As my colleague, Terry Johnson, noted in the first installment in ACE's Gig Economy series: “From an employer’s perspective, independent contractors, hired on a project basis, and free to take on other gigs, may make more sense than a full-time hire in a bad economy.” That having been said, it’s unlikely that employers look at a downturn as an opportunity to replace their workforces with a fleet of contract workers. Moreover, there are legal limits on when it can be done.
There are serious consequences to misclassifying a worker as an independent contractor, and classification is not always clear-cut. The IRS weighs twenty (20) factors to determine whether a worker is an employee or an independent contractor. State laws vary on matters such as workers compensation and tort liability.
There’s good reason to be cautious. In general, though, these are the usual hallmarks of an independent contractor:
- The worker is responsible for a result, as opposed to a series of incremental tasks, and is free to determine how the result is achieved;
- The worker has a skill set, achieved through education or experience qualifying her in a trade (electrician), profession (optometrist), occupation (hair stylist), or business (distributor);
- The worker keeps profits associated with accomplishing the result cost-effectively;
- The worker is free to hire or contract with others to assist in accomplishing the result; and
- The worker is free to offer her skilled services to others, provided she fulfills her contractual obligations.
Under these circumstances the worker, in most cases, could be an independent contractor or could also be hired as an employee. At this point a business can look at economics, which will obviously include matters such as insurance, access to benefits, withholding, and payroll taxes, as well as the potential cost of misclassification.
An employer does not need to be so risk-averse that it automatically puts every worker on the payroll. The legal rules allow a fair amount of flexibility in staffing a project and assembling an expert team. To take advantage of this flexibility you need to ask a second question: Who should be the employer?
Shifting Employer Responsibilities by Contract
A temporary staffing agency is a simple example of an alternative employer, and the business model has been around for a long time. Typically, the agency acts as an employer, and is responsible for payroll, payroll taxes, wage and hour requirements, and other legal employer responsibilities. The agency and the business have a contract where the business pays a set hourly rate for the services of an agency employee, inevitably at a higher rate than if the business had added the worker to its own payroll.
The temporary agency is both an employer AND an independent contractor in this scenario. It can provide workers to other businesses. It can re-deploy its employees once it has fulfilled its contractual obligations. If it can keep its direct and indirect costs down it will be profitable.
Creative Variations on the Theme
With the Gig Economy’s expansion, the staffing industry has developed creative variations on the traditional “temp” theme.
Ed McKersie, founder of ProSearch, a staffing and recruiting agency in Portland, says that his firm has been increasingly involved with skilled freelancers, particularly in information technology. ProSearch effectively acts as a matchmaker. As McKersie describes it, gig workers come to his firm, his team evaluates the skills and experience of that worker and matches them with the staffing needs of the firm’s client, but not necessarily as a “temp hire” or permanent placement.
Custom-Built Back Rooms. For example, if your business is quality winter wear, your suppliers are far away, and a significant portion of your sales is online, you rely heavily on IT, but it’s not your core business. You may not be able to create an in-house tech team to meet your needs. Nor do you want to manage a tech team of independent contractor specialists because, quite frankly, you wouldn’t know where to begin.
Instead, you might consider contracting with a business that has access to a wide variety of IT workers, has the expertise to assemble them into custom-built teams, and coordinates their efforts to deliver the services you need. The workers might be employees or independent contractors, they may work part time or full time, but that is not your problem to solve.
Project Staffing. Besides contracting for a custom-built backroom, an outsourcing strategy can also apply to projects demanding a high degree of expertise across several disciplines. In this case, the contractor might retain an experienced project manager, then work with the project manager to identify and recruit gig talent to staff the project from a well-vetted portfolio of skilled professionals.
Note that the service the business buys in these cases is not expertise in a particular profession or trade, but rather the ability to assemble and manage a team that requires different kinds of talent, and the ability to correctly classify employees and contractors, and to serve as an employer when legally required to do so, without risk to the client.
Before the COVID pandemic, Upwork, a leading digital platform, projected that by 2027 more than half of U.S. workers would be self-employed. An employer does not need to stretch definitions of employee and independent contractor and risk liability for misclassification. As the gig economy expands, we can expect to see more creative approaches to allocating employer responsibilities contractually, and honoring employees' legal rights.
This is the third installment in the ACE Blog’s series on the Expanding Gig Economy.
See previous Gig series blog articles:
Maine’s Expanding Gig Economy, by ACE President, Terry Johnson
Preparing Yourself Financially to Join the Gig Economy, by Allison Bishop, CPA