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The Importance of Vendor Compliance


Recently, a report was published stating that Elon Musk had publicly apologized for workers of subcontractors hired by Tesla being paid just $5 per hour. For any company, this can be an embarrassment, and quite frankly, could easily have been prevented. Because so many companies in today’s economy utilize subcontractors for the efficiency and cost savings that they provide, it is essential that they have a thorough understanding of how a vendor/subcontractor program works.

So what is a subcontractor?

In the broader contingent workforce industry, there are a variety of different terms used to describe specific types of relationships between vendors and suppliers. Under the general umbrella of “subcontractor”, exists sub-vendors, vendors, and suppliers. Generally, subcontractors provide a service to their client, which in most scenarios, that service is providing skilled workers to perform work for the client or the client’s end client. Usually this service is needed because the customer does not have anyone to complete the work in-house. Whether there is a need for a specialized skill that is not available in-house, variable demand that requires a flexible staffing solution, or there is a need for cost savings, subcontracting is here to stay for the long run.

The pay rate revelations at Tesla demonstrated the value for companies to have a real understanding of how they are managing their vendor compliance and vendor qualification process. Tesla, and companies utilizing similar vendor processes would benefit from taking a deeper look into their vendor population, and ensuring that their vendors are in compliance with not only the client’s policies and practices, but that the vendor is also compliant in the eyes of the law.

With best practices in place for qualifying vendors, it is important to have assurance that each vendor fits into the client’s vendor program. The vendor qualification process should, among many other requirements, be able to ensure that the vendor is a legitimate company, that the vendor is the true employer of the workers performing services and not misclassifying workers as independent contractors, that the vendor is ACA compliant, that there are no other vendor layers hidden in-between the vendor, the worker and the client, and that all appropriate business insurances are in place, such as workers compensation, professional and general liability insurance. It is also important to note that this is not an exhaustive list and is only a small portion of what should be verified when ensuring vendor compliance.

Also taken into consideration to ensure that a vendor program is managed compliantly is the payment to the worker performing services. A compliant company should verify that the vendor is paying their employee a reasonable wage, that they are correctly classified as employee or independent contractor, and that they are correctly paid as an exempt or non-exempt employee according to the FLSA guidelines. Many companies have strict background screening requirements and processes that must be adhered to in order for a worker to perform work a client’s site. Based on our experience, a simple criminal instant search will almost never meet the strict requirements which many companies require for workers on site at a client location or to gain access to sensitive propriety and often confidential information. These pre-screenings could include drug screens, license verifications, employment and education verifications, FINRA searches, FACIS searches, etc… If there is no vendor qualification and compliance process in place, there is no guarantee that the worker would even qualify to meet the client’s minimum pre-screening standards.

A significant portion of these skilled workers who are being identified by vendors/subcontractors are not U.S. citizens, and are only able to work in the U.S. under an H-1B visa. Because a worker can only obtain an H-1B visa by having their employer sponsor said visa, the employer of record should be the only layer between the worker and the client. As previously discussed there are often multiple layers between the client, the vendor and the worker, and it is within these multiple layers, which non-compliance often exists.

An example to illustrate the complexity of subcontracting

The following example illustrates the complexity of these engagements: Company A has a need for a highly skilled worker and has a vendor or supplier based which they utilize to fill these specific roles.  Company A is focused on fulfilling the need, and pays no mind to how the vendor accomplishes the need.  In our scenario, Vendor 1 is subcontracting with another vendor, Vendor 2, who is actually providing their employee to perform the work. However, behind the scenes the vendor could be subcontracting with another vendor or supplier, who is in turn possibly subcontracting with another vendor or supplier who ultimately is the one identifying the needed worker who will be performing work for the client. In the eyes of Company A, the process is seamless because the need has been fulfilled, the work is completed, and Vendor 1, who has a relationship with Company A is invoicing Company A for the work performed. However, the process is not seamless, and many issues can result from the multiple layers in our scenario. First, there is no way to guarantee that the worker is being paid a reasonable wage, or at all. Vendor 1 is not the employer of record for the worker, and is not actually responsible for paying the worker. Vendor 1 simply pays vendor 2. This can result in workers, performing work for Company A, who are not actually paid for work performed.  This is a major problem.  Ultimately, Company A is at risk and will be responsible for paying the worker, even if Company A has already paid for this work by paying Vendor 1.

As the above hypothetical example illustrates, the issues that can arise here are that there is no way to know how many layers involved there are. This means that there is no way to guarantee that the worker is being paid correctly through all the different layers, and in some extreme cases, these workers may file claims against the client stating they were never paid, and because the DOL follows the relationship as opposed to following the money, the client is ultimately the one at risk and responsible for correcting and paying out the worker, even if the client had already paid the invoice that Vendor 1 had submitted. Again, most of the time, through the client’s eyes, there is only one layer and everything moves forward as normal.

In some cases when an H-1B visa is involved, the employer of record, also the sponsor, will need to be able to provide a letter to the USCIS illustrating what the job is, including a job description, a description of why the worker is qualified for the job, and an explanation for the relationship with the client or client’s end-client. If there are multiple layers involved, this letter can become cumbersome and confusing, causing unnecessary risk for the client as the worker may be denied the H-1B visa by the USCIS agent reviewing the letter.

When there are multiple layers of vendors and there is no H-1B visa involved, another preventable potential risk is the possibility of improper worker classification. Risk is present when the client company believes that the vendor with whom they hold the agreement has properly classified their own employees correctly. This classification risk is not only seen with independent contractor status, but also with classifying the employee as exempt or non-exempt, meaning eligible for overtime or not.

Many companies incorrectly believe that this classification responsibility falls solely on the employer of record. In reality, should a lawsuit or audit arise, the government will follow the relationship from the worker to the recipient of the work product,  meaning that if that W2 employee was incorrectly classified as exempt, the client company is ultimately at risk. The potential for misclassification occurring in this scenario is far greater than imagined, as the client is generally unaware of any issues and will treat the worker no different than any of their other contingent workers, when in reality, they may be treating them like a regular employee. All it takes is one worker to file a claim asserting that they are being misclassified and should be employees of the client company, or file a workers compensation claim due to a work related injury, or file an unemployment claim due to the project or work being terminated earlier than expected. Any of these claims could lead to a potential audit for the client company, and even possibly the client’s end client.

Why is it necessary to have a vendor qualification process?

As this discussion has illustrated it is vitally important for any organization engaging contingent labor to have a vendor qualification process in place to mitigate risk from both a financial aspect, but also from a reputation standpoint. There should be no need for a CEO of an organization like Tesla to have to apologize for discovering workers performing work for its company are being paid only $5 per hour in today’s globally connected world. Having a vendor qualification process in place would not only mitigate this unnecessary risk, but also help organizations bring on vendors quickly, efficiently and compliantly. TalentWave’s Vendor Qualification and Subcontracting solutions enables organizations to leverage our vendor compliance expertise and empowers each client company to be able to work with the vendors they need to get vital work done. TalentWave can provide vendor management services and ensure complete compliance across all aspects of any of the risks mentioned above. With this solution TalentWave acts as your partner ensuring flexibility, success, compliance, risk mitigation and cost savings for all parties involved.

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