Freelancers offer a ton of benefits to companies. To start, they are cheaper than full-time staff (considering benefits can add up to around 1.35 times base salary), and they enable companies to be more agile and efficient, scaling up and down as needed. Need a highly specialized skillset or someone on the ground quick in international markets? Freelancers are ideal for those needs.
The “blended” workforce—which includes a mix of freelance and full-time employees—is what the workforce of the future looks like, but as businesses begin to explore a blended approach, they also have to be aware of the risks. Misclassifying a freelance worker can have major repercussions—just ask Microsoft and Uber. The IRS can levy significant penalties if they find your classification is off.
Misclassification is rampant, and this is often due to lack of knowledge. Sure there are examples of companies trying to get away with the independent contractor label to avoid costs and liability, but many that just aren’t sure what the rules are.
According to the IRS, the general rule for defining an Independent Contractor is that ”the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” It also has a set of more specific questions for determining a worker’s status, known as the “common law test,” which is broken down into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
It gets tricky though, because some of the seemingly obvious criteria don’t necessarily apply. A freelancer can go into an office and a full-time employee may work from home; A freelance videographer may use an employers’ equipment rather than bring their own, and so on.
There are many different criteria and ways to slice and dice employee classification, but practically speaking, companies need tools that help them navigate this terrain. This is where a Freelance Management System (FMS) can help.
The two biggest questions that companies can’t answer about their freelancers is 1) How many non full-time employees do we work with? and 2) What type of work are they doing for your business? If a company can't answer those two questions, they face a serious risk of a lawsuit or a fine from the Department of Labor or the IRS.
Without an FMS, employers are left to compile this data manually. It involves paperwork, phone calls, surveying that is resource and time-intensive. An FMS automates this tracking and centralizes all the information about the non-employee workforce in one place. In short, it serves as a system of record that a CFO or Chief Legal Officer can refer to.
An FMS also makes it easy for employers to cross-reference their freelance workforce with the IRS checklist. For example, how many workers come onsite? Did they get access to an email address? Did they receive training? Did they use their own equipment? An FMS logs all that information and makes it quickly findable. It also identifies red flags. One of the biggest issues the IRS cares about is earnings. There’s a threshold for how much a worker can earn and still be considered freelance. An FMS can flag when someone is making too much money for one client
Freelance Management Systems give companies the right data to make the right decisions around classification. Without it, they are in the dark, lost in a paper-based system, and risking a ton of exposure to being sued by the IRS.
As your freelance workforce scales, it’s virtually impossible to perform this kind of granular tracking manually. Businesses need a Freelance Management System to keep all the information in one place, to streamline collection for all the relevant information, and to stay audit-ready. Classification can be a pain in the ass and a regulatory minefield, but with an FMS, it doesn’t have to be.