Navigating Flexible Pay Options, Employee Classification and Compliance

Misclassification of employees as independent contractors

The ability to accurately classify employees, and pay freelancers quickly and accurately, can help organizations attract the most talented gig economy workers.

In the current world of work, organizations are utilizing independent contractors in greater numbers. This development is enabling firms to secure the right talent for their business needs, and it also offers freelancers an independent relationship with work that can prove more flexible, satisfying and financially lucrative than regular employment.

Still, this relationship comes with challenges, particularly around regulatory compliance and efficient payment for your freelance workforce. Organizations' aptitude for meeting these challenges can impact their ability to attract top-level freelance talent.

Challenges for Employers

It's important to understand that, according to labor laws, the question of independent contractor vs. employee is critical. If employers fail to account for the differences between the two, they could face fines or other sanctions.

While federal laws concerning proper worker classification haven't changed, legislation at the state level is developing and will continue to do so. For example, effective January 1, 2020, California has updated its criteria for determining who's an independent contractor with Assembly Bill 5 (AB 5).

This bill and others could raise concerns for businesses looking to engage with independent contractors, but there's no regulation stating that they can't work with them at all. Rather, organizations should be more deliberate in making sure they know which freelancers are working for them, what they're doing and what must be in place to remain compliant with all appropriate independent contractor vs. employee conditions.

Challenges for Independent Contractors

Every freelancer, essentially a business-of-one, wants to be paid on time for the work they've done. It's almost impossible for an employer to forget to pay a typical W-2 employee, but this isn't necessarily the case for independent contractors, who aren't paid through a business's payroll cycle. These workers are invoiced and compensated through accounts payable, and some organizations — taking their cash flow into account — try to manage this by extending the time in which invoices get paid.

This can put a strain on a freelancer's finances, and it also doesn't meet their growing expectations around timely payments.

A Solution for Both Sides

With these factors in mind, a freelance management system (FMS) sets the stage for organizations to ensure freelancer status compliance. It can also provide a platform for independent contractors to select employers of choice and leverage tools that support faster payment.

Under California's AB 5 bill, certain types of workers can remain classified as freelancers, such as photographers. Under this exemption, they can work up to 35 assignments per year for a business. To address restrictions like these, a freelance management system can establish parameters to prevent independent contractors being assigned work that goes beyond the prescribed threshold.

Another benefit of an FMS is its audit trail capability. Around 40-50% of the gig economy is considered "shadow economy." This includes assignments paid for via cash or corporate travel and expense (T&E) card, which typically aren't tracked. Fortunately, freelance management systems' auditing and reporting capabilities can offer organizations a way to track productivity in this arena.

For independent contractors, an FMS can help secure quick, direct payments through direct deposit, payout platform applications or EBT cards. An FMS can also provide the means to review a potential client's qualifications, primarily through feedback and rating mechanisms.

With the emergence of these rating systems, it has become more critical than ever to manage your organization's reputation, which can be affected by how the firm is known to treat its contingency workforce. Organizations should strongly consider this factor as they attempt to engage the services of quality freelancers. Having a good reputation around payments in particular can be a significant boon for organizations seeking talent, as there's a lot of research showing that the vast majority of freelancers (80-90%) would do more gig work if they got paid faster.

Focus on All Your Talent

Traditionally, many human resources and business leaders have given greater attention to their W-2 population than their "extended workforce" — temporary workers, independent contractors and vendors. However, in many cases the latter group now delivers services which are essential to the organization's mission and objectives.

If a business wants to be considered among top-tier hiring entities, it must focus on how it is perceived in the freelance marketplace. That means understanding and abiding by the appropriate regulations regarding classification for independent contractor vs. employee. It also means having systems in place to ensure that freelancers are paid accurately and expediently.

Learn more in this webcast, launch anytime: lluminating the Shadow Workforce: Insights into the Gig Workforce

Read more on the WorkMarket (an ADP company) blog: 11 Consequences of Misclassifying Your 1099 Contractors