10 Things Procurement Professionals Must Consider Before Hiring Labor for Their Organization

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Spend Matters welcomes this guest post from Deepesh Jethwani, consultant at GEP.

Every manufacturing facility, from automobile to food, has multiple production/assembly lines that employ hundreds of workers. Most of these organizations prefer to outsource line workers rather than put them on payroll. The outsourced workers can be from the local country where the manufacturing facility is set up or from a foreign country.

There are times when you need to hire non-permanent labor for your production line or when your contract with an existing labor providing agency is about to expire. Before you decide to launch a request for proposal (RFP) with suppliers, here are the top factors you must consider as a procurement professional.

1. Understanding the Different Types of Labor

Temporary labor, contracted labor, part-time labor, service contract labor and contingent labor are terms often used interchangeably. However, there are differences between them, and you must understand those before you proceed. These differences can best be explained with examples.

  • Temporary labor is like asking a third-party vendor to give you 10 people to manage a job. There is no specific expertise required, and what matters is the number of people rather than their skill set. The labor provided every week/month could be completely different, yet the task can be completed with the same quality. With temporary labor, there is a predefined job duration (generally up to 12 months). Many companies mandate a gap — not allowing the same set of workers after 12 months — before hiring them back. This is generally applicable for blue-collar workers.
  • With contracted labor, you’re looking for a particular skill set. You engage a third-party vendor with a specific scope of work describing the expertise needed, and develop a contract based on the personnel who would fit those requirements. The duration of this type of contract generally goes beyond 12 months and is generally applicable for white-collar workers.
  • In a service contract, you make a contract with a third-party provider to manage a particular service in your organization. For example, if you have a manufacturing/production line and you need it to be up and running 24/7, you need a service contract. The scope of work becomes the key deliverable here, rather than the number of workers you need. The duration of a service contract is generally greater than or equal to two years.
  • When it comes to part-time labor, the requirement is generally dynamic regarding time. For example, you might need janitorial services for your small office requiring six hours of labor per week rather than eight hours every day.
  • Contingent labor generally constitutes freelancers and independent consultants who are assigned to get the job done. When an organization uses contingent labor, its focus is on results. Some organizations have salespeople as contingent labor, paid on commissions without a fixed salary.

2. MSP Model vs. Direct Hiring

Once you are clear on which of the above requirements you are looking for, the next step is deciding whether you plan to hire the workers on your own (direct hiring) or whether you want to put up a managed services provider (MSP) model. An MSP model streamlines workforce management, ensures that results are delivered and makes the task of governance easier.

3. Co-Employment Laws

When you hire contracted labor, they are generally under the payroll of the MSP. It’s important that your MSP ensures there is no co-employment risk. Co-employment is when there are two (or more) employers who bear the legal responsibilities of the same employee. Many countries have laws that mandate a contracted worker be converted to a permanent worker and the organization handle employee benefits after a specific period. If your organization continues to use the same contracted worker for multiple years without making them permanent, it could lead to co-employment issues.

4. Evaluating Local Labor vs. Foreign Labor

This evaluation can be complicated, as there are many factors you must consider while deliberating whether to hire local labor or foreign labor. These include:

  • Recruitment costs (can be higher when you want to recruit from foreign countries)
  • Travel costs (when you want to hire foreign labor)
  • Levies (many countries impose a foreign worker levy on the company for any foreign workers you want to employ)
  • Worker turnover (foreign workers are likelier to stay in the same production line, whereas local labor may find it easier to switch to other production lines as they are not bound by permit)
  • Recruitment time (it takes more time to get foreign labor because of administrative formalities that need to be completed with the government)

5. Your Permit vs. Supplier Permit

If you decide to go for foreign labor, it is important to decide up front whether the workers will come in under your organization’s permit or under the supplier’s permit. If the labor comes under the supplier’s permit, a major part of the risk is transferred to the supplier. If the labor comes under your organization’s permit, it is easier to move the labor from one plant to another plant in the country.

6. Employee-Related Add-On Charges

When you are outsourcing your labor requirements to an agency, it is important to consider up front who will take care of employee-related charges, some of which can be:

  • Accommodation of workers
  • Back-and-forth transportation
  • Payroll management costs
  • Leaves (paid leaves, medical leaves, public holidays, etc.) as these are daily wage workers and they need to be paid on these leaves; the supplier needs to arrange backup personnel to ensure continuous operation
  • Management fees (the supplier will need additional personnel like account manager, warden, supervisor per production line, etc.)
  • Personal protective equipment (PPE), when labor will be working on the production line and active measures need to be taken for their safety
  • Flight tickets (if you decide to go for foreign labor), while bringing them in and after their contract expires, also needs to be factored in as part of recruitment costs

7. Adherence to Local Labor Law

While evaluating suppliers through an RFP for providing labor, many organizations tend to agree on a fixed rate per shift per worker. However, it is crucial to ensure that you get a cost breakdown from the supplier. Ensure that the supplier is adhering to local labor law with respect to:

  • Minimum daily wages paid to worker
  • Defining normal hours vs. overtime hours
  • Maximum permitted overtime allowed in the country
  • Medical examination, if mandated by the law, before allowing foreign labor into the country
  • Public holidays and medical leaves as mandated by the law

8. Rostering and Backup Plan

If you are signing a service contract where your production line needs to be running 24/7, the supplier needs to be made aware of the requirement. Once this is done, you need to check the rostering plan suggested by your supplier.

For example, if the law allows a worker only six days a week and you need 100 workers per day, the supplier needs to have 117 workers, so that every set of workers has a separate leave once a week, and you have 100 workers on any given day.

Also, it is equally important that you and the supplier have an agreed-upon backup plan. Some of the questions you need to ask are:

  • If a worker leaves or is terminated, what is the lead-time that the supplier needs to get a new worker on board?
  • Who takes care of the recruitment cost of the new worker?
  • What is the guaranteed period or the minimum amount of time ensured by the supplier agency that a worker will stay in the plant?

9. Insurance

When it comes to working in a production line environment, it is important to address insurance from two standpoints:

  • Worker insurance: To insure the workers against any calamities or damage during work on the production line
  • Liability insurance: To insure the capital equipment along the production line against any accidental damage; also, to cover liability in case of property damage

10. SLAs and KPIs

When you decide to outsource your labor requirement to an agency, it is important to decide on a set of service level agreements (SLAs) and key performance indicators (KPIs) you will use to gauge the performance of the supplier. Daily attendance/absenteeism, lost production output, damages due to mishandling and worker attrition are some of the things you need to talk to the supplier about before getting into the contract.

Once your organization has clarity on the type of labor required, it is important to take a holistic view of the considerations above. This will help you make an informed decision by comparing at a qualitative and quantitative level. After all, it helps to plan your labor requirements in advance, so you’re equipped to face any challenges in the future.

First Voice

  1. cris buningh:

    a useful checklist for novice labor buyers, but less useful for more experienced

    the labor classification is just one of many, while it is not positioned as such

    the re are more laws applicable than just co-employment, these differ widely per country, eg ANU gesetz in Germany.

    local labor laws may include mandatory union or collective labor agreement rules

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