The Risks of Shadow HR

As an HR leader, your job is to patrol your organization’s employees — to ensure, for example, that they fully understand their terms of employment, that they’ve received and signed the right paperwork, that they get paid on time and get access to essential job-specific and company-specific documents, and that they’re properly offboarded when it’s time to move on. 

However, this task has become increasingly difficult in the wake of the COVID-19 epidemic, as in-house workforces diminish and the freelancer population explodes. As most organizations face more pressure to do more with less, many leaders and hiring managers are simply bypassing traditional hiring processes and hiring freelance workers to their departments without ever informing HR. “As soon as a line manager engages a freelancer directly, bypassing HR’s processes, it creates an unseen, unchecked risk,” writes Jonny Dunning of HR Zone.

The result of this is a phenomenon we like to refer to as “Shadow HR.” Essentially, Shadow HR consists of everyone who’s doing work for your company but isn’t on your payroll. And, in fact, we’ve found that in many organizations, the number of freelancers being employed is triple what the HR department is aware of. 

The Risks of Shadow HR

The Risks of Shadow HR on HR

As you work to rebound from the effects of a global pandemic, it’s important to check yourself around the realities of your workforce. If you’re like an increasing number of companies, a growing portion of work in your organization is getting done by people you don’t employ on a full-time basis.

This work could include anything from small tasks to ongoing consulting to a full-time employee replacement. However, a growing number of contract providers could spell trouble for your organization. 

Why? 

Because the way many of today’s companies choose to leverage contingent workers is either very expensive of (likely) illegal. In a vast majority of cases, there is no designated tool or unified process to onboard these freelancers and ensure they have signed all the right paperwork — including NDAs, IP assignments, non-compete clauses, and more. This could open your organization up to a number of negative consequences, like misclassification, improper onboarding/offboarding and more.

Misclassification

The line between contractors and employees isn’t always clear. In fact, you might think that you’re doing your organization a favor by keeping freelancers in your company’s official HR system.

However, this can lead to unintentional misclassification of on-demand workers, which could get your business in trouble with the government. Additionally, while you may strive to make on-demand workers feel like a part of the team, mistakes such as asking independent contractors to work at your office, setting specific work hours (especially full time–equivalent hours), giving contractors employee handbooks, not issuing 1099 forms, and more could all lead to the employee being misclassified as a staff member.“If you’re caught making a mistake in classifying an employee as an independent contractor, you can be forced to pay hefty back taxes and penalties for federal and state income taxes, social security, Medicare and unemployment,” writes Nellie Akalp, CEO and Founder of Corpnet.com.

Lack of Proper Paperwork

Because Shadow HR largely operates independent of the official HR function, critical paperwork is often overlooked or missed completely in the hiring process for on-demand workers. This sets a dangerous precedent for your organization and the freelancer, exposing you to non-compete and nondisclosure issues, intellectual property issues, and conflict of interest issues—just to name a few.

Setting up payment information is also a critical aspect that sometimes gets overlooked. In fact, more than 70 percent of freelancers have, at some point, had issues collecting payment for the work they performed. If your company ends up being on a list of names that comes up in circles of on-demand workers for being one of “those” companies, it could damage your reputation among the very talent you’re trying to attract.

Improper Off-Boarding

Is there anyone in your organization making sure that once freelancers have completed their time with your company that they are being properly off-boarded? Many times the answer is no. This means freelancers who no longer work for you have access to systems where they shouldn’t have it, among other potential risks. However, because the off-boarding process is usually so hurried and rarely closely managed, these critical issues never get addressed.

How Can Your Organization Avoid These Issues?

As an HR leader, now is the time to take the reins on your on-demand workforce. While Shadow HR has become an inevitability in a majority of today’s businesses, there are steps you can take to regain control of how these workers are hired, onboarded, paid, and managed—and ensure all are done consistently. Start by seeking out programs and software that act as a one-stop shop for managing every freelancer on your payroll. Taking this step will make it easier to get the workers in your company who are hiring on-demand workers “under the radar” to buy into plugging the workers’ info into a single system of record, making it easier for you to keep tabs on the status of your organization’s freelance workers, and ensure the proper procedures are being followed.

This will help bring uniformity to the processes of hiring, onboarding, training, paying, and off-boarding on-demand talent and will ensure all of the proper paperwork makes it into the right hands at the right time.

Written by
Shahar Erez

Co-Founder & CEO @StokeTalent

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