LAW MATTERS TO BUSINESS
Companies’ Compliance Concerns Regarding Independent Contractors
Freelance workforce misclassification 101: what legal and finance teams should know by Shahar Erez
Shahar Erez is co-founder and CEO of Stoke. Stoke uses real-time data to streamline the entire independent contractor lifecycle with an emphasis on legal, tax and workforce classification. The Stoke platform provides reporting and alerting for documentation including W9 & 1099 forms, background checks and validating all required legal documents are in place (NDA, IP Data protection etc.). In addition, Stoke analyzes multiple data points to establish proper classification by state or internationally.
JAN. 2021
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INBUSINESSPHX.COM
The gig economy has exploded and, now more than ever, contract workers are in high demand. One report showed that month-over-month revenues in the gig economy increased 18% in June 2020 alone, according to an article in Forbes. What’s more, many organizations are leaning on these contractors to keep their businesses afloat in the wake of this monumental recession. However, with this huge new wave of contract workers — and the opportunities it presents for businesses — comes a number of misclassification risks that finance and legal executives need to be aware of. As recently as 2017, Harvard Business Review reported that up to 20% of businesses misclassify their employees. And this was before a global pandemic flooded the market with tens of thousands of additional contract workers. As this trend picks up, federal governments in countries around the world are setting stricter standards and regulations to ensure companies properly handle this growing workforce as they work to build (or rebuild) their organizations. The problem? Most companies still don’t fully understand the basic differences between their relationships with traditional employees and those with independent contractors. In fact, most organizational leaders are unaware of the volume of independent contractors working for their organizations and, due to a lack of proper tracking tools and processes, they often grossly underestimate the amount of freelancers they employ. This knowledge gap can lead to expensive consequences, including back-taxes at federal
and state levels; back pay for “wage theft,” retroactive insurance premiums, and additional penalties; back premiums for workers’ compensation insurance; and lawsuits from freelancers and independent contractors. Below are some ways to approach the business of hiring and managing contract workers, and measures to implement so as to ensure a company is protected from unwanted consequences.
WHO QUALIFIES AS AN INDEPENDENT CONTRACTOR?
To qualify as an independent contractor, a worker typically earns income from multiple employers, and does not depend on a single employer for a majority of his or her income. Additionally, the amount of control exerted over a worker is the largest factor in determining how he or she is classified in the eyes of the law. The more control an organization exerts in these areas, the closer they are to crossing the line from contractor status to employee status. However, it’s important to keep in mind that there isn’t a single list of items that can be checked off to determine whether or not an employee is considered a contract worker (and that list varies by state). “There is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor, and no one factor stands alone in making this determination,” says the IRS website. “The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”
Revenues in the gig economy increased 18% in June 2020 alone, according to an article in Forbes (“A New Payoneer Report Shows COVID-19 Is Accelerating Freelance Growth,” Forbes; Sept. 1, 2020). forbes.com
