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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  • Hi Kelly, thanks for calling this out. BTW, this goes for other jurisdictions as well. Canada and Europe have similar laws. These labor laws are in place to protect workers, not companies.

    One other point you might mention here is that companies could consider using third party commercial services like Manpower (and thousands of others) to get obtain freelance services. When doing so, the “hiring” company is dealing with a professional business service and the labor acts apply to the service provider (who typically know how to take care of this) not the “hiring” company.

  • Part of the problem in this area is imprecise use of terminology. “Employee” means something very specific in legal terms, and employees have many protections under the law that contractors don’t have, such as overtime, workers compensation, protection from discrimination, etc. Generally under employment law, a worker is either an employee or a contractor. There is no such thing as “1099 employees or “freelance employees.” Many business owners do not understand that they cannot usually decide whether someone is an employee or a contractor. There is a large body of law encompassing many of your great points above that defines who is an employee.

  • Kerry,

    Great thoughts here on a rapidly changing marketplace of freelancers. Another item to consider when working with “freelancers” is the impact on your business insurance.

    If freelancers end up being determined employees there could be drastic and devastating consequences for Workers Compensation, Business Auto Insurance and potentially General Liability.

    Just another thing to consider…

  • Absolutely, Ryan! Critically important, given the cost of insurance.

  • Exactly, but when the Department of Labor says they’re all probably employees, it becomes a distinction without a difference. For freelancing as we know it to continue, there needs to be a clear difference between the two statuses, and there just isn’t right now.

  • Great addition! Thanks, Steve.

  • This was very eye opening to me. Authors are increasingly hiring freelancers to do the work that publishers used to do. At this point, all the freelancers I deal with do work for other people, but I will be very careful going forward. Thanks!

  • Pingback: Like A Boss? - Sm Biz Mastery()

  • My personal opinion is the DOL and the IRS (who by the way are cooperating to find improperly classified workers) came down hard to root out the business owners who are purposely calling true employees contractors to save money on benefits. Unfortunately, a lot of people are hurt or inconvenienced by this.

  • Jason Nuss

    Hi Kerry…these new legal guidelines are, most likely, unfortunately, and in-my-opinion, about government agencies reporting higher employment rates and collecting more tax dollars (as it states in the first paragraph of the 15 page interpretation), not additional worker protection than was previously provided by these agencies. I have trust issues. 🙂

    I’m guessing they’ll focus on the big money companies, that will provide the most new money to the IRS, with these new guidelines.

  • Excellent and timely post, Kerry. Whether the guidelines prove to be good or bad, at least the muzzy status of “freelance” is finally getting some attention. The shift in the workplace has been going on for 20 years; it’s high time for a mind and policy shift that keeps pace. As you write, “For some entrepreneurs, working with freelance employees is the only way a business concept can be viable.” Also, for some freelancers, finding a full-time gig is not really an option.

  • I’m glad you’re drawing attention to this. Too many people don’t really understand the difference between being a freelancer and being an employee and get taken advantage of – if you’re working full-time, on-site, in an ongoing position, you should be correctly classified and getting the benefits that come with it.

    If you’re taking on the extra taxes and expenses of being a freelancer, you should be able to take advantage of the flexibility that comes with that – work hours you define yourself, working from wherever you want, etc. /

    Both types of positions have their advantages of being pushed into one for classification purposes when the employer really wants another isn’t good for the worker (or the business if they get caught).

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