New legal guidelines may impact many freelancers

freelance emlpoyees

By Kerry Gorgone, {grow} Contributing Columnist

Turns out, managing “Like a Boss” sometimes makes you a boss, even if the people you’re managing are supposed to be freelance employees or independent contractors.

The U.S. Labor Department recently issued a 15-page “interpretation” of existing employment law that declared businesses should, in many instances, designate workers as employees rather than independent contractors.

But what if your company wants to hire freelance employees? Or what if you’re one of the people who prefers to freelance on a contract basis? The Labor Department’s statement makes this type of arrangement increasingly problematic.

“Employee misclassification” has led to lawsuits against companies including Uber and FedEx— businesses that rely on contract workers to fill customer demand without taking on the overhead of hiring full-time employees.

Some companies classify full-time workers as contractors in order to circumvent minimum wage laws, or to avoid paying benefits like health insurance or unemployment.

But other businesses operating in the new collaborative economy simply can’t function using a traditional hiring model. For some entrepreneurs, working with freelance employees is the only way a business concept can be viable.

What’s the difference? Potentially millions of dollars in back wages, payroll taxes, insurance, and so on. FedEx, for instance, will pay $228 million settlement for misclassifying workers.

According to the Department of Labor, businesses must apply the “economic realities” test when classifying a worker as an employee or an independent contractor. This test focuses on whether the worker is “economically dependent” on the company or “in business for him or herself.”

The new view of freelance employees

Whether a worker is “economically dependent” on a company depends on several factors including the company’s degree of control over the worker, whether the work is an integral part of the company’s business, and whether the relationship between the worker and the employer is permanent or indefinite.

The problem for business is that, using this standard, most workers are employees. The Department of Labor said as much in its interpretation memo.

So how can you engage a contractor without unintentionally hiring a full-time employee? You don’t have much wiggle room. You should speak to an attorney before creating a hiring policy, but here is some information to help you in your quest to engage independent contractors rather than hire employees:

1. Don’t rely too heavily on a single contractor

If someone works full-time hours for you, they’re probably not a contractor: They’re probably an employee.

Using the same person for every project can be tempting, especially if they’re exceptional at what they do, but resist the temptation: Otherwise, they could be an employee in the eyes of the law.

2. Work with freelance employees who have other clients

This reduces the likelihood that they’ll be “economically dependent” on your company specifically. Using contractors who have other clients to serve will also limit their availability in terms of hours, which helps to establish their independent status.

Independent contractors have “economic independence,” because they’re operating a business of their own. If someone’s only doing projects for you, he really doesn’t have a business of his own: He’s reliant upon yours. This makes him an employee.

3. Use contractors for non-integral projects

The Department of Labor uses the example of construction companies hiring carpenters: carpenters are integral to running a construction business, which makes them employees rather than independent contractors.

Applying this logic, it seems clear why Uber is having problems, too. Uber can’t work without drivers: Drivers are an integral part of Uber’s business, which makes them employees in the eyes of the law.

If you need to staff up during heavy work periods, contract out support projects or tangential functions. Don’t use contractors for projects integral to your business.

If you provide legal services, don’t use contract lawyers.  Hire full-time lawyers and use contract paralegals or support staff, instead.

4. Use limited-term contracts

One factor courts use to distinguish contractors from employees is whether the work arrangement is permanent or indefinite in terms of time. A permanent arrangement obviously looks more like employment, but an indefinite term can resemble “at-will” employment (which is the kind most employees have).

If you want to use independent contractors, use them on a short-term basis. Work with an attorney to create a contract that states a start date and end date for the project: Don’t leave things too open.

5. Don’t micro-manage freelance employees

You pay independent contractors to complete projects, not sit at a desk from 9 a.m. to 5:00 p.m. As such, don’t dictate when or where they should work on your project. And don’t be picky about how they dress while working on your project. Why should you care? They’re not an employee, right?

While we’re at it, pay on a project basis rather than using an hourly rate.
Why do you care how many hours it takes a contractor to get the job done, so long as the project is completed on schedule?

These guidelines are a good start, but nothing can guarantee a court won’t declare your independent contractor relationship an employment relationship, so talk to an employment attorney in your area.

Kerry O’Shea Gorgone is a writer, lawyer, speaker and educator. She’s also Instructional Design Manager, Enterprise Training, at MarketingProfs. Kerry hosts the weekly Marketing Smarts podcast. Find Kerry on Google+and Twitter.

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