What do Uber, Lyft, FedEx, Amazon, Lowes, and Google all have in common? They’ve all been sued for millions of dollars for misclassifying temporary workers.
We’re now living in a gig economy, with over 34 percent of the U.S. workforce classifying themselves as temporary, freelance, or independent contractors. That number is only trending up, with 70 percent of millennials either currently freelancing, or planning to in the future. How did we get here? An unscientific guess would be that a generation grew up watching Office Space, and decided that making TPS reports in a cubicle sounded like the opposite of happiness. But regardless of why a generation of workers no longer identify with the feeling of company loyalty, employers have to figure out how to engage with this freelance workforce without facing a lawsuit (or worse).
Unlike the freelance tradition of old, the gig economy is characterized by online marketplaces such as Upwork, TaskRabbit, and Fiverr, where talented individuals bid for “gigs”, putting themselves in charge of their schedule and pay. But it’s not always mediated by a platform. It’s also just a general mindset of picking up gigs on the side, such as being a part-time Uber or Lyft driver. The Washington Post even declared that “side hustles are the new norm” in a recent headline.
The single biggest mistake businesses make when engaging temporary or contract workers is misclassifying them. It’s not quite as simple as classifying all non-employees as 1099 contractors and calling it a day. Right now in the U.S., approximately 3.4 million employees are classified as 1099 independent contractors when companies should report them as W-2 employees. With the cost of misclassification being enormously high (million dollar lawsuits, hefty fines, even jail time), how can you be sure you’re not falling into the same trap as Uber, Amazon, and Google? By answering these four questions.
The Department of Labor applies an economic reality test to gauge whether a contractor is “economically dependent on the employer or truly in business for him or herself”. If the economic reality is that you are their functional employer, you may be out of compliance.
Even if the relationship between you and your contractor is mediated by a platform like Upwork, that doesn’t automatically signify a 1099 designation. In 2014, Google faced a class-action lawsuit for treating an Upwork contractor like a regular employee (among other things, such as not paying for overtime). The contractor had a Google phone, worked at their New York office, and performed the same work as W-2 employees. In short, there was nothing different about him besides the fact that he was paid through Upwork, and it cost them.
If the initial project ended years ago, but the freelancer has now established regular work rhythms week in and week out, it may be time to reevaluate the relationship. When the work has ceased to be a project-by-project basis, the government may only see that a contractor is performing regular W-2 work.
Having a clear process and written agreements will make all the difference in navigating the murky waters of contractor-company relationships, especially because individual managers are usually the ones left to manage the relationship, not HR leaders. Agreements should include standard processes such as: contractors must submit invoices to be paid, the contractor won’t work on company premises unless absolutely necessary, and the employer won’t reimburse the contractor for expenses.
If you haven’t had to ask the employee classification question yet at a large scale, you will soon. Having a simple, structured plan in place that clearly delineates between regular employees and freelancers could save your company millions of dollars, and will give managers the clarity they need to focus on getting their work done, rather than worrying about compliance.
But freelancers aren’t the workers who require a structured set of expectations. Do you have a clear strategy for outlining standards, guidelines, and expectations for your employees? Download our free Performance Measurement & Management Guide Book today to get moving in the right direction.