In recent years, businesses have become more proactive about their risk management strategies—and for good reason. Today’s business arenas are growing more volatile across the board. Whether in real estate, construction, retail, finance, education, or healthcare, project managers are leaning on rampant outsourcing of jobs to third-party vendors and subcontractors to complete smaller parts of larger projects.
The so-called "gig" economy (aka "shared" or "on-demand" economy) has experienced unprecedented growth since 2005. Subsequently, the number of people labelled “contingent workers” has skyrocketed, and employers and workers alike are choosing to skirt traditional “employee” distinctions for independently contracted work.
In fact, the percentage of workers reporting that they've worked for a company that contracted out their services in the preceding week rose from 0.6 percent in 2005 to 3.1 percent in 2015. So, why is this happening? And what does this have to do with the ways we manage risk?
The Truth about “Contingent Workers"There are many who would assume that this shift has been driven by middle- and lower-class millennials, or that “rooms and rides” businesses comprise the bulk of the contingent worker influx, that millennials' preferential use of services such as Uber and AirBnB and a general unwillingness to work a “normal” 9-5 must be at the root of the sudden relevance of this formerly untapped subsector of the workforce.
Those people would be wrong.
Research by Lawrence F. Katz of Harvard University and nonprofit National Bureau of Economic Research (NBER), and Alan B. Krueger of Princeton University and NBER, offers some explanations, and not one iota of their findings reflects these common assumptions.
In truth, it turns out that workers with attributes and jobs that are associated with higher wages are more likely to have their services contracted out than those associated with lower wages.
Rather than “rooms and rides,” the educational and health services industries were the most prevalent industry groups among those in alternative work, surpassing even construction and professional and business services. Together, professional and business services, health and education, and others represented half of all of those engaged in an alternative work arrangement.
And regarding the demographics of those holding these contracted positions, Katz and Krueger have this to say:
“6.4 percent of those aged 16 to 24 were employed in an alternative work arrangement in 2015, while 14.3 percent of those aged 25-54 and 23.9 percent of those aged 55-74 were employed in an alternative work arrangement... Interestingly, the rise in the incidence of alternative work occurred has been sharpest for older workers (those 55 to 75 years old) and strong for prime age workers (those 25 to 54 years old) as well.”
All this is before considering the new tax provisions of 2017.
A New York Times article by Noam Scheiber titled “Tax Law Offers a Carrot to Gig Workers. But It May Have Costs” details the ways in which the affluent within the highest tax brackets, workers and business owners alike, can gouge profitability from this economic shift under the new tax laws. Scheiber claims that the new tax law is likely to reward workers who sever formal relationships with their employers and become contractors, because it allows sole proprietors to deduct 20% of their revenue from their taxable income.
Seth Harris, a deputy labor secretary under President Barack Obama, thinks the tax provision will entice more employers to offer independent contractor classification to employees under the guise of employee benefit. Employers will leverage the employee’s tax reduction that comes with the acceptance of independent contractor status, but the employer is the only real winner; the employer saves on payroll costs, and all of the extra added benefits of formal employment to the employed fall to the wayside, along with their costs to the employer.
David Weil, an appointee of President Obama as Administrator of the Wage and Hour Division of the U.S. Department of Labor from 2014 to 2017, says in his book The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It that sustaining the employer-worker relationship ranks far below building a devoted customer base and delivering value to investors. His analysis points to large corporations ditching their roles as direct employers of the people responsible for their products, in favor of outsourcing work to small companies that compete fiercely with one another.
Regardless of causality, third-party outsourcing makes for intensified risk management procedure. Between all of the additional bodies, the insurance implications attached to each, special license requirements and subsequent documentation, and ever-changing rules and regulations for government compliance, there are a lot of capricious moving parts to track and manage.
Compliance issues are bound to arise; it’s imperative to have a plan in place for each potential risk event. So, let’s get back to basics.
What is Risk Management?
The identification, analysis, assessment, control and prioritization of risks followed by the steps and application of resources to minimize, avoid, or eliminate the probability or impact of these risks.
Practice of this process might look differently from industry to industry, but the goal of risk management remains the same: To preserve the physical and human assets of the organization for the successful continuation of its operations.
4 Questions to ask when determining a risk management strategy:
Is there a proper vetting process in place for vendors, suppliers, and subcontractors?
- Are all registration and compliance documents organized in a central location? This includes insurance, licenses, and any other qualifying data.
- What happens after we collect data and documents? How often is it updated and verified?
- If/when an incident invariably does occur, how will you prove due diligence on every vendor, supplier, and subcontractor?
Here are some risk-mitigating practices that your company could benefit from if they’re used correctly to ensure safety and compliance:
4 Risk-Mitigating Practices
Successful risk management involves identifying and analyzing potential risks, then planning for their avoidance or reduction. Several risk management techniques that provide opportunity for proactive risk management include: Certificate of Insurance Tracking, Safety Pre-Qualification, Regulatory Screening, and Vendor Credentialing.
Certificate of Insurance (COI) Tracking
Even the most sophisticated contract, lease, or loan agreement will not protect your organization without compliant insurance to back it up.
In order to ensure vendor compliance, and subsequently, to limit their own liability, risk management teams collect what are called certificates of insurance (COI). COIs serve as proof that an insurance policy has been issued, but without the bulk of the policy itself.
Note: Collecting COIs is merely the first step in ensuring compliance; it’s only the first line of defense, insurance-wise. To guarantee loss transfer, it is imperative to exercise due diligence in reviewing full insurance contracts as well as collecting and tracking COIs.
Health and safety pre-qualification is vital for assessing contractors. This step works to ensure potential hires are:
- Committed to safety
- Have good systems to back up this commitment
- Are capable of working safely, in practice
An efficient safety pre-qualification procedure ensures your vendors and subcontractors are aligned with your organization's standards by streamlining the data collection and review process, and leveraging dedicated compliance analysts to verify electronic medical records (EMR) and Occupational Safety and Health Administration (OSHA) data.
The regulatory landscape has changed dramatically in recent years. The challenges of governmental and global regulation compliance that were once limited to financial services organizations are now extended to risk management professionals in nearly every industry to cooperatively combat the broadened scope of large-scale criminal activity.
Any company in the United States must adhere to:
- The Foreign Corrupt Practices Act (FCPA)
- Uniting (and) Strengthening America (by) Providing Appropriate Tools Required (to) Intercept (and) Obstruct Terrorism (USA PATRIOT) Act
- Export Administration Regulations (EARs)
Failure to comply with these regulations can carry high penalties, regardless of the industry you may operate in. Regulatory screening should work to identify compliance issues related to the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury, FCPA (anti-money laundering), adverse media, trade licenses, etc.
Vendor Credentialing (VC)
Vendor Credentialing entails assessing the qualifications and backgrounds of potential vendor hires for legitimacy. This is especially important for healthcare and environmental professionals wherein VC is used to objectively evaluate a vendor representative’s credentials for:
- Providing a service
- Ensuring proper training
- Proving competence
- Maintaining compliance with health and safety requirements
- Continuing equal opportunity standards for vendors
- Exposing fakes and frauds via documentation
For the above purposes, vendor credentialing companies are generally interested in documentation for the following areas:
1. Immunizations: The most commonly requested are MMR, HepB and TB tests
2. Background checks: This includes drug screens, criminal background checks and the sexual offender registry
3. Hospitals' policies and procedures, possibly hospital orientation
4. Education and training: This includes product competency, HIPAA policies, code of conduct/ethics, OSHA/bloodborne pathogens
5. Statement of insurance liability letter
Outsource Your Risk Management to BCS
Business Credentialing Services prides itself on providing the perfect amalgam of cutting-edge technology and outstanding customer service. The BCS App's proprietary software integrations—InsurComply, SafeComply, and ReguComply—are built upon best-in-class data sources and work not only to track the documents necessary for effective risk management, but also help to correct compliance issues within those documents.
By outsourcing your COI tracking, safety pre-qualification, regulatory screening, and vendor credentialing duties to BCS, you could free up several weeks' worth of work for you and your team per year, so you can get back to whatever it is that you do best.
Contact BCS today to schedule a demo, find out which services are right for you, and get started constructing you customizable risk management plan.
Topics: risk management services