CWS 3.0: November 16, 2011 - Vol. 3.33

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Because You Asked: Why Companies Have Term Limits

Currently, my company has term limits for our contingent workers in the United States. What are the benefits of term limits? Do most companies have them?
— Skeptical in Syracuse, N.Y.

I did a quick check and found that terms limits are almost universal. Of course, there are some companies that don’t have them. The concept of term limits has attracted its fair share of dialogue and misconceptions. The phrase “term limit” typically refers to the length of time that contingent workers are engaged at a company. I have seen term limits from 6 months to two years. Typically, when a contingent reaches that limit, there is break in service from 44 to 90 days before he or she come back to work as a temporary worker. The idea is that once the term is over, the worker leaves. Some industry experts claim businesses can obtain some sort of legal protection from enforcing term limits.

Attorney Eric H. Rumbaugh disagrees. “Term limits adopted to avoid co-employment status have little benefit and may have an added cost if it gives the business a false sense of security,” he says. Co-employment refers to situations in which a worker is simultaneously treated as an employee of two or more entities. Federal agencies determine co-employment in a variety of ways. “How long someone has been engaged is almost never very important in deciding whether co-employment exists in a particular case,” Rumbaugh says.

What term limits can do is help businesses assess the situation and the worker. One option to consider is whether the worker is a good fit and should be brought on as an employee. Another decision is whether the company needs to bring in that particular skill set in-house or not. But there is a cost to all of these choices. Bringing people in or replacing them has a price. There are administrative/transactional costs — and the less obvious but more complex overhead related to educating and training the worker. Hiring managers dislike losing trained and productive people.

But if a manager really wants to keep a worker on as a contingent, make sure you have an escalation process — and very good reasons — to extend the tenure. An informal poll reveals that companies don’t allow for extensions greater than six months. Six week additions are common. An executive member, however, should always sign off on the extension.

Term limits have other uses too. They can help with avoiding some kinds of benefits liability. But attorneys warn that careful plan design and execution is a better way to go.

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Contingent Worker Specialist

Leslie Holbrook 11/16/2011 01:23 pm

Our company does have tenure restrictions for contingent workers, and an important benefit that we see is that this allows us the opportunity to ensure that staffing is properly aligned with procurement sourcing and cost containment strategies. Excessive tenure is often a signal that the business line is not giving sourcing adequate consideration. Additionally, when you keep staff augmentation style contingent workers for too long, you lose the ability to effectively negotitate rate. It's hard to determine what this costs, but we know that pre-identified resources (as opposed to those obtained via competitive bid) cost about 15% more. A contingent worker who's been around for years and years is basically the ultimate pre-identified resource.


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