that everyone had input to the strategy.

    • Collect Financial Data. In order to maximize buying power for the service, Purchasing must find out how much is being spent on temporary services. From the personal interviews, current suppliers were identified. Those suppliers were checked against Purchasing and Accounts Payable data to determine how much was paid to them. It is also valuable to collect information on what rates have been paid, in a base rate plus markup format, if possible. Purchasing must know what the company is paying, so that after the evaluation is complete, they can show Resource Managers that the service is being obtained less expensively while maintaining quality. The Internet is another source for labor market wages at websites for state labor and employment data.

    • Review Supplier Data. Once the suppliers were known, the suppliers' databases provided the best data. The account representatives were able to provide what personnel were supplied, what categories of labor were provided, what the base rates were and what supplier markups were applied to the base rates. They also indicated whether or not their temporary workers are true employees who receive benefits or subcontractors. They provided Purchasing with information on what the competition was doing, who the players in the industry are and what current trends are emerging.

      One trend that emerged was the willingness for suppliers to work with each other to fill specific needs in a co-operative rather than competitive manner. Another trend was the desire to assist companies in managing multiple suppliers by partnering with a company's existing supplier base and managing the billing and the relationships with those suppliers. Some suppliers also provide an on-site account manager or a vendor on premise, as it is called by some temporary agencies. It is also worth broadening the base of the inquiry to other suppliers the company may not have used before. The Internet is a valuable tool in obtaining information on temporary services suppliers, as is the NATSS.

    • Identify High Volume Users for the Evaluation Team. The above information can be obtained by Purchasing. However, to select a supplier who meets the needs of the company, Purchasing must develop a team to help create the bid and evaluate the respondents. High volume Resource Managers can identify contract job categories their department needs and create the job skills required for each category to insure the supplier meets quality objectives. Human Resources should provide a representative so that employment issues can be addressed and proper policies for handling contract labor in the organization are communicated to the suppliers.3 Legal should also participate in preparation of the contract terms and conditions to cover temporary services issues. The participation of these members is critical as the project moves into the preparation of the bid package and then later into the bid evaluation phase. These members are also critical in supporting the initiative when it is rolled out to the company.

II. Prepare the Bid Package and Evaluate the Results.

The Bid Package. Because the purchase of temporary services involves the acquisition of human capital, many times with specialized skills, there may be a perception that these services cannot be purchased with the black and white process associated with RFP's or RFQ's. While the evaluation team will be requesting and evaluating some subjective information, it is still possible to organize and review the bids objectively.

The RFP should contain:

  1. A method to evaluate the quality of the service provider and temporary workers
  2. A method to evaluate prices
  3. The value added services which are desired
  4. A scope of work if possible
  1. Evaluating the Quality. The most difficult part of creating the RFP is getting Resource Mangers and Human Resources personnel to talk about the intangible or soft aspects of selecting a temporary services firm. It is difficult to articulate these things. Managers may fall back on statements like "I use So and So because they always send qualified workers" or " I have worked with Company X for many years and they understand what I need without me having to tell them" or "they got me my job at this company so I always use them."

    These soft aspects include:
    Pre-employment screening
    Skills testing and training
    Retention of qualified workers
    The ability to find workers with unique skill sets, particularly in Information Technology
    Response time to phone calls
    The time it takes to fill a position
    What happens when a temporary worker does not perform
    Customer satisfaction evaluations during and after the assignment

    The RFP should contain a series of questions that specifically address the intangible aspects of the service. These questions should be weighted for importance by the evaluation team. The answers to these questions will also form the basis for the supplier performance measurements in the contract.

  2. Evaluating Price. Intangible aspects aside, determining the base line for a price comparison between temporary service providers is still of major importance. Interviews with various managers in the organization should have determined the types of temporary workers that are needed. The RFP should include a list of the most commonly needed job titles. In addition, it should include a description of what each title means and the skill requirements for that position. A Marketing Secretary may have a different meaning in terms of skill set and pay rate at different temporary services companies.

    Prepare a Bid Response sheet that lists the job titles and ask the temporary services providers to respond with:

    Hourly pay rate - the hourly wage the temporary worker is paid

    Taxes - the various taxes paid on behalf of the temporary worker including FUTA, SUTA, FICA, Unemployment and Worker's Compensation.

    Overhead - the cost of maintaining the staff and office

    Profit - the amount of profit usually based on the volume of business to be done with the potential client

    Hourly bill rate - the total of all of the above, the amount the company will be charged

    Requesting the rates in this manner does several things:

    It insures that the temporary services companies are paying the approximately the same wage to an employee for the same skill set. This wage is generally based on supply and demand and the employment outlook in the region. An extreme variance between the pay rates could indicate that the provider is not in touch with the market or industry or is low-balling.

    It isolates the portions of the rates that the temporary service provider has control over, namely overhead and profit.

    If the ability to hire temporary workers as full time employees is important to Resource Managers, include a section on the bid response sheet which requests hiring fees and fees for temporary to permanent placements.

  3. Value Added Services. If is important to identify the value-added services that are required to assist in the management of both the supplier and the contingent workforce. These services may include:
    Reporting capabilities
    Preparation of customized guides for both hiring managers and temporary workers.
    Partnering with other suppliers
    An on-site account manager

  4. Scope of Work. If the organization has a clearly defined process for bringing temporary workers on board, include that process as the scope of work. If there is no clear-cut process, then the evaluation team can develop one prior to issuing the bid. The team can also elect to send the RFP out without a scope of work and develop one during the contract phase, using the expertise of the winning temporary service firm. In any case, details such as who is authorized to request temporary workers, how the temporary workers will be granted access to buildings, computers and phones and what types of pre-employment screening will be done must be established prior to executing the contract.

The Bid Evaluation. The purpose of any bid evaluation is to insure that all suppliers receive fair and objective consideration. It is advisable to prepare a formal checklist for the evaluation team members which lists the key topics covered in the RFP, how they were weighted by the team and what the range of scores will be. Each evaluation team member can all read and evaluate all portions of the proposals or team members can evaluate only those portions that apply to their area of expertise. For example, the Information Technology representative may evaluate only the sections pertaining to IT positions.

In evaluating price, focus on overhead and profit rather than the hourly bill rate. The tax figures should be almost identical, as the government controls them and the employee pay rates should also be very close.

The evaluation team may be able to select the final supplier(s) based on the written bids alone. They may elect to have formal presentations from suppliers as part of the process. There are many methods to evaluate and select a supplier.

II. Implementation

The implementation process generally has three phases.

  1. Executing the contract
  2. Implementing with the workforce
  3. Avoiding Pitfalls


  1. Executing the contract. Each organization has different requirements on what should be included in a contract. Most contracts include the terms and conditions, a scope of work and a schedule of values.

    Terms and Conditions. In addition to clauses addressing issues such as term, cancellation, dispute resolution, indemnification and liability a contract for temporary services should also include language which addresses the following:

    Ownership of work product
    Insurance including Statutory Worker's Compensation and Employers Liability plus general and auto liability.

    Statement of independent contractor not employee status
    Services non-exclusive
    Compliance with laws, especially ADA and EEO laws
    Right to hire
    Confidentiality with particular attention to computer access

    Scope of Work. A scope of work for temporary services will include such things as:
    Reporting requirements and frequency
    Pre Employment screening requirements such as drug testing and criminal background checks
    Special skills tests which are required
    Minority sub contract requirements
    Removing and replacing a non performing employee
    Who can release against the contract and how

    Schedule of Values. The schedule of values can list the hourly rates for each and every job listed on the bid and if it is appropriate for the organization, the hourly rate for each job description can be fixed. A more practical way of managing the price is to establish a mark-up table based on the cost information disclosed in the bid. The mark-ups may vary from state to state, by worker's compensation categories or by skill set. The purpose is to establish a figure that can be applied to the wage paid the employee to establish the billing rate. This method allows the hiring manager more flexibility in selecting the correct temporary worker for the job and insures that the markup will be consistent even if the employee base rate changes.

    Include hiring fees and any drug or background testing fees. Include the payrolling mark-up, which should be less than the standard mark-up.

  2. Implementation. Implementation is the most difficult part of the process. However, there are a few things that can help keep the process moving forward.

    Clearly identify the team members and their responsibilities. For example: Purchasing - Team leader, contract and price issues, documenting other issues in the contract Human Resources - hiring process, prescreening, security
    Supplier - training guides for hiring managers and temporary workers
    Accounts Payable - Invoices

    Develop a written plan
    Set realistic deadlines

    A sample implementation plan might look like this:

    Determine team members from both supplier and company
    Schedule regular meeting date
    Basic contract terms negotiated
    Design order process
    Design invoice process
    Contract finalized with inclusion of Scope of Work
    Decide on affiliate suppliers if needed
    Develop Resource Manager guide
    Announce selection of supplier to workforce
    Supplier open house and training session for Resource Managers

  3. Pitfalls in the Process of Trying to Manage Temporary Services.

    Participation. To avoid problems during and after the implementation process, you must have participation from all team members. If Purchasing selects a supplier and creates a process that no one will use, it is not effective. It is best to have pitched battles among the team members along the way and come out resolved than to create a contract and a process that does not meet the needs of the organization.

    Education. Educate along the way. Resource Managers are not always well educated on employment issues. Because there is much turnover in companies nowadays, continuous communication on how to use temporary workers and the legal issues around using them is needed for Resource Managers.

    Processes. Processes must be clearly defined prior to the introduction to the work force. Human Resources, or other departments such as Security, must define the processes on how to handle the contractors, get them security access cards, computer passwords, etc. and retrieve or cancel all these things when the temporary worker leaves. There should be no ambiguity in the supplier's mind on what these processes are. The supplier will probably have to lead Resource Managers through the process and should know exactly what to do.

    Labor Shortages. The same labor market issues which impact companies seeking to hire full time employees impact temporary service providers. Even the best temporary service provider cannot overcome a tight labor market. Although it is tempting to possibly achieve greater savings by consolidating with only one supplier, be aware of the job market.

IV. Legal and IRS Issues Around Temporary Workers. There are three particular areas of the law and IRS regulations concerning temporary workers that a company should be aware of. They are:

  1. The protection of temporary workers under U.S. employment laws
  2. The impact of leased workers on pension and 401(k) plans
  3. The IRS Twenty Point Test for independent contractors
  1. Protection Under U.S. Employment Laws. The civil rights laws, work site safety requirements, minimum wage and overtime provisions, worker's compensations and unemployment insurance also protect temporary workers. They may also be included in the work site collective bargaining unit if they can show a sufficient "community of interest." More recent laws include the Americans with Disabilities Act and the family leave law. Businesses using temporary workers can often be held as joint employers giving the workers recourse against both the temporary help employer and the work site employer.

  2. Impact of Leased Workers on Pension and 401(k) Plans. An obscure tax law can have an effect on the use of temporary workers. Section 414 (n) of the Internal Revenue Code requires businesses with qualified retirement plans to include "leased workers" in their head count when applying the IRS coverage tests designed to insure that employer plans do not discriminate in favor of higher-paid workers. For this provision, a "leased worker" is defined as one who works 1500 hours or more in a year.

    Independent Contractors who are reclassified as employees cam impact benefit plans approved under the Employee Retirement Income Security Act (ERISA). Benefit plans must be operated for the exclusive benefit of the employees. A minimum percentage of employees must participate in the plan in order for the plans to be qualified. If a large number of independent contractors are reclassified as employees, previously qualified plans could fail these tests and be disqualified.

  3. The IRS Twenty Point Test. Certain industries, such as the natural resources industry, frequently use independent contractors for work such as right of way acquisition, surveying and land management. The same can be said of the IT industry. Ray Marcy, president and CEO of staffing company Interim Services estimates that some companies now staff as much as half their IT jobs with contractors. Five years ago the typical mix was 10% temporary to 90% in-house IT employees. Be aware of the trends in your particular industry regarding the use of independent contractors. The IRS has developed audit guidelines for these types of companies to determine if independent contractors are truly employees.

When is a person an independent contractor or an employee? The IRS defines the difference through its controversial Twenty Point Test. Some key issues in defining the difference, to name only a few, are:

Behavioral Control. Does the employer indicates how the task should be performed and provide training and instruction or is the employer only interested in the end result.

Financial Control. Can the individual performing the services incur a profit and loss, do they have significant investment in the business and are their services available to others.

Relationship of the Parties. Them employee/employer relationship cannot be overridden simply by using a contract. The IRS looks as behavior patterns during the course of the relationship.

While reading the twenty factors, it is alarming at how much interpretation could result from evaluation against each of these criteria. Even though the company may intend that an individual is an independent contractor, there is always exposure to co-employment issues if a contractor were to make a claim that they were an employee of the company.

For example, a company decided to outsource its information services department. They released their employees from employment and subsequently hired them back as contractors. After five years the company terminated the contractors. The group collectively filed for unemployment and named the company as their employer, claiming that they were actually employees during this time. The court ruled in the contractors' favor requiring company to reinstate benefits and employment status to the employees and leveling fines to company for how it managed the situation.

If a company is selected for an employment tax examination to determine if independent contractors have been correctly classified, there is still hope to avoid a tax payment. Section 530 of the Internal Revenue Code offers some relief requirements. They are:

Reasonable Basis. A reasonable basis for not treating the workers as employees includes court cases and previous IRS decisions, prevailing industry practices or advice from someone who would reasonably be considered an expert.

Substantive Consistency. The company or any predecessor business must have been consistent in the treatment of workers or any similar workers.

Reporting Consistency. The company must have filed Form 1099 for workers earning over $600 annually. Relief is not available for any year the company did not file 1099's or for the workers for whom the company did not file a 1099.

Good record keeping and good contracting can assist in avoiding joint employment problems.

Observe the maximum annual hours limit. When hiring temporaries, utilize them as temporaries. Working temporary is defined as working up to 1499 hours in a given year. Human Resources should be advising Resource Managers on when a temporary worker has reached the maximum and if the position that should be a hired position instead.

Always have a contract. If left up to interpretation of the Twenty Point Test only, a company could be in for some real heartburn. Two of the contract provisions suggested in earlier, "services non-exclusive"and "independent contractor status" deal specifically with two points in the Twenty Point Test. In addition, requiring insurance can also serve to meet one of the Twenty Points as it is a clear cost of doing business. Make sure that the person contracting for these types or services is fully informed on these issues. Walk away when you cannot contract with someone on your own terms. There is always another way to skin the cat without putting the company at undue risk. Be aware however, that the Twenty Point Test also includes behavior. If you treat an independent contractor like an employee, what the contract says does not matter to the IRS. Train the supervising manager on how to behave with a contract employee.

Avoid using temporary service contractors who work for themselves. Studies over the last eight years running indicate the best job in the USA is being a contract programmer. Programmers migrate from employer to employer trying to elevate their base pay while reducing the margin contractor charges for services. Yet, when they strike out on their own, they try and bend a lot of rules regarding maintaining insurance coverage, paying their own taxes, and all the other requirements, that they place the burden of keeping track of all their rules with the company instead of with themselves. It is a common misconception among hiring managers that it is cheaper to use an independent contractor because the profit paid is being reduced. This minimal reduction in price does not offset the risk.

REFERENCES

Press Release, "Temporary Help Reaches Record Levels in Strong Economy." National Association of Temporary and Staffing Services, April 24, 1998.

"Labor Market Information." Colorado Department of Labor and Employment, [http://www.state.co.us/gov_dir/labor_dir/lmi/wages/2080g.htm], March 5, 1998.

"Employee or Independent Contractor? Thinking Like the IRS." Alexander Hamilton Institute Incorporated, Payroll Legal Alert: Special Report 1996, 1-8.

Kolbasuk McGee, Marianne, "Staffing-Just Don't Call Them TEMPS." Information Week, May 12, 1997.

Internal Revenue Service. Training Manual 8463 and 3142-01, "Chapter: Employer-Employee Relationships."

Internal Revenue Service. Publication 1976. September 1996.


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