On one level, hiring freelancers is all about ease and convenience. A team has a need, finds a freelancer to fulfill that need, and boom. Job complete. If only it were really that simple. The term “freelancer” actually sits on top of a pretty complex taxonomy—like “marsupial” or “astragalus.” Under this heading are a number of narrower classifications that any business hiring freelancers needs to be aware of. Contractor rights are complicated, so don’t let them bite you in the astragalus.
A Tangled Web
Companies getting themselves in trouble around contractor rights is nothing new. Back in the 90s, Microsoft ran into some issues by misclassifying workers. It had them sign agreements stating that they were “independent contractors,” but treated them as if they were employees, short of providing benefits. When the IRS audited Microsoft’s payroll, it found that Microsoft had misclassified these workers, and eight of them filed a suit against the company. Through a series of appeals, the courts decided on behalf of the workers and Microsoft owed them a “small fortune.”
The more recent incarnation of these freelance classification troubles is Uber. 1.6 million Uber drivers in California filed a class action lawsuit against the company, requesting a $100 million settlement. In August 2016, a U.S. District judge said that the drivers were, in fact, independent contractors (rather than employees), but the case raised serious questions about labor practices in the gig economy.
These examples demonstrate what a quagmire freelance classifications can be, so here at Kalo, we are going to break it down for you.
The 6 Pillars Of Independent Contracting
Full-time employees are entitled to benefits, rights and protections that independent contractors (ICs) are not. These workers fill out W-2 forms, while ICs fill out 1099 MISC forms. According to the IRS, the general rule for defining an IC 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.”
The Fair Labor Standards Act has six criteria to determine whether a worker is an employee or an IC, which center around determining the degree of “economic dependence”:
Is the work performed an integral part of the employer’s business? If so, then it is more likely that the worker is economically dependent on the employer and less likely that they are in business for themselves.
Are the worker’s managerial skills affecting his or her opportunity for profit and loss?
This question evaluates the extent to which a worker makes decisions. If the worker assumes leadership duties, such as hiring and supervising workers or investing in equipment, and if those decisions impact their earnings, then they may not be an freelancer.
Are the relative investments in facilities, tools, and equipment by the worker and the employer?
ICs are, by definition, independent, which means they probably make investments in their own business. If an employer is the only one bearing costs (and associated risks), then that looks like a more traditional employer relationship than a freelancer-employer one.
Do the worker’s skills demonstrate that he or she exercises independent business judgment?
Workers’ skill and initiative are another factor. The issue at stake here is not so much the job-specific skills themselves (photography, writing, coding, plumbing), and more if the worker demonstrates that they actively operate independently.
Is the relationship with the employer indefinite, as opposed to permanent?
This one is pretty straightforward. Contracts tend to be project-based and/or have a specific start and end date. If the work is ongoing and not connected to specific projects, that worker could be classified as an employee.
What is the nature and degree of control by the employer? Does the worker work free from control by the employer?
Finally, freelancers are supposed to have control over their own lives, meaning how work gets done. Who sets the pay amounts and work hours, and determines how work is performed? Is the worker allowed to work for others? Each one of these questions is not necessarily conclusive. For example, there are some contracts or projects where work hours or set or where a freelancer goes into an office, but the answers contribute to a greater whole.
Freelancers are cheaper for businesses than full-time employees, which is why companies will fight hard to maintain that their workers are, in fact, independent contractors. However, as Uber discovered, things can get murky when 1099 workers work full-time and are economically dependent on their employer. Freelancers are supposed to work for themselves, and so if their entire livelihood is wrapped up in one company, they are not legally considered an independent—even if they signed a 1099. From a legal and business perspective, these are the criteria that matter.
Beyond determining for tax and legal purposes whether a worker is full-time or freelance, W-2 or 1099, there are further sub-categories within freelancers that are useful for companies to consider. In a report a few years ago, the Freelance Union broke down “freelance” into five categories. The first is independent contractors, which we went into above. These are traditional freelancers, who tend to work on a project-by-project basis. They tend to have specific, valuable, and in-demand skill sets, like web design or accounting.
The second is “moonlighters.” These people have a full-time, traditional job and do freelance work to supplement their income. For example, a brand executive who dedicates weekends to paid photography projects or a designer at a tech company who spends nights working on freelance design projects. Or a moonlighter might not make enough to get by with their full-time job and so take jobs through “gig economy” platforms like Postmates or Thumbtack when they have time.
Third, we’ve got “diversified workers.” These people do a mixture of jobs and bring income in from multiple sources. They might work at a law firm part-time, drive for Uber or Lyft, and walk dogs. It’s pretty common for at least one of these freelance jobs to take the form of a gig economy gig.
The fourth category is made up of “temporary workers.” This designation is for people who work exclusively with one employer or client at a time, but for a (relatively) short period. Think about a web developer who signs a six month contract with a startup or a consultant who is hired for one project.
Finally, there are “freelance business owners” who are in business for themselves but also hire other people to help. For example, a freelance copywriter who hires other writers to share some of the workload.
We know that’s a lot of categorization to take in, but understanding how all these distinctions work is essential to create an effective freelance strategy. Any business that wants to work with freelancers—which is more and more every day—needs a solid grasp on what constitutes an independent contractor and what does not. At Kalo, we’ve made understanding all the nitty gritty details our job so you don’t have to.