Father’s Work Force
n today’s work force, jobs are being accomplished in different ways. Job-sharing, flex-time, freelance, contract workers, Professional Employer Organizations (PEOs) – all illustrate newly relevant arrangements for firms striving to remain competitive in an ever changing marketplace.
Some would call these the most significant work-force trends of the early 21st Century.
A growing number of competent, creative, highly skilled and highly specialized workers in search of meaningful and well-paying jobs are opting out of their father’s work force, and opting into alternative arrangements that provide flexibility, independence and a different kind of security.
Increasingly, companies in search of new ways to trim costs and realign functions are finding what they are looking for within this alternative worker pool, and from the PEOs, staffing firms and similar organizations that have acquired the expertise to manage this unique labor force, and make this resource available to employers.
As a result, states in search of a competitive edge to retain and grow employment and to attract new companies and investment are discovering that their existing economic development
incentives packages do not always align with this new reality.
At issue is the nature of job creation incentives, typically pegged to the number of “full-time permanent” workers to be employed by an applicant company. As employment arrangements have changed (along with responsibility for payment of salaries and benefits), the designs of many incentive programs have not kept pace with the evolution of the work force, and risk becoming non-competitive.
Companies are paying the equivalent of full-time salaries to armies of specialized independent contractors with sophisticated skills across a wide range of specialties – such as IT, human resources, communications, security and the like. But because these companies may not cut the paychecks for these workers, or may retain them on alternative, project-based pay scales, some states consider the jobs to be ineligible for incentives.
Those states are now finding that some important new projects are beyond their reach. And, as significantly, they run the risk that an existing company may be deemed in default of a current incentives agreement because some or all of their full-time workers are now being compensated via PEOs or other alternative arrangements.
“Job growth-related incentives are a primary tool to attract new businesses and to retain existing businesses,” notes Dennis Donovan, a principal at Wadley Donovan Gutshaw Consulting in Bridgewater, New Jersey. “When states subtract all of the consultants used by companies from the employment equation, they are putting themselves and their businesses at a disadvantage.”
Demography, technology and globalization are all significant influences contributing to the changing nature of employment, and to the locations where work is performed and capital is invested. The U.S. Department of Labor recently counted 14.8 million workers in alternative employment arrangements – approximately 11 percent of all U.S. employment. This figure is expected to double within the next decade: The U.S. Occupational Handbook Outlook projects 45-percent growth in the number of workers employed in non-standard work arrangements.
A significant number of these jobs will be full-time and will be provided standard benefits such as health insurance, retirement plans and paid time off. While many will be staffed by independent contractors, a growing number will be hired by PEOs and “leased” to other companies. PEOs help companies staff a variety of functions in a more cost-effective and flexible way.
“We will employ your employees,” explains Mike Flagg, senior public relations director for the National Association of PEOs. Flagg notes that the number of companies using PEO services has grown dramatically in the previous decade. “The amount of payrolls has increased at double-digit rates during the last few years, and we expect that this growth will continue as companies outsource all their dreary and complicated HR stuff.” Flagg says that PEOs today manage $50 billion in payroll and two million employees.
A growing number of states are instituting changes to their work-force incentives to respond to these labor market trends. It can seem like a complicated task, given the diversity of this alternative work force. Some states are concerned about linking job creation with specific employers. “The challenge is in trying to understand who is creating these jobs,” notes Ted Knorr, director of Pennsylvania’s Job Creation Tax Credit (JCTC) program.
Nonetheless, an increasing number of states are finding ways to align their incentives programs. For example, Indiana’s Economic Development for a Growing Economy (EDGE) program grants tax credits as a percentage of payroll tax withholding for new jobs created in the state. Firms can receive these tax credits for full-time third-party workers through their contract vendors. Florida permits incentives for a range of employees working in industries the state is pursuing, including contract employees, employees of on-site vendors, licensees and joint-venture partners. And in Texas, incentive programs permit flexibility to count contract employees and independent contractors receiving IRS Form 1099.
Some states, such as North Carolina, acknowledge only a portion of their new work force, making full-time employees affiliated with PEOs eligible for Job Development Investment Grants and similar job-creation incentive programs.
According to Karen West, Deputy General Counsel for the North Carolina Department of Commerce, “This recognizes the increased use of PEOs, which can help small businesses. But these are considered permanent jobs.”
However, North Carolina does not extend eligibility to independent contractors or consultants, even if they represent “new jobs” employed by the firm on a full-time basis. “Contractors and temp workers are specifically excluded,” she says. “They are not considered direct employees of the company getting the benefit, whereas PEO workers are.”
The highly competitive Northeast provides another illustration of the differing approaches that states adopt. New Jersey has only started to consider the implications. The state took its first step towards alignment by changing its policy to allow employees of PEOs to be eligible for its primary job attraction program,
the Business Employment Incentives Program (BEIP) grants.
However, New Jersey does not extend BEIP benefits to other non-traditional employees, including 1099 workers that work on the project site (either on a full-time basis or on a full-time equivalent) or the full-time employees of a vendor that provides services to a company at an approved site, with benefits and W-2 withholdings provided by the vendor. The state also does not recognize the concept of full-time-equivalent employment when establishing eligibility for the BEIP. These exclusions could put the state at a competitive disadvantage for some projects.
In Connecticut, jobs eligible for tax credits under the State’s powerful Urban Reinvestment Project program now include full-time employees of a company’s vendors who work primarily on-site at the company’s designated facility, as well as contract workers that receive IRS Form 1099 from the company.
In Pennsylvania, the Job Creation Tax Credit program accommodates modern staffing arrangements, allowing both the company and a contract vendor to apply for the credits in connection with a single project, with credits issued to the company for its employees and credits issued to the vendor for its employees. The vendor does not have to be a PEO. Additionally, Pennsylvania affords companies flexibility in defining “full-time” according to the standards prevailing in the particular industry.
In New York, authorities long ago re-wrote job creation incentives to include contract employees and self-employed workers. New York also accommodates part-time employees on a two-for-one FTE basis, joining an increasing number of states recognizing “job share” and other part-time arrangements that accommodate two-wage-earner families and enable states and companies to more precisely match the increasingly diverse supply and demand for talent.
Non-Traditional Talent Sourcing
Bottom line: Job creation incentives tools must evolve along with the trends in the marketplace. Over the past few years, we have found an increasing willingness among senior state officials and legislatures to listen to the merits of a more flexible and market-based approach to incentives, resulting in changes in statutes, regulations and contract terms. States that have updated their incentives programs have become more competitive, and have enabled many companies to obtain incentives for their non-traditional workers.
In an era of ever-tightening labor shortages, it will become increasingly important for companies to expand the ways they source and retain talent. States competing for these companies will need to act accordingly; those that do will be the long-term winners in the contest for new and better jobs and future investments.
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