Contractor or Full-Time Employee? How to Get the Right Mix of Staffing

In the past, prevailing work models revolved around dedicating one’s entire career to a single employer. Then the trend moved towards staying with an organization for stints of less than five years. And now, an increasing number of U.S. workers don’t consider themselves to be employees at all.

36 percent of employed individuals in the U.S. identify as independent workers, according to McKinsey’s American Opportunity Survey (AOS). That percentage is predicted to rise significantly over the next several years.

It’s not just a matter of volume, but who is working independently: Historically, skilled workers made up a smaller percentage of the freelance workforce. According to Zippia data, however, 2021 was the first year where more than half of freelancers provided skilled services and labor.

Administrative workers, consultants, and social media marketers are now among the types of roles that employers are typically outsourcing to contractors, according to a report from Gusto. The report, which was based on Gusto’s platform data and a survey of over 2,000 U.S. and international contractors, found that the ratio of contractors per employee is now nearly 1 to 5. 

To avoid a talent war, employers are turning to contract labor

It’s what Margaret Lilani, vice president of talent at Upwork, calls a “tectonic shift.” Skilled professionals are gravitating towards the flexibility and autonomy of freelancing. At the same time, uncertain economic conditions are forcing businesses to find new ways of accessing the right talent. 

While the job market has cooled somewhat, employers are still facing a talent crunch. For many HR leaders, skilled freelancers represent an alternative to engaging in an all-out talent war. In fact, 41% of HR professionals are using contract labor to fill the skills gap, according to Wiley. 

The advantages of this approach are manifold. Organizations can tap into specialized skills on-demand, enabling them to swiftly adapt to market changes and disruptions. Leveraging freelancers who work remotely also broadens the pool of available candidates. 

Using contract labor, alongside a stable core of permanent employees, can also support on-demand labor models. As the authors of this HBS report state, this kind of blended model “offers the prospect of achieving every manager’s goal of putting the right talent on the right project at the right time.” 

Data backs this up. According to an Upwork study, “80% of hiring managers who engage skilled freelancers say they are confident (78%) in their ability to find the talent they need, compared to just 63% of those who don’t engage freelancers.” Leveraging freelancers also increases hiring managers’ confidence in their organization’s capacity to respond to disruption. 

However, reaping these benefits requires deliberate planning: building and maintaining a blended workforce is not without its complexities.

Getting the right staffing mix: it’s complicated

Conventional wisdom holds that hiring contract workers can be cost-effective because it helps employers reduce overhead, pull back on training expenses, and avoid spending on benefits. 

But relying on contract labor and expensive staffing firms with limited oversight can increase costs dramatically. Consider how the dependency on contingent nursing staff contributed to a 258% increase in labor costs at hospitals between 2019 and 2022.

As the Gusto report warns, employers shouldn’t always expect to pay less for skilled temporary labor: U.S. contractors can command higher rates because they have more specialized work opportunities requiring greater skills.

There are other types of risks to consider in addition to spiraling costs. Many employers have been laying people off from permanent positions and turning those roles into contract work. But this could lead to heavy fines for misclassifying workers. (Employer beware: the IRS frowns upon organizations hiring independent contractors and permanent staff to do the same type of work.)

Another consideration is that not all work can be contracted out effectively. If multiple points of contact are needed throughout the day, it might be better to hire people in-house. In certain cases, time zone challenges and a lack of commitment to the organization’s mission might counteract the financial advantages of hiring contractors.

According to a SloanMIT report, “orchestrating a [blended] workforce ecosystem is a multifaceted effort that involves integration among many business functions.” This is not an easy feat when staffing demands are constantly changing.

3 ways to orchestrate a blended workforce for maximum impact

Leveraging freelancers effectively, then, is not a fly-by-the-seat-of-your pants endeavor. With appropriate oversight, advance planning, and the right data, employers can get the necessary skills, at the right time, and at the right cost. 

This doesn’t mean that HR leaders need to bring in processes that bog the organization down in red tape. Here are three ways employers can plan strategically using an agile approach:

1. Get a unified picture of talent

To manage a blended workforce effectively, employers need a total view of their talent in terms of geography, costs, and employment type. Oftentimes, this information is scattered throughout the organization in disparate systems, but the right analytics platform can pull all of these pieces together in one place. This can also be overlaid with labor market data to inform decisions about sourcing needed talent. Taken together, this data delivers the guidance that finance, workforce planners, and the CHRO need to optimize their workforce plans. 

2. Think skills, not jobs

According to a Deloitte survey of 1,200 professionals, forward-thinking organizations are fractionalizing work into projects or tasks so they can become more agile. Unilever, for example, “identified more than 80,000 tasks it may need done over the next five years that are likely to be performed by a combination of full-time employees, gig workers, contractors, and those working flexibly.”

To see where the organization can tap into freelancers to alleviate work shortages, start by deconstructing jobs into individual tasks and related skills. This exercise will provide a clearer picture of the different types of arrangements that can be used to get the right skills at the right time.

3. Plan on a shorter cycle

Workforce planning cycles typically march to the drum of the fiscal year. Planning is often spreadsheet-based, with HR pulling information from many disparate systems (covering everything from compensation and performance data to financial targets). This can take a significant amount of time, which means that rapid-cycle planning is simply not feasible.

When planning is done on a shorter cycle, however, it enables HR to quickly realign resources to different projects as they become more critical. Aim to reduce the amount of time that teams manually pull data from disparate systems. When this process becomes automated and analytics-based, employers can look ahead at which skills are needed, when they are required, and where in the organization they are needed the most.

Achieve flexibility and growth with the right approach

The modern workforce is undergoing a profound shift, driven by a perfect storm of economic uncertainty, talent shortages, and a growing desire for flexibility. Freelance workers are emerging as important sources of skilled labor alongside a core of permanent staff. 

Employers who successfully navigate this paradigm shift will gain a competitive advantage, achieving the right mix doesn’t have to be complicated. With the right strategy and commitment, it paves the way for a future of flexibility, innovation, and sustainable growth.

On the Outsmart blog, we write about workforce-related topics like what makes a good manager, how to reduce employee turnover, and reskilling employees. We also report on trending topics like ESG and EU CSRD requirements and preparing for a recession, and advise on HR best practices like how to create a strategic compensation strategy, metrics every CHRO should track, and connecting people data to business data. But if you really want to know the bread and butter of Visier, read our post about the benefits of people analytics.