If your business is hiring independent contractors and misclassifying their status, your business is breaking the law. In 2018, a nail salon in California was issued over $1.2 million in wage theft citations for misclassifying workers as independent contractors instead of employees.
Why does this matter? It matters because:
- By 2020, contingent workers in the gig economy are expected to constitute more than 40 percent of the entire workforce.
- More and more companies are using these workers to supplement their existing workforce, and they need to know much more about how to hire independent contractors.
- Businesses that aren’t aware of the complexities of managing independent contractors will develop ineffective partnerships that don’t benefit the organization.
Independent contractors are highly flexible, scalable and skilled, but managing them and ensuring compliance around their classification can be both confusing and challenging. Businesses that are aware of the implications of hiring them will be better positioned to hire them both legally and effectively.
In this article, we’ll take you through what you what you need to know to achieve business benefits by hiring independent contractors (also known as “contingent workers”, “freelancers” and “gig workers”). We’ll look at the legal, workforce and technology considerations for businesses that hire these workers.
Here’s what we’ll cover:
The Fundamental Differences Between an Independent Contractor and Employee
Let’s get one thing straight from the get-go: you need to know the differences between an independent contractor and an employee. In the ever-growing gig economy, not knowing the distinction between these categorizations can cause significant legal issues.
Instances of misclassifying hired workers as independent contractors rather than employees is an issue gaining increased scrutiny. More industries are turning to the gig economy, increasing the number of independent contractors.
One of the reasons for this is that hiring workers as independent contractors transfers the tax burden from the employer and onto the worker, while also reducing costs to the employer by around 20 percent.
If you misclassify an individual, this can severely impact worker morale and seriously jeopardize your business. All businesses should be completing the IRS’s “20 factor test” when hiring what they think might classify as an independent contractor.
If a worker thinks you’ve misclassified them as an independent contractor, they can file Form SS-8, which triggers the IRS to investigate and determine the correct classification. Worker classification audits are on the rise due to the growth in the gig economy, and the IRS is developing more stringent regulations.
Here are just a few examples of how your business could be penalized or suffer because of misclassification:
- The IRS will charge you for back taxes plus penalties
- Compensation payments may be collected and awarded to affected workers
- You risk high legal costs for ongoing disputes
- Your business’s reputation can be damaged
To help you figure out where to get started, the table below breaks down the main differences that businesses need to be aware of:
|Works on an ongoing basis||Works for a contracted period of time for a specific assignment or project|
|Works exclusively for one company||Can work for multiple businesses and clients|
|Is paid an hourly wage or an annual salary||Is paid a predetermined rate for the assignment|
|Eligible for company benefits such as medical coverage, PTO, 401(K)||Not eligible for any company benefits|
|Has assigned hours or a fixed work schedule||Sets own schedule and working hours|
|Completes work through processes defined by the company||Completes assignments through their own methods and processes|
|Taxes are withheld by the employer||Are responsible for filing their own taxes|
|Training and tools are provided by the employer||Supplies own tools for completing assignments|
- If you’re already working with independent contractors, conduct an internal audit of your current classification practices with the help of an independent and professional advisor.
- Develop internal guidelines for hiring and managing independent contractors. Train all members of your HR, hiring and recruitment teams to become well-versed in your independent contractor hiring policies.
- Ensure relevant teams are keeping up-to-date on all of the relevant federal and state level tests that exist to help businesses classify independent contractors and employees.
How To Effectively Recruit and Hire Independent Contractors
Businesses that use independent contractors benefit from a shorter recruit-to-hire journey, lower costs and a huge talent pool from which to fish.
And while there are benefits for independent contractors, it’s easy for companies to unintentionally blur the lines between what they can expect from hiring these types of workers.
Because of this, confusion can also arise while recruiting and hiring independent contractors. Gartner advocates a six-stage life cycle of hiring independent contractors.
Source: “Get Your Procurement and HCM Systems Ready for Managing a Flexible Workforce” (Available to Gartner clients)
Below, we’ll go through a few steps that all businesses should take to effectively and legally hire independent contractors.
1. Have a Clear Definition for Independent Contractors Versus Employees
Though we went through this step above, we emphasize how important it is to have a clear definition for how independent contractors are defined.
2. Devise Manager Training and Facilitate Cross-Team Collaboration
Managing independent contractors is not the same as managing your full-time employees (FTEs): it requires a wholly different skill set, whether they work on-site or remotely.
For example, managing FTEs alongside independent contractors will require you to manage expectations between both types of worker. Your FTEs may not be allowed the same degree of flexibility and autonomy as independent contractors, although they’re carrying out very similar work.
Discontent can arise when managers aren’t equipped to communicate changes and policies clearly to all workers and assist with a shifting dynamic.
Managers will also need to show independent contractors how to use new systems, maintain clear lines of communication and learn how to work around varied business hours, styles and expectations.
3. Write a Request for Proposal—And Don’t Scrimp on the Details
A request for proposal (RFP) is an often standardized and templated document that lays out the requirements for the assignment you’re hiring for. They’re often clunky, jargon-filled and unengaging.
Sure, legal language and compliance details are important—but be warned, if just reading the RFP is off-putting, quality talent won’t be tempted to apply. You should include the legal, compliance and procurement information, but use plain language (this will also help avoid any misclassification errors).
To be as specific as possible about the assignment or project, especially one that demands a high skill level, you’ll need to outline the following information in detail:
- Clear deliverables: Be clear on why you’re hiring for this role, what solution the contractor will deliver and what problem you are trying to solve.
- Time frames: Not only is an assignment length limit important for the classification of contractors, it also helps prevent any scope creep or any misunderstanding surrounding the length of the contract.
4. Specify the Scope of the Work (SOW)
Establishing the rights, responsibilities and liabilities as it protects both your business and the contractor, an airtight SOW is non-negotiable. A SOW is a part of a contract that clearly sets out:
- Responsibilities of the independent contractor, including timelines and expectations. This includes information on when the deliverables are expected, and at what standard.
- Responsibilities of your business, including the provision of technology, systems and information needed to complete work, and also how often you will review the project status together.
How Technology Will Evolve Alongside the Gig Economy
With the rise in the use of independent contractors and other gig economy workers, businesses are being pushed to remain compliant by ensuring their workplace practices and regulations are in order. As a result, technology is emerging to help with this transition.
Freelancer management systems are emerging into the gig economy space, although the market for these systems remains immature. Yet noting the gap in the market, several companies are beginning to offer enterprise-level SaaS platforms that support the entire life cycle management of gig workers.
Upwork Enterprise offers a SaaS platform to manage both talent sourcing and operational management functionality (Source)
Current HR, recruiting and vendor management systems are not fully equipped to handle the nuances of hiring and management of contingent workers. As a result, vendors in this space will likely begin to develop additional modules to support contingent workers, develop additional suites or allow for integration with other systems.
Conclusion: Preparation, Patience and Protection
For many businesses, the gig economy is helping them effectively hire specialized contingent workers to complete projects and assignments. However, those who don’t know where to start are vulnerable to heavy penalties and risk establishing ineffective contractor-employer relationships.
- Ensure that you are meeting all classification compliance guidelines, both state and federal, and that you train your management teams to follow this guidance.
- Follow a structured and clear recruiting and hiring plan and contractor life cycle to ensure that both you and your independent workers are gaining value from the relationship.
- Constantly evaluate your processes and engagements with independent contractors to ensure that this hiring style suits your workforce and project style.
NOTE: This article is intended to inform our readers about business-related concerns in the United States. It is in no way intended to provide legal advice or to endorse a specific course of action. For advice on your specific situation, consult your legal counsel. Additionally, the information contained in this article has been obtained from sources believed to be reliable. The applications selected are examples to show a feature in context, and are not intended as endorsements or recommendations.