Independent Contractor—Or Not? Spend More Now to Avoid Big Payments Later

Independent Contractor - Or Not? Freelancer WorkersThere’s been somewhat of a push and pull over the last few years for employers and HR professionals when it comes to staffing issues. On the one hand, many employers have been hesitant to add new staff since the bottom fell out of the economy in 2008, even despite signs of an upturn. On the other hand, with business starting to pick up existing staff members have a feeling of being overwhelmed that needs to be addressed.

Increasingly, organizations are turning to contract workers and freelancers to fill these gaps. In fact, MBO Partners’ 2014 State of Independence in America Report (the 2015 report will be released later in September), indicates there were 17.9 million independent workers in the workforce in 2014—a shift of +12.5 percent from 2011, the first year they conducted the research.

By way of comparison, the overall labor force grew only about 1.1 percent during this same time period. MBO Partners is a firm that provides support services for consultants and the employers who work with them—the fact that MBO Partners exists is another testament to the growth in the temp workforce.

Not New, But Growing Quickly

The use of freelancers and contractors is nothing new. Many organizations have used contract labor for a number of years. What is new is the significant growth in numbers of these workers—now also being referred to as “solopreneurs” or “gig workers”—and the many online web sites springing up to provide ready access to their services., for instance, connects employers with part-time, telecommuting or flexible schedule workers across a wide range of geographies and types of positions. Job categories run the gamut from account and administrative jobs, to computer jobs, entertainment and media jobs, legal jobs, marketing jobs, sales jobs, and much more.

A similar site,, provides a graph that visually shows the growth in various types of flexible jobs across 25 job categories. A number of other sites have sprung up to help make connections between freelancers, contractors and employers. There are reportedly 100 freelance sites on the web, and this number is likely to continue growing.

Benefits—and Risks

There are certainly benefits on both sides of the solopreneur/employer relationship. There are potential drawbacks as well. From an employer standpoint, the biggest drawback is the potential risk in misclassifying someone as a contractor who the federal government determines is really an employee—and, consequently, subject to a range of withholding taxes. The penalties for noncompliance can be significant and the government’s attention to the issue is growing as it address budget cuts and look for ways to generate more tax revenue.

Most recently, Uber has come under scrutiny over whether its drivers—hundreds of thousands of them—are being inappropriately classified as independent contractors when they are, indeed, employees. The decision generally comes down to the level of control the employer exerts over the individual, and the extent to which the individual also performs similar work for other organizations. However, despite the fact that the IRS has a list of criteria to help determine which category an individual might fall into, the nuances behind these distinctions are growing and employers are increasingly concerned that they might fall prey to what can amount to multi-million dollar settlements. Earlier this year FedEx agreed to pay $228 million to settle a misclassification case in California.

HR’s Role

While some suggest that HR’s traditional role of recruiting and hiring employees might be at risk because of the growing contingent workforce, there is ample opportunity to HR to play both a strategic and a tactical role here.

From a strategic standpoint, HR can work with employers to evaluate the workforce and its staffing needs, outlining proactively those situations where contingent staff can provide the most benefit from a cost/risk/contribution standpoint. Tactically, HR can play a role in ensuring that documentation is in place to support the definition of a position as an independent contractor vs. an employee.

XpertHR has an Independent Contractor Agreement template that can serve as a good starting point in considering whether existing or future contract positions will stand up to scrutiny.

Do you have independent contractors working in your organization and, if so, what roles are they filling? If not, are there positions in your company that might be able to be performed by solopreneurs in the future—what are they and why do you think this might provide value for your organization?