Introducing the Concept of Shadow HR

If you’re losing sleep over finding top talent for your organization, you’re far from alone. The world has changed more in the past several months than many of us have seen in our entire lifetimes. A global pandemic has hurled companies into uncharted waters as huge portions of the workforce have been laid off, furloughed or have moved to work-from-home roles.

Even before the COVID-19 crisis, executives and HR leaders in every industry were under growing pressure to accelerate delivery, drive growth, and increase business efficiency. Now you, like many organizational leaders, may be wondering how to quickly adapt to these volatile hiring needs and labor markets. 

Add to this increasing pressure to perform and the fact that more open roles require highly specialized skills—and that 83 percent of HR professionals attribute their hiring difficulties to a widening skills gap—and it’s no wonder businesses are thinking outside the box when it comes to hiring top talent, leaning heavily on freelancers and on-demand workers to fill this gap.

But as we’ve seen over the past several months, the unfortunate reality is that HR strategies have lagged behind the on-demand talent explosion and the global economic crisis caused by COVID-19, leaving many organizations in the lurch. As Elain Pofeldt of Forbes writes, “Although more companies are depending on remote and flexible workers to tackle mission-critical projects, many aren’t putting any policies in place to manage them successfully.”

In other words? Slapdash freelancer management practices open your organization up to a host of threats. 

This strategy—rather, this piecemeal management of on-demand workers has led to what we at Stoke refer to as “Shadow HR.” And while shadow HR is a regular fixture in most organizations, left unchecked it can lead to unwanted consequences such as putting your firm at risk of incurring lawsuits and audits, or overspending on freelance workers that aren’t being properly tracked, among others.

In this four-part blog series, we’re going to explore what shadow HR is, the implication of shadow HR on finance and legal, the risks of shadow HR, and the implications of shadow HR on your organization’s HR department.

Introducing the Concept of Shadow HR

What Is Shadow HR?

In its simplest terms, shadow HR is everyone who’s doing work for your company who’s not on your payroll—such as workers hired via Fiverr or Upwork, for example, as well as the other types of on-demand talent mentioned above.

If you’ve ever heard of the concept of “Shadow IT” (and if you haven’t, here’s a quick breakdown), shadow HR is similar in that it is a growing part of organizations—but an element not formally managed that still exists outside the standard organizational boundaries. In other words, shadow HR sometimes uses HR and human capital management tools to hire, onboard, manage, and pay on-demand workers, and sometimes this happens outside formal channels, without the organization’s explicit approval. However, either way these on-demand workers come into the organization, the fact for both groups is that they have no formal governance past that point.

And with the exponential growth of the freelance and on-demand talent workforce, it’s no wonder that occurrences of shadow HR have grown in recent years as well. Surprisingly, most companies we work with underestimate the number of non-payroll employees by figures up to 300 percent.

How Shadow HR Impacts Your Organization

With shadow HR, the question is not whether it’s happening in your organization, but to what extent.

Almost every business we work with has some issue with shadow HR, whether it’s the fact that on-demand workers aren’t being monitored properly or consistently, or that the HR department—or any other department, including Legal and Finance, for that matter—doesn’t have a clear understanding of how many freelancers are employed at any given time, or how much they’re costing the company.

Typically, the primary drivers of the perpetuation of an organization’s shadow HR are, in fact, its top performers. These workers want to get things done but know how bogged down and bureaucratic enterprise-level hiring processes can be. So they may sidestep traditional avenues of hiring and take it upon themselves to find, onboard, manage, and pay on-demand workers. And while the intention behind these efforts is noble, the results of these hurried and unchecked processes put your entire organization at a greater risk for a host of legal, financial, and HR issues.

Legal Issues

More than a few legal risks accompany unchecked hiring and management processes around on-demand workers, including not distributing or filing the proper paperwork in a timely manner, not filing the correct tax documents, the lack of liability insurance, intellectual property disputes, security risks, and more.

Financial Issues

Overspend, underspend, and misappropriation of tax documents are just a few financial risks for organizations that have shadow HR that is not closely monitored. Take, for instance, 1099 forms: if you fail to properly file 1099 forms, you  could incur thousands of dollars in fines and penalties for a single worker.

HR Issues

Obviously, shadow HR has a huge impact on the human resources functions of your organization. Misclassification of employees, lack of proper paperwork, and improper off-boarding are all hallmarks of shadow HR. Not to mention that with shadow HR, cluttered, chaotic processes and pay cycles are common and can set your organization up for liability issues. For example: Are freelancers being paid within thirty days of finishing the work? If not, this could cause your organization significant trouble in the near future.

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The Good News

The good news? Now more than ever, you have a unique chance to play a critical role in addressing these challenges — and shaping a better future for your business — by implementing the right systems with your freelance workers. 

According to Deloitte’s 2019 Human Capital Trends report, managing alternative work and employees well “enables an organization to put the right talent in place where and when it’s most needed to get results, in a labor market where traditionally on-balance-sheet talent is becoming ever harder to find.”

Indeed, in this new normal of mixed and remote workforces, it’s up to you to put a new set of tools and best practices into place to manage workers well. While shadow HR presents its share of potential problems, it simply reflects an organizational need — one that many firms simply don’t yet have the appropriate tools to support.

Perhaps Deloitte’s 2019 Human Capital Trends report puts it best in pointing out that, “Organizations that take this workforce seriously can build strategies and programs to access and engage talented people wherever they may sit in the labor pool, driving business growth and extending the diversity of the workforce.”

While there aren’t many quick fixes for the issues inherent with Shadow HR, the good news is that there are tools, processes, and solutions to help your company better manage your freelance and on-demand workers. Throughout this blog series, we’ll be taking a deeper dive into the implications and risks of shadow HR on each of the above departments — legal, financial, and HR — and what organizations should know and can do to resolve existing shadow HR issues.

Written by
Shahar Erez

Co-Founder & CEO @StokeTalent

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