An increasing number of businesses have been relying on contingent workers to fill their open positions. For businesses struggling to find qualified candidates, it’s a matter of necessity. For others, it’s often a strategic move, seen as an opportunity to access specialized skills and services on an as-needed basis — and often at a fraction of the cost when compared to hiring full-time employees.

Regardless of the reason, there’s more to hiring contingent workers than just bringing them in to fill talent gaps or keep pace with the ever-changing demands of the marketplace. A few considerations must be made prior to integrating the use of freelancers into your talent strategy:

 

Worker Classification

Worker classification is one of the first factors to take into consideration when hiring a contingent worker. This is not just for the rights and entitlements that differ between an employee and a freelancer, but also for the legal and financial implications that can come from misclassifying workers. No business is exempt from this. In fact, Nike has recently run into issues as a result of misclassification, joining Uber, FedEx, Microsoft, and countless other companies that have made the same mistake.

It’s important to understand that as soon as independent contractors start to assume the responsibilities of an employee, they may no longer fall under the IRS classification of “independent contractor.” If this is the case, besides becoming subject to heavy financial penalties, you could find yourself responsible for back pay, holiday pay, medical benefits, and pension contributions.

Before hiring, make sure to assess:

• The nature of the work.
• The degree of independence that comes with the role.
• The level of control over tasks.
• The level of integration in operations.
• The employees who are doing the same work, if any.
• The importance of the work to your business.
• The permanence of the relationship.

Even if you enter into these relationships with contracts, it’s essential to properly vet the candidate to determine whether you’re actually misclassifying the individual.

 

Contingent Worker Rights

All workers have fundamental rights — contingent workers included. It’s your legal obligation to provide them with a safe working environment; ensure protection from discrimination, harassment, and unfair treatment; and allow them to join labor unions.

However, in some states, contingent worker rights are much more expansive. They may include overtime pay, sick pay, rest periods, meal periods, and other rights and benefits that are conventionally only enjoyed by “traditional” employees. With labor laws always changing, it’s critical that you stay current with state, federal, and Occupational Safety and Health Administration (or OSHA) regulations. Otherwise, you could encounter contingent worker legal issues, which may result in financial penalties and other undesirable consequences.

 

Employment Contracts

Contracts are fairly standard in the independent contractor space, and like all types of employment contracts, these agreements are legally binding. To protect yourself, it’s advisable to first consult a lawyer before signing a contract. The agreement should also clarify certain details, including:

• Project descriptions
• Scopes of work
• Deadlines
• Deliverables
• Payments
• Payment schedules
• Payment methods
• Cancellation fees
• Deposits
• Reimbursements (if applicable)
• Duration of engagements (i.e., project-based or ongoing)
• Duties (if not included in projects)
• Termination terms
• Determination of worker classification

Depending on the type of work you’re hiring a contingent worker to do, the agreement may also need to include additional clauses involving confidentiality, intellectual property, nondisclosure agreements, and even noncompete agreements.

If you’re hiring W-2 employees, many of the same details apply, but they also include specifics like job titles, job descriptions, tasks, duties, expectations, work schedules, locations, outlines of benefits, and compensation. In both the offer letter and employment contract, their eligibility for tax withholdings should be mentioned. In some cases, there should also be an arbitration agreement ensuring that both the employer and the worker have a shared understanding of the terms and conditions of employment.

 

Tax Obligations

Tax obligations go back to correctly classifying workers. What you must withhold will be based on worker classification. Ordinarily, independent contractors are responsible for their own withholdings, and your business won’t pay any taxes (e.g., federal, Social Security, Medicare, etc.).

That said, regulations do vary by state. In Minnesota, for example, you need to withhold state income tax for “backup withholding” if any independent contractor fails to fill out a W-9 and provide their taxpayer ID number. Much like contingent worker rights, it’s important to stay informed on potential changes to state and federal tax regulations.

Because it’s generally a good idea to seek guidance on your business’s tax obligations, you should plan to meet with legal and financial professionals. If you don’t have an accountant on staff, you should work with an outside accountant to conduct regular audits of your payroll and tax practices. They will be able to quickly identify any discrepancies and offer recommendations for rectifying them before regulatory or compliance issues become a serious problem.

It may also be advisable to work with an employer of record, which can act as the legal employer or agent of record for your contingent workers and assume many of the responsibilities that come with hiring workers on a temporary basis.

If you’d like more information on this topic or any other topic involving contingent workers, contact Innovative Employee Solutions (IES) today. A member of our team would be more than happy to answer any questions or work with you on your employment needs.

 

Written by: Kara Hertzog, President of Innovative Employee Solutions

Kara Hertzog is president of Innovative Employee Solutions (IES), a leading provider of remote and contingent workforce solutions, specializing in global Employer of Record, Agent of Record and Independent Contractor compliance services in 150+ countries. Founded in 1974, IES is a woman-owned business, certified by the WBENC and partners with companies to provide compliant employment solutions that empower people’s lives.