As the world of work increasingly engages freelancers, here's how your organization needs to comply with state employment laws covering contractors.

Because of changes in the operating environment triggered by the pandemic, including a need to embrace flexible staffing models while also reducing labor-related costs, many organizations are continuing to expand their workforce by hiring gig workers. However, those same businesses may struggle to navigate the contractor compliance challenges that may accompany the engaging of those workers.

If, as recent data suggest, freelance and flexible work is the future of work, how can organizations ensure that they're satisfying the applicable compliance rules? Moreover, why are businesses reconfiguring their workforce and what compliance-related factors should HR departments consider when engaging gig talent?

The rise of the independent contractor

According to a recent ADP Research Institute® report, the share of gig workers within organizations stands at 16.4%, up from 14.2% a decade ago. In the report, ADP identified three types of workers: contractors receiving Form 1099 from their hiring organizations; short-term W-2 employees working more than six months; and traditional, long-term W-2 employees working more than six months. In the report, gig workers are split evenly between short-term W-2 employees (temps, seasonal workers) and independent contractors.

What's driving the corporate sector's willingness to embrace the extended workforce? Recently, companies have had to find ways to form a hybrid approach between their traditional workforce and their extended workforce to scale up or down at high velocity and handle onboarding of talent in a virtual environment. Plus, an extended workforce allows organizations to enter new markets and create innovative products at a lower cost and with greater flexibility than with a traditional workforce. This in turn allows for improvements in service-level agreements and higher customer satisfaction scores. It also allows businesses to shift the utilization of their workforce from a relatively significant, fixed cost to a lower, on-demand expense, which is also called "workforce-as-a-service."

The Ds of compliance: Determine and document

As the percentage of independent contractors within the workforce grows, businesses must ensure they possess the people, processes and technology that will track their adherence to compliance requirements. Businesses should understand what specific laws and regulations apply in their industry and geographic location. For example, an organization with workers in California will have different state law requirements than a hiring entity who only engages workers in another state. Employers with a worker footprint in several states will need to be aware of many different state laws.

First, businesses must determine how and when they engage independent contractors and for what purpose. Audit your current independent contractor usage and make sure you have a clear understanding of how independent contractors are engaged and paid by your organization. Doing so will require checking with your accounts payable team, procurement, legal, HR, as well as checking your payroll system to see if there are any freelancer-related payments. It will also likely involve engaging with hiring managers to understand the business case for hiring freelancers. Does your organization have independent contractor engagement guidelines in place and, if so, are those guidelines known and followed?

It is essential for compliance purposes to take the time to do a proper analysis before engaging a worker. Misclassification errors, treating an employee as an independent contractor, can result in significant fines and penalties. You need to make sure the worker is an independent contractor under all applicable laws and not an employee. Generally, a worker is an independent contractor if the hiring entity has the right to control or direct only the result of the work and not what will be done or how it will be done. The worker should not be integrated into the organization's operations. Independent contractors typically are engaged for limited assignments or projects, and also work for other organizations.

Next, every aspect of the organization's contractor management activities should be documented with the goal of complying with related rules and regulations. This will also create an audit trail.

Organizations should have documented procedures for engaging an independent contractor informed by the applicable laws, have compliance controls in place, and training to make sure hiring managers are following established protocols. Rather than relying on manual processes, automation can drive efficiency, reduce errors and improve service levels while ensuring compliance.

Preparing for tomorrow's (today's) workforce

To meet the organization's goals, businesses should focus on unlocking the power of their extended workforce. That requires a willingness to experiment with different workforce models that incorporate traditional or temporary W-2 employees along with independent contractors. As part of this effort, businesses should identify quantitative and qualitative measures that can be used to assess the pros and cons of each model.

While today's workforce mostly consists of traditional or temporary W-2 employees, there's a growing number of organizations that are engaging independent contractors for specific tasks or to work on a contract basis. If business owners wish to do the same, it's important to comply with applicable laws and regulations, so engaging the assistance of legal counsel or a partner with independent contractor compliance expertise is worth consideration.

Learn more

[Report] Worker Classification 101: Everything You Need To Know About Compliantly Managing Your 1099 Contractors

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