Contractors, Compliance and the Cloud: How a Freelance Management System Can Help

A young freelancer stretches at his desk at home

A cloud-based freelance management system (FMS) can help organizations overcome critical challenges, including classification, regulatory compliance, freelancer profile management and manual process automation.

The freelance economy is stronger than ever. More than 53 million Americans are engaged in freelance work and together they contribute more than $700 billion to the U.S. economy, according to research by the Freelancers Union and Edelman.

Given their ability to work wherever, whenever, it's no surprise that many freelancers have no interest in returning to traditional jobs. Organizations' desire for freelance talent — particularly among younger hiring managers — also seems to be on the rise.

The caveat is that more freelancers means more classification and compliance challenges. Here's how a cloud-based freelance management system (FMS) can help with this.

Classified Information

Worker classification matters. Part-time and full-time employees are subject to specific labor protections, while independent contractors and freelancers enjoy greater flexibility. Here, three broad categories apply:

  1. Employees — Standard employees are onboarded and trained by organizations directly and are entitled to protections such as minimum wage, workers' compensation and employer-provided benefits. Employers must withhold federal and state taxes and file W-2 forms with the IRS on behalf of employees.
  2. Freelancers — This broad term is used to cover workers who are hired to complete specific tasks on a temporary basis. They're free to work with multiple clients and set their own hours, and they are paid a specific amount for their services. Unlike employees, any work created by freelancers must be signed over to employers with a separate contract. Freelancers are responsible for paying their own taxes and are not covered by federal labor laws.
  3. Independent Contractors — Technically, all freelancers are independent contractors, but the term is often used in reference to freelancers who take on longer-term contracts with organizations. These contracts may include more in-depth training and hourly pay rates, but the onus remains on workers to file tax paperwork and secure their own benefits.

Current Conditions, Potential Consequences

As organizations leverage freelancers in greater numbers and the contractor job market diversifies, misclassifications are becoming more common. A recent U.S. Government Accountability Office report found that almost 20% of 15.7 million audited tax returns included worker misclassification, resulting in more than $40 billion worth of unpaid taxes.

From a business perspective, hiring freelancers is typically more cost-effective than spending on full-time equivalents, since there's no need to budget for training, benefits or tax withholdings. But the rise of online gig economies and freelancer-driven convenience services — like ride sharing — have prompted states such as California, Massachusetts and Illinois to issue more rigid guidelines around employee classification. For example, California's recent Dynamex ruling led to the creation of an "ABC" test:

  • A: If employers control the manner and means of work, workers are employees.
  • B: If employers hire staff to perform "work their business normally does," they're considered employees.
  • C: If workers perform trades or tasks through businesses they've established, they're independent contractors.

Part B is new to California law, and has already prompted hiring changes across the state. For organizations hiring in the new freelance economy, misclassification of employees may result in more than just legal challenges: Employees could initiate legal action to recoup owed overtime or benefits, while the IRS could seek restitution for taxes that were not withheld.

Capturing The Market

As the freelance economy moves online, organizations are encountering a paradox: It's now possible to find contractors for almost any job, anywhere, but accurately tracking and managing freelancer profiles is both time-consuming and difficult. To account for this, freelance management systems, such as WorkMarket, offer ways to capture the inherent potential of freelance contractors and ensure they're properly classified.

By leveraging a system that can track contracts, manage tax requirements, handle insurance, compile work histories and streamline classification, managers can spend less time searching for freelancers and more time completing key tasks. At the same time, by unifying previously fragmented freelance HR processes, businesses can improve both consistency and compliance. For one IT services provider, this drove a 300% volume increase over the first year and a 25% dispatch reduction time, which allowed the provider to take its business nationwide.

Controlling Complexity in the Cloud

While empowering local processes to streamline freelancer procurement is a solid starting point, the sheer volume of workers, skills, job requirements and labor regulations can quickly outpace in-house attempts to manage complexity. A cloud-based FMS can enhance automation and improve labor pools.

By automating traditionally manual processes such as workflow scheduling, dispatch and paperwork, an AV resource company Mega Services was able to boost job capture from 15 to 20 per month, to the same number each day. Meanwhile, the integrated APIs and telephone features improved communications for both freelancers and clients. The reduction of manual processes combined with enhanced data transparency can also empower executives to focus on strategic decision-making rather than double-checking freelancer details.

Cloud-based FMSs can also enable organizations to classify freelancers by skill set, cost, work history and other key factors with ease. These "labor clouds" allow businesses to eliminate the tedious process of finding and vetting potential contractors. By automating data collection and classification, employers can engage with ideal candidates immediately, saving both time and money.

Combined Impact

Freelancers are becoming more integral to long-term business success as the gig economy heats up, fueled by skilled professionals who make their own hours and set their own rules. But emerging classification and compliance challenges require HR professionals to alter certain processes to find best-fit contractors and ensure that legal obligations are satisfied.

By opting for a cloud-based FMS, organizations can take advantage of automation, data transparency and customizable freelancer databases to overcome compliance challenges and discover talent on-demand.

Learn More

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