Independent Contractors: Conflicting Definitions, Conflicting Regulations

Employment trends are undergoing a seismic shift in which independent contractors – also known as freelancers or gig workers – are no longer seen as peripheral players. Worker preferences, technological advances, legislative changes, and the scarcity of talent in certain areas have paved the way for independent contractors to become a mainstream component of the modern workforce.  But is the risk worth the reward?

A Reality Check

• Fiverr’s recent study, The Strategic Insights: Leveraging Freelance Talent in Tech, indicates that 90% of tech executives use freelancers during peak stress periods, and more than 28% of firms report integrating freelancers daily into their operational processes. Additionally, more than 21% leverage freelancers nearly every workday, and over 30% deploy freelance talent two to three days a week.
• Research conducted by TeamStage concludes that the gig economy is expanding 3x faster than the total US workforce, with persons in the 18-34 age range more likely to take independent contractor assignments.
• Forbes reports that in 2023, 52% of Gen Z and 44% of Millennials performed independent contractor work. 
• Data provided by Statistica indicates that in 2022 21.6 million U.S. workers were full-time independent contractors, with an additional 43 million performing part-time independent contractor work.
• An evaluation conducted by the National Bureau of Economic Research found that approximately one in 10 workers who reported working for an employer on one or more jobs in which they were listed as an employee was actually an independent contractor on at least one of those jobs. With this adjustment, it was determined that independent contractors represent about 15 percent of all workers.

Why it Matters

While there is general agreement that freelance talent is rapidly growing, confusion still exists regarding the classification of an independent contractor.  The Federal, State and local governments frequently pass new legislation in an attempt to reach agreement on a standard definition of an independent contractor.  However, each new regulation adds to the complexity and confusion, increasing the likelihood that businesses when engaging an independent contractor can be non-compliant with rules and standards for the purposes of wage and hour, workers’ compensation, unemployment insurance and taxation.  The costs – measured in government-imposed fines and litigation – are high. And, to make matters worse, a worker that classifies as an independent contractor in one jurisdiction may fail to qualify in another.

The Backstory

Recent legislation attempts to curtail the use of independent contractors in an effort to ensure that the rights of these workers are protected.  Examples include:

• In January, the U.S. Department of Labor introduced the “Final Rule”, revising the standard for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act. The Final Rule returns to the six economic reality factors that both the DOL and federal courts historically have applied (employer control, worker opportunity for profit/loss, required skill and initiative, permanence of working relationship, worker’s required investment, integral part of employer’s business), but states that the six factors are to be applied equally, with no factor to be given predetermined weight over other factors. However, The US House of Representatives Committee on Education and the Workforce issued a proposal on March 21 to repeal the Final Rule.  The proposal, viewed as viewed as highly politicized, will now be considered by the entire House of Representatives.  In addition, other litigation is expected to follow.
• Freelance Isn’t Free Act: This New York State legislation, which goes into effect on May 20^th, is similar to legislation enacted in New York City in 2017. It defines a “freelance worker” as any individual hired as an independent contractor to provide services for compensation and requires a business that retains the services of a freelance worker to put the terms of the relationship in a written contract and specifies when payment must be made.
• Illinois passed a similar law, the Freelance Worker Protection Act, which will take effect on July.  Other states proposed similar laws, which did not pass.
• Existing laws in California, Massachusetts, Illinois, Maryland, and New Jersey are considered to be most stringent in protecting the rights of independent contractors.

The Path Forward

Regardless of the status of recent legislation, businesses should audit their workers deemed independent contractors.  Misclassification audits should be conducted using the most stringent standards. Given the need to comply with Federal, state and local statutes, you may want to outsource classification to a company that specializes in independent contractor consulting services.

When nextSource is engaged to provide independent contractor classification services to our clients, our efforts include review of written agreements, evaluation of current compensation structures, identification of day-to-day duties and overall role in corporate structure, and assessment of the level of exposure and potential for misclassification. Evaluation factors in all relevant jurisdictions and is done under advice of employment attorneys who specialize in misclassification. If workers fail to classify as an independent contractor, and compliance is not possible, nextSource recommends engaging the workers under an Employer of Record (EOR) solution which is a third-party organization that serves as the legal employer for a temporary worker on behalf of another company.