Navigating the Gig Economy: The Risks of Hiring Contractors
Today’s work culture looks much different than it was just a few short years ago. The traditional model of full-time employment has given way to a new, flexible gig economy, and phrases like “remote work” and “gig worker” are no longer met with furrowed brows and confusion from the everyday professional.
In 2023, the projected gross volume of the gig economy is expected to reach 455.2 billion U.S. dollars. The gig economy in the UK has also seen significant growth in recent years. According to a report by StandOut CV, an estimated 7.25 million people are now working in the gig economy as of the end of 2022. Similarly, Nearly 36% of US workers today participate in gig work, a number that is expected to rise to over 50% by 2027.
While the gig economy offers several advantages for businesses, like hiring flexibility and reduced costs associated with full-time employees, it also poses new hurdles around legal compliance and worker rights. Companies that leverage on-demand labor need radically new strategies to manage compliance in this new frontier. Here are our two cents on the topic, including how to navigate the ins and outs of compliance for gig workers and the tools you can use to make it easier.
The Hidden Risks of the Gig Economy
Tapping into the gig economy gives employers access to an agile, skilled talent pool without the financial commitment of traditional full-time employees. By hiring freelancers and gig workers, they can tap into niche skills as they need them and scale up or down as their needs change. It’s also fairly easy to budget this type of expense because the costs of hiring independent contractors are often limited to project-based fees rather than salaries and benefits.
However, while companies rarely intend to violate labor regulations, ambiguity around compliance can occur when contract workers are managed as if they were full-time employees without being classified as such.
Uber is a perfect example of this. In 2022, the American rideshare company agreed to pay $8.4 million to settle a class-action lawsuit with California drivers who claimed they were misclassified as independent contractors rather than employees. Ultimately, the onus falls upon organizations to ensure that their contractor relationships don’t slip into a noncompliant employer-employee dynamic that sidesteps vital worker protections.
If compliance wasn't concerning enough, hiring mainly contractors can also negatively impact customer service, product quality, and innovation over the long term. By opting for full-time employees over contract workers, companies can mitigate their exposure to compliance risks over the long term.
Defining the Gray Area Between Employees and Contractors
What qualifies a worker as an independent contractor versus an employee, exactly? The distinction lies in how much control is exerted over how work gets done.
For employees, companies usually dictate specific work hours, processes, tools, and training to accomplish job functions. Basically, this means that traditional, full-time employees are totally integrated into an organization.
Independent contractors, on the other hand, typically have autonomy over deciding when, how, and where to complete the deliverables outlined in their service contracts. They use their own equipment, and they can accept or decline work freely, even with ongoing business relationships.
There’s an intricate balance between controlling outcomes and controlling the work itself. Walking that thin line requires care, as relationships can evolve organically across that gray area over time. What begins as a project-focused gig can quickly devolve into benefit-less employment without conscious safeguards from both the employer and the employee.
Compliance Challenges with the Gig Model
Most employers don’t mean to misclassify their contract workers—but that won’t exempt them from facing the fines and penalties associated with noncompliance. Accidentally sidestepping employment laws leaves employers at risk of facing noncompliance penalties down the road if their gig relationships are treated more like employer-employee.
For instance, by not paying into unemployment insurance or social security programs that full-time employees benefit from, employers expose themselves to liability risks. Or, if an independent contractor files for unemployment benefits after project termination, investigations into employee misclassification can lead to expensive audits and legal fees.
Ultimately, treating a contract worker like an employee—but failing to provide them with full-time benefits–is a blatant violation of most labor regulations. And if this happens, penalties like lawsuits, back taxes, and litigation fees can quickly add up and potentially ruin a business.
Employers who are trying to cut costs on employee benefits—or who cross the contractor-employee line accidentally—aren’t exempt from these consequences either. Even with clearly defined independent contractor agreements, gig employers can unconsciously overstep boundaries. Requiring specific work hours, imposing rules and processes, and providing training or tools to accomplish job functions are indicators of an employer-employee dynamic from a compliance standpoint.
Navigating Global Compliance Complexity
Understanding the nuanced worker classification rules and regulations across multiple countries can introduce daunting complexity for companies who are trying to tap into global on-demand talent.
For example, the US uses a 20-factor IRS test focused largely on financial independence to classify contractors, Canada focuses primarily on intent and actual working relationships, and the UK uses a four-factor “mutuality of obligation test.”
This being said, the specific factors used to determine employment classification can evolve based on legal cases and precedents in each country. Keeping up with these changing factors across different continents while also building region-appropriate protections for how you engage talent adds substantial legal and operational overhead.
This level of localized legal vigilance is challenging for most companies to undertake, even though they aim to hire globally. Despite these challenges, there are some steps you can take to simplify global compliance. Here are some of our recommendations:
Best Practices for Gig Economy Compliance
Managing compliance risk begins with correctly classifying gig workers. In other words, you need to understand the factors that define independent contractor status in your operating regions.
Screen Your Contractors
In the US, guidelines like the IRS 20-factor test can help determine if a gig worker qualifies as an independent business entity. You should make a habit of screening contractors using similar criteria before onboarding them onto your teams. This is non-negotiable if you want to ensure you’re properly classifying new talent.
Implement SOPs Across Your Organization
There are also several steps you can take to encourage autonomy across your gig worker talent pool. For instance, you should avoid last-minute work directives that encourage contractors to drop existing commitments. Or, if you want to be even more proactive, you can build workflow handoffs and standard operating procedures (SOPs) that minimize real-time collaboration needs between you and your independent contractors.
Empower Your Managers to Ensure Compliance
Ensuring compliance doesn’t just stop at the business owner, however. Your managers and team leaders should also be empowered to maintain a compliant operation within your business. Training your managers on compliance risk factors like imposing work hours, mandatory meetings, and providing office space or equipment is a great place to start. You can also create oversight guidelines that create strict boundaries around how your managers are able to provide direction over how and when your independent contractors work.
Maintain Records of Work Requirements and Communications
One last thing—audit trails matter here. In order to prove that you’ve taken these steps listed above, you need to maintain records that validate contractor independence. This is a crucial step for defending against any potential employee misclassification claims. And you don’t have to make this complicated, either. Simply log how your work requirements were communicated and how much latitude contractors had in executing deliverables. You can then quickly reference these logs to resolve any disputes around employee misclassification.
Leverage Employer of Record Services
Trying to manage nuanced employment classifications across regions introduces substantial risk to your daily operations. One misstep and you could be subject to a costly legal battle around compliance. Fortunately, Employer of Record (EOR) services are purpose-built to handle this kind of nuance and ensure your business maintains global compliance.
Here’s how it works: EORs become the legal employer abroad while your business hires employees across different countries and regions. And as the employer, the EOR manages in-country tax filings, employment contracts, compensation, termination, and more—relieving you of any employer liabilities.
Beyond helping avoid compliance risks, a reputable EOR also enables employers to develop staff just as they would domestically through providing training, growth opportunities, and career progress. When you compare this to hiring teams of gig contractors focused on completing one-off projects, formally employed international employees contribute far greater value over time, even as your staffing needs ebb and flow.
Stay Compliant While Scaling a Global Workforce
The emergence of flexible on-demand workers is radically changing how companies source skills and talent. However, labor laws are still evolving to define protections for gig workers across different countries and states. With such a gap in these protections, smart companies will build processes that ensure compliance and workers' rights from the outset.
Taking informed steps to validate contractor status, reinforcing gig worker autonomy, and familiarizing yourself with the rules and regulations of each region are key first steps you should take to avoid compliance risks. Ultimately, investing in an EOR will give you the ability to maintain compliance as you scale your global workforce.
Curious whether or not your independent contractors qualify as employees? Download our recent White Paper, Are Your Independent Contractors Independent?, to find out.