The workforce in the United States has always been shifting one way or another – from manufacturing to automation, retail to ecommerce – people in the workforce constantly need to learn new skills and adapt to changes in the job market. One of the most prominent workforce changes over the past few years has been the growth of the “Gig Economy”. More and more people who want to be their own boss are becoming self-employed with small businesses, setting themselves up as independent contractors (ICs), which can give them more flexibility over how they perform work.
In addition to freelancing working out better for the worker, it also has many benefits for the client organization. Since the company is paying an independent contractor, it often does not have to worry about benefits and gets some tax breaks as well. The act of engaging freelancers as ICs can be beneficial to both parties and is one of the main reasons why the Gig Economy has been growing to the extent it has – but there are some issues that businesses need to know about when engaging someone as an IC instead of an employee.
Recently, both federal and state legislation has been cracking down on worker misclassification. This means that if you have a worker who should be fully employed but is instead engaged as an IC, your company may be at risk. California has been one of the more prolific states when it comes to passing legislation regarding the misclassification of workers. Effective on January 1, 2020, California enacted a new labor law, Assembly Bill – 5 (AB-5.) The basis of this law is that most workers are employees and should be classified as such, and that the burden of proof for classifying individuals as independent contractors belongs to the hiring entity. AB-5 entitles workers classified as employees to greater labor protections, such as minimum wage laws, sick leave, unemployment insurance and workers’ compensation benefits, which do not usually apply to independent contractors. This is a state law and only applies to workers in California, with an exception for several strict work classifications. With the passing of this legislation, there are now many ICs in California that would gain a lot from being reclassified as an employee.
So, what can a company do when a worker insists on being paid as an Independent Contractor on a 1099 basis?
For any business in this situation, remember that just because the worker insists on being paid on a 1099 basis, they may not actually be qualified for it. The first step is for your organization to evaluate how much worker classification compliance risk you are willing to accept. If you are ever faced with a federal or state audit, your business could face heavy fines and penalties – including back taxes – for the misclassification of an employee. Some states also hold the decision maker personally responsible and fine them, too. You must evaluate the business risk of engaging a worker on this basis and decide if that talent is worth the risk.
Are you engaging independent contractors compliantly? Independent contractors can remain a viable operating option, and if your organization needs some help ensuring your ICs are classified properly, ClearPath Workforce Management has an IC evaluation process and risk mitigation services that bridge the gaps to enable compliant engagement of this highly skilled talent and to expand your talent supply chain. ClearIC™ can automate and simplify the Independent Contractor evaluation process while mitigating your risk via our full-service IC vetting process. Contact ClearPath for a complimentary 1:1 review of your current worker status.