Misclassified and overlooked: the hidden workforce

What if half your workforce wasn’t who you thought they were - or if the job you thought you had wasn’t what it seemed? 

It might sound farfetched, but it’s a challenge faced by both contingent workers and those that employ their services. As organisations increasingly look to non-permanent talent to deliver critical outcomes, the lines between contractors, consultants and employees have blurred. And with that blurring comes risk. 

Over the past five years, attitudes and approaches toward the contingent workforce have shifted dramatically, notes Nick Williams, Chief Procurement Services Officer for Hays Enterprise Solutions: “Remote and hybrid work are now the norm. Cross-border hiring has surged. Services like Statement of Work (SoW), Employer of Record (EOR) and direct sourcing have scaled.” 

“Smart organisations are now thinking about their workforce in its entirety and how they can maximise productivity, rather than having the slightly archaic perspective that permanent recruitment is where the value lies,” adds Shane Little, Managing Director for Hays Enterprise Solutions in APAC. 

It’s easy to see why these models are becoming more popular. Matt Hayes, Senior Director for Flexible Recruitment Solutions at Hays Hong Kong, attributes this largely to the economy: “In the last couple of years in particular, most major markets have emphasised cost management, with a decrease in the fixed costs that organisations are willing to take on board, with permanent salaries being a primary example.” 

Although this shift is strategic, it’s also complex. Misclassification of contingent workers - whether accidental or systemic - can lead to tax penalties, reputational damage and missed opportunities to access the right skills at the right time. 

Moreover, as legislations change across the globe, it’s becoming increasingly confusing for both employers and professionals to keep track of whether they’re following the route that’s optimal – and indeed legal – for them. Nick explains: “Compliance scrutiny has certainly intensified, with landmark legislation like IR35 in the UK, the DOL Independent Contractor Rule in the US and the EU’s Platform Work Directive reshaping how organisations engage talent.” 

For organisations, misclassification of their contingent workforce can have heavy financial and legal consequences, as well as failed outcomes. So how can decision makers ensure they’re engaging the right people, in the right way, through the right model? 

Future focus: Understanding how different models work for you 

While organisations can reap the benefits of a contingent workforce - such as flexibility, cost effectiveness and access to specialised skills - a lack of coherent understanding, planning and monitoring will lead to significant problems that undermine those advantages. 

Dan Craddock, Associate Director for Outsourced Service Sales at Hays UK, warns: “Organisations are often most confused when they don’t have clear visibility or tracking of their contingent workforce. Without accurate data, organisations can end up with a ‘hidden workforce’ that operates outside of formal oversight, sometimes equating to as much as 50% of the permanent staff base. This creates confusion not just about who is engaged, but also about how they’re being managed, paid and governed.” 

This challenge is only exacerbated when moving into other regions, as Nick explains: “Inconsistent status tests, wage rules, holiday and pay parity, social-security affiliations – all of these will vary across locations”. There also needs to be clarity around intellectual property (IP) ownership and rules on data and AI. 

Whether you’re growing your contingent workforces overseas or locally, finding a solution that aligns with your business needs is vital. Nonetheless, it’s something that many organisations still get wrong. Dan confirms: “It’s very easy for organisations to fall victim to misclassification, particularly when they don’t have clear, consistent definitions of the different types of workers within their non-permanent spend.” 

“Even down to the vocabulary that's used - there are lots of different definitions and there's always a different interpretation of those definitions. A lot of employers are eager to get as much clarity on those things as possible,” adds Matt. 

SoW, EOR, MSP – you won’t be alone in wondering what these mean and which ones are best for you.  

These are not exclusive to one another, and each bring their benefits in overseeing a non-permanent workforce. Services and contracts such as these offer greater visibility and legal reassurance, without which problems can quickly arise. 

What are the consequences of failing to engage and manage contingent workers effectively? 

1. Taxes and penalties
2. Overspending 
3. Failure to achieve commercial objectives 
4. IP leakage 
5. Rifts in organisation culture 

What’s more, they rarely occur in isolation – should you incur one of these, it’s likely that more will naturally follow. Shane explains: “If you don’t get the employer value proposition right, then there’s a risk to your culture. This will result in either a disengaged permanent or non-permanent workforce, or even both. However, you can’t rely upon your non-permanent workforce too much without investing in them sufficiently, or else you increase the risk around IP because they’re less committed to your long-term success. That’s before you get to any financial repercussions.” 

All of this makes it vital to utilise the right services that keep you in control of your contingent workforce. But what should you do before picking the right service? 

1. Define your goals. Shane explains: “You can't design a workforce strategy without understanding the business strategy. Where is your organisation trying to go?” 
2. Understand the workforce’s statuses. Dan elaborates: “You need to establish clear worker categories (for example contractor, temporary staff, Statement of Work supplier etc.) very early on. Once those categories are defined, it becomes much simpler to align each worker with the correct engagement model and payment route.” 
3. Compare delivery models. As mentioned above, different engagement methods will succeed depending on the first two steps. 

Once this is done, you can begin to explore whether your contracts are based on deliverables or rates, the conditions around IP and data, and more. 

Career corner: Knowing your rights 

For contingent workers, how you're classified isn't just a technicality. This defines your career, your income and your rights. 

“If someone is wrongly classified, they may miss out on important protections such as holiday pay, pension contributions, sick leave and other statutory rights. On the flip side, if a genuine contractor is incorrectly engaged as an employee, they may lose the flexibility and freedoms that come with being self-employed. Workers may also face unexpected tax bills, lose access to benefits, or even end up in disputes with the organisation or authorities,” says Dan. 

Nick provides regional examples of the consequences: “In the UK, for example, being wrongly placed outside IR35 could mean losing employee protections, while platform workers in the EU could now be presumed employees under new legislation.” 

It’s also about culture. Shane highlights how contingent workers can feel excluded from training, incentives, or even social events, which over time can impact engagement and reputation. “Some of those subtle differences can be quite impactful over time if they're not managed effectively.” 

How can you navigate this so that you get the outcome you want? 

1. Understand different models. It’s best to seek guidance on whether being an independent contractor or working with an agency is best. What do you stand to gain or lose in each model, and how will your obligations differ? 
2. Ask questions before you begin. Matt advises: “It's in the interest of any contingent worker to know as soon as possible what the terms and conditions of that contract are, so that they can then decide whether it’s right for them.” 
3. Ensure your contract matches your expectations. Check the language, deliverables and status indicators are as you’d agreed. 
4. Take action if you’re unhappy. If the reality doesn’t match your expectations, you don’t have to sit still. Keep evidence of day-to-day control and deliverables, before seeking an independent review or escalating your concerns via an agency (or even HR department). 

Whether you're contracting for the first time or in negotiations with a new client, understanding your classification is key to protecting your future. 

Unlock your potential with the Contractor Toolkit 

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