“Freelancers” are now an established part of the workforce. Currently, there are 17 million independent contractors in the US, and 40 million if you count temporary workers, day laborers and part-time workers. And the number is growing.
Freelancers can be a great solution for employers.
- Flexible “on demand” work
- Reduced payroll costs
- Reduced benefit costs
- No employment taxes
- Not covered by minimum wage, overtime, unemployment, or other labor laws
But there are risks, too, if you misclassify an employee as a freelancer.
- IRS can collect back employment taxes, interest and legal fees
- Worker can seek compensation for overtime and job benefits denied to them
- Employer may be fined if intentional misclassification
- “Freelancer” may be able to collect unemployment
Many businesses have been sued over this issue. You may have read about some of the big cases, such as FedEx, Amazon, Lyft, Grubhub, XPO Logistics, Pepperidge Farm and, most famously, Uber. But small companies are vulnerable as well. A quick Google search shows pages of law firms eager to take on these cases.
So how do we tell an employee from an independent contractor?
It may surprise you that there is no federal law on the issue. Instead, court cases and the Department of Labor (DOL) give guidelines. In recent years, the DOL has been trying to narrow the definition of “independent contractor.” The current definition is as follows:
A worker who is economically dependent on the business of the employer, regardless of skill level.
A worker with economic independence who is in business for themselves.
It sounds straightforward enough, but in fact it can be difficult to determine if your worker is an employee or an independent contractor, and a wrong decision can be costly.
Is James an Employee?
For example, let’s say that you have hired James to handle customer service. James works 10 hours per week from his home office. You agree to pay him $150 per week for his services. You would like to pay him the $150 as a freelancer and let him handle his own taxes.
The two main questions you have to ask are, is James financially dependent upon you; and is he under your supervision.
In this example, further examination shows that James is paid whether he answers any customer service calls or not (i.e. he is paid for his hours worked, not results); he must report all conversations to a company manager daily; he has no other business outside of what he is doing for you.
In this case, he is an employee, and you must treat him as such. Just because he works remotely does not mean he is a freelancer.
Understanding the key differences between an employee and a freelancer will help protect your company going forward.
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