By Joe Mullich
Contingent workers, freelancers, moonlighters, temps, third-party consultants, human cloud workers — whatever you call its participants, the “gig economy” is thriving. Some 83 percent of executives in a recent survey said they plan to increase their use of contingent, intermittent or consultant employees in the next three years.
While the gig economy offers many benefits, there are also risks.
“Many workers today do not fall neatly into either the employee or independent contractor camp,” said Ellen Feeney, a vice president and corporate attorney in ADP’s Global Compliance group. “And the U.S. has not caught up with the realities of today’s more fluid workforce.”
Given the many compliance hurdles that come with tapping into the gig economy, talent professionals should consider these four questions:
- How Is Work Getting Done At Your Company?
Hiring managers often farm tasks out to independent contractors or contingent workers, leaving HR departments iffy on the exact makeup of their workforces. A quarter of business leaders in the United Kingdom couldn’t even say how many contract workers they have working for them.
Many organizations have policies for engaging independent contractors, but in practice, not everyone follows them, Feeney said. To prevent this, HR departments should determine why managers are using contingent workers. For example, if managers are using them because budgetary restrictions prevent them from hiring full-time employees, they run a greater risk of using the contingent workers in ways that run afoul of existing law.
Only by understanding how work is done can HR develop and enforce a policy that matches the company’s business model to the evolving nature and rules of the gig economy. HR must stay on top of the situation given how work is constantly evolving.
- Are You Overlooking Any Tests?
One of the greatest compliance challenges is that the gig economy is subject to many different legal tests from different governmental agencies. The IRS has a 20-factor test to determine a worker’s classification. The Fair Labor Standards Act requires an economic realities test.
“The federal and state tax liability and wage-and-hour risks are the big-money issues,” Feeney said. But even the Affordable Care Act can include criteria that affect worker classification. “The analysis is very fact-intensive and involves getting into the weeds and looking at all related circumstances.”
States and cities are coming out with their own rules. Last year, New York City passed the Freelance Isn’t Free Act, a first-of-its-kind law that grants new rights to any “freelance worker.” It mandates, for example, that freelancers be paid within 30 days of any service provided unless another time period is specified in writing. In California, the law starts with the presumption that the worker is an employee, and it’s up to the employer to prove the person is an independent contractor.
“The main question is whether the company has the right to control the manner and means of accomplishing the desired goal,” Feeney said.
A key thing to keep in mind is that companies whose business models depend on independent contractors are open to class-action challenges, increasing their risk level. Lyft, the ride-sharing service, settled one such suit for $27 million, while Homejoy, a home-cleaning service that used the Uber-worker model, closed for good in 2015 in the face of a bevy of lawsuits concerning worker misclassification.
- Are You Rehiring Former Workers As Independent Contractors?
Companies sometimes unknowingly go against compliance rules when an employee is laid off or retired but then brought back on an interim basis as an independent contractor. In that case, the government might assume that the change has taken place solely so that the organization can circumvent classification laws, especially if the worker continues to perform his or her previous duties.
Feeney said this problem can be compounded if the former employee is initially expected to stay on as a contingent worker for a short time to solve an immediate issue, but actually continues on in that new role for a year or more.
For this reason, it’s important to constantly monitor how work is getting done and make sure your employee classifications are up to date.
- Are You Brushing Off Concerns Because “It Only Affects Silicon Valley”?
There’s a common misperception that the gig economy is limited to firms that work in technology or employ large numbers of Millennials. In reality, the gig economy transcends industries and demographics.
“There are many discussions in the media, the legal and compliance [communities], and academia about exactly what the gig economy is and what it isn’t,” Feeney said. “So many employers are confused about exactly what they should be doing.”
Those discussions will only continue. The Hamilton Project at the Brookings Institution recently released a discussion paper that proposes a new category of worker, the “independent worker.” In line with this proposal, independent workers would have the right to organize and to tax withholding, insurance, and other employee benefits.
While the politics of such an idea are complex, the United Kingdom has already created a new classification of worker, one that lies between independent contractor and employee. With more than one-third of the U.S. workforce operating as freelancers, and with that number set to increase, the scrutiny over gig economy practices is sure to become only more intense.
For more information and for more articles like this, visit adp.com/spark.
Joe Mullich is a Los Angeles-based freelance writer on finance, economics and other topics for top publications and Fortune 500 companies.