The U.S. Department of Labor, the Internal Revenue Service as well as state regulators monitor the gig economy and how businesses classify their workers.

The emergence of the "gig economy" has led many organizations to eschew the hiring of long-term employees in favor of routinely engaging contract workers for all manner of tasks — ranging from the mundane to the highly specialized.

What's Driving the Gig Economy?

Workers today crave flexibility. A contract worker swaps the trappings of a traditional employment arrangement, such as a steady paycheck, sick days, vacation time and matching 401(k) contributions, for the ability to work from any location, as well as set their rates of pay and hours. In return, employers engage workers on an "as needed" basis, without incurring the costs related to hiring a permanent employee. As a case in point, in ADP's 2018 The Evolution of Work study, 80 percent of North American workers surveyed were "eager or excited" about defining their own work schedule based on what is convenient and effective for the worker.

While the size of the gig economy continues to grow exponentially, legal risks abound for unsuspecting firms that embrace contractor workers without considering the compliance-related issues that might arise. In particular, when employers misclassify workers, fines may follow from the U.S. Department of Labor, the Internal Revenue Service, or a state agency.

A recent Deloitte Global Human Capital Trends study found that only 8% of companies said they had established processes to manage and develop alternative workforces. So how can your firm participate in the gig economy while ensuring compliance with relevant laws and regulations?

Understand what it means to misclassify a contractor

Much of the legal risk associated with the hiring of contractors stems from their misclassification. In general terms, the more control your company maintains regarding how a contractor works, the more likely they meet the legal definition of an employee. An article from the Internal Revenue Service shows the test to determine whether an individual is an employee or a contractor is far from straightforward and contingent on a detailed understanding of the facts.

Seek input from legal counsel

According to Brant Biggers, Vice President of Sales for ADP Smart Compliance, "Traditional HR platforms are not designed to help employers manage freelance workers and how the work gets done. Today, department managers keep their own lists of contractors. Employers don't typically have a good singular view of this talent pool, and thus, also have some exposure tied to credentials, background checks, and other items critical to internal company compliance."

Against this backdrop, minimizing legal risk depends on your firm's ability to manage gig workers in a manner consistent with state and federal laws. If your organization is already a participant in the gig economy, or plans to do so in the near future, share the process that your firm follows to engage and manage contractor workers with an experienced employment attorney. In addition, provide the attorney with the paperwork your firm provides, or intends to provide contract workers. They'll help assess whether your firm could withstand scrutiny regarding its contractor hiring practices.

Document and share your policies and procedures

Maintaining compliance requires everyone who comes into contact with an independent contractor follows the agreed upon policies and procedures. Deviating from the agreed upon approach increases the potential for legal risk, especially when such activity takes place over an extended time period. In addition to making your firm's independent contractor policies and procedures freely available to hiring managers, periodically assess the degree of compliance, making sure to resolve exceptions quickly.

As the size of the gig economy increases, businesses can expect increased oversight from government agencies. But by carefully following all relevant regulations and creating and adhering to strict contract worker guidelines, your organization should be able to feel confident it can take full advantage of this critical business hiring trend.

As Brant Biggers summarized, "Freelance labor and the gig economy are here and are critical elements of the future of work. As such, this labor group should be as visible and transparent to finance and HR as full-time employee populations are. Now employers need to focus on how to better manage it."

Go Deeper

Your Company is Ready for the Gig Economy

ADP Webcast: The Future of Work | "Gig Economy" - Register now.

The Future of Work: Employers and Workers Aligning

How Technology Can Help Your Organization Manage Its Overtime

Tags: Risk and Compliance Outsourcing Workforce Planning Large Business Midsize Business Research & Insights Articles Finance HR Talent Acquisition

[Webcast] The Future of Work & “Gig Economy”

How will you manage the compliance risk associated with using freelancers at scale? What can we learn from companies who've already done so? Launch this webcast for the latest information.

Register or Replay

Compliance Resources to Strengthen Your Business

Stay up-to-date on the tax, compliance, and financial challenges facing organizations.

Get the Resources