One of the many challenges facing pharmaceutical employers today centers around how to identify and retain the best talent in the marketplace. And competition is fierce. With the “blockbuster era” widely regarded as coming to an end, pharmaceutical companies must reevaluate how work gets done and how to find the top talent to do it. The key is engaging a workforce that is flexible enough to keep pace with evolving needs; that’s where contingent labor comes in. However, this strategy is laden with the responsibility of properly classifying temporary workers (as W-2 employees or independent contractors) to mitigate the risks involved.
How we work: the next generation
In recent years, the worker landscape has changed. Today’s millennial workers are abandoning the notion of a staying at a “9 to 5” job for decades at a time. Instead, they want to own their careers by working as free agents. They crave the excitement and variety that comes with fresh challenges and new projects. Up-and-coming talent is rethinking career trajectory, employer loyalty and how they want to work today and in years to come.
On the employer side, companies are grappling with how to attract the best and brightest and achieve strategic product development, all while keeping shareholders happy. Due in part to widespread layoffs in recent years, the pharma industry has been left with talent gaps that threaten its ability to perform well in an outcomes-based healthcare model.
In a recent global survey, pharma CEOs identified talent gaps as the second-biggest threat to their growth prospects, behind anxiety about corporate tax burdens. Utilizing a combination of traditional full-time employees and contingent workers enables firms to achieve dynamic scalability as corporate initiatives shift over time. Hiring trends now extend to new kinds of corporate partnerships, academic alliances and even crowdsourcing, with each raising unique roadblocks when it comes to classifying workers properly.
Re-envisioning the pharma workforce
These and other challenges are forcing human resources departments to re-envision their workforces and articulate new talent identification and management strategies. A 2013 global survey of human capital and R&D executives, conducted by PwC, found that some 60% of pharma executives said they intended to increase investments in the coming years to create a more skilled workforce; 72% intended to increase their R&D capacity in the following 12 months. Large companies are taking cues from smaller ones by repositioning the size and focus of their internal R&D groups, according to a separate analysis by the PwC Health Research Institute.
An application of this strategy for big pharma to consider is mirroring the precise therapeutic approach that’s typical of smaller, more agile firms. As one example, Eisai restructured its internal R&D into 12 different units, six focused on therapeutic areas and the other six focused on regulatory science or riskier “next generation” topics. Each group is comprised of around 100-250 people to foster more efficient decision making. This strategy enables HR to entice top researchers by offering the best of both worlds; the ability to enjoy the benefits of working for a large firm while offering a work environment that supports autonomy and enables greater freedom of scientific pursuit, all leading to greater job satisfaction and contributions.
The realization of cutting-edge models in R&D is inspiring new approaches to overall organizational structure. Pharma companies are testing a variety of ways to externalize risk and cost with the hope that this will result in greater productivity and innovation. These new organizational models reflect the fact that scientific discovery does not need to be housed strictly within a single company. Instead, PwC concluded, it can be curated from partnerships or external sources and arranged into a reinforced network of relationships. Approximately one-third of pharma and medical device companies revamped their R&D model between 2010-2013, according to the PwC survey, with changes that had major effects on organizational structure, leadership and other aspects of human capital.
Classification is complex
Bringing temporary workers into the mix as a way to jumpstart any of the above strategies may seem like a panacea, but if done the wrong way, it can create as many problems as it solves. Companies capitalizing on an “on demand” workforce must take care not to misstep when it comes to assessing worker classification. Engaging contingent workers as independent contractors (when in fact they should be compensated as employees) can attract federal, state and local government entities interested in collecting missed tax revenue. A special report to Congress in 2011 highlighted this tax gap and it continues to be an area of focus today.
As a consequence of worker misclassification, an increasing number of audits are being performed. The subject matter is complex and the penalties for getting it wrong are stiff. Misclassification can result in substantial tax liability, including income tax withholdings, Social Security and Medicare contributions and unemployment insurance tax to both federal and state governments.
Another potentially costly area of risk arises from misclassified workers seeking employee benefits, such as medical benefits, vacation pay, 401k contributions and stock options. Class-action lawsuits by groups of independent contractors requesting employee status are on the rise; reports suggest this is one of the hottest areas in employment litigation, and the pharma industry is fair game. Any one of these types of liabilities, plus penalties for noncompliance, could be devastating for a company that makes substantial use of independent contractors. Tack on the cost of defending these cases (not to mention the negative press that could ensue) and you’re left wondering if you should ever hire a contingent worker again.
Overall, as many as one-third of companies fail a worker classification audit, and 46% of independent contractors reviewed by the Internal Revenue Service are found to be misclassified. If violations are determined, fines assessed can include penalties that have multiplied since the Affordable Care Act was enacted and can easily stretch into the millions of dollars.
Accurate worker classification
The misclassification of workers, when it occurs, is liable to stem from a misunderstanding as to what constitutes an independent contractor. The IRS offers a three-category test to assist businesses in determining how to classify workers correctly. It is interesting and important to note that the determination of worker status is not based merely on how (or how often) a worker is paid, or whether the work is full or part-time. Rather, as noted by the IRS guidelines, the determination of worker status is rooted primarily in the behavioral and financial aspects of the arrangement, along with the nature of the relationship between company and worker. More specifically, it centers on the degree of control that the one has over the other in regards to those three factors as the two conduct business together.
For example, due to internal policy and compliance requirements, pharma workers are generally subject to the company’s instruction for key assignment indicators including: the location and times to perform the work, what equipment and tools to use, and what order or sequence of tasks to follow. If a company has the right to control how the work results are achieved, or if the worker must be trained to perform tasks in a particular manner, he or she is more likely to be a W-2 employee. In contrast, independent contractors generally determine their own schedule and use their own methods and resources.
Additionally, employees are guaranteed wages for time worked and a regular payment schedule. In contrast, an independent contractor can be compensated in a variety of ways (hourly, based on the achievement of milestones or upon delivering a final product) and the payment schedule will follow suit. Depending on the contract between the two parties, the independent contractor’s fees might not be guaranteed; instead, the fees could be subject to the acceptance of the services or deliverables by the company. If the work product isn’t up to snuff, the company may request modifications and withhold payment until the desired state is achieved. Independent contractors, like all businesses, stand to suffer financial losses or gains as a result of their business relationships.
More regulatory, more risks
The challenges surrounding contingent workers for pharmaceutical companies go beyond the risks involved with assuring each contingent worker is classified correctly. Compliance is a round-the-clock effort and third-party workers are typically held to the same standards as full-time employees.
A key concern involves the ownership of intellectual property when contingent workers have been involved in its creation. IP protections, such as patents and data protection, provide incentive to spur research and development. They also help ensure innovative companies investing in life-saving medicines have an opportunity to justify their investments.
IP is a type of intangible property, including patents, trademarks, copyrights and trade secrets. In the case of contingent workers, it begs the question: who owns the work product that has been created? The unfortunate answer: it depends.
Copyright law guarantees that work performed by employees is considered work-for-hire and therefore, owned by the employer. However, who retains the rights to materials created by an independent contractor is less straightforward. The ownership of work product prepared by an independent contractor hinges on how comprehensive the contract between the parties is (assuming a contract was signed in the first place). An inadequate agreement could lead to court disputes that take years (of time and attorneys’ fees) to settle.
An additional challenge involves ensuring compliance with the Physician Payments Sunshine Act (PPSA), also known as section 6002 of the Affordable Care Act of 2010. The PPSA requires manufacturers of drugs, medical devices and biologicals that participate in U.S. federal healthcare programs to report certain payments and transfers of value (worth $10 or more) given to physicians and teaching hospitals to the Centers for Medicare and Medicaid Services. The congressional sponsors of the ACA reporting provisions have stated that this process is designed to ensure that interactions between physicians and industry are transparent.
There are three broad reporting categories. The first covers general payments or transfers of value such as meals, travel reimbursement and consulting fees. The second applies to ownership and investment interests held by physicians and their immediate family members. The third category covers any payment made for participation in preclinical research, clinical trials or other product development activities. Companies subject to the PPSA must collect this information and make it available in a public, searchable database (http://cms.gov/openpayments/), which went live last September. These reporting requirements apply to physicians that are paid directly, as well as those that are paid by third-party agencies. This requires careful tracking on the party of the agency, as well collaboration amongst all parties to ensure consistent and accurate reporting.
Engaging expert advice
Recognizing the importance of navigating these challenges, many companies choose to partner with a third party that can provide expertise in a range of relevant areas. These can include a comprehensive understanding of staffing industry complexities and trends, including contingent worker engagement strategies, risk mitigation in an industry context and the breadth and quality of resources to support the evolving needs of the business.
Employers are shifting toward a greater reliance on contingent workers and it is likely that the engagement of these workers will heavily influence employment strategies for the foreseeable future. It is in the best interest of these companies to be intimately familiar with the classification issues involved when these workers are hired—or hire a firm or consultant that can provide that expertise (as an independent contractor, of course).
American Medical Association. Physician financial transparency reports (Sunshine Act). Available at: http://www.ama-assn.org/ama/pub/advocacy/topics/sunshine-act-and-physician-financial-transparency-reports.page?.
American Medical Association. Toolkit for physician financial transparency reports (Sunshine Act). Available at: http://www.ama-assn.org/ama/pub/advocacy/topics/sunshine-act-and-physician-financial-transparency-reports/sunshine-act-toolkit.page?
Health policy brief: the Physician Payments Sunshine Act. Health Affairs. 2 Oct. 2014. Available at: http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=127.
Nolo.com. How to protect your intellectual property rights in works created by contractors. Available at: http://www.nolo.com/legal-encyclopedia/how-protect-intellectual-property-rights-29913.html
Ostrand M. Pharma employment: industry shifts, competition for talent require proactive workforce planning. Contract Pharma. April 2013. Available at: http://www.contractpharma.com/issues/2013-04/view_features/pharma-employment/
Pharmaceutical Research and Manufacturers of America. Intellectual property protections are vital to continuing innovation in the biopharmaceutical industry. Available at: http://www.phrma.org/innovation/intellectual-property
PwC Health Research Institute. New chemistry: getting the biopharmaceutical talent formula right. February 2013. Available at: http://www.pwc.com/us/en/health-industries/health-research-institute/publications/human-capital-pharma.jhtml.
Reibstein RJ, Petkun LB, Rudolph AJ. Pepper Hamilton LLP: The 2015 white paper on independent contractor misclassification: how companies can minimize the risks. Available at: http://www.pepperlaw.com/pdfs/ICMisclassification_MinimizeRisk_04_2015.pdf
Thomas P. Pharma workers enter the era of free agency. Pharmaceutical Manufacturing. March 6, 2012. Available at: http://www.pharmamanufacturing.com/articles/2012/037/
Wang L. Hired…for now. Chemical & Engineering News. December 2, 2013. Available at: http://cen.acs.org/articles/91/i48/Hired.html