This blog was originally featured here.
Back in 1995, 93% of workers in the United States were full time or part time staff. Today, one out of every three workers in the United States is freelance or temp. Why? How are companies saving money? What are the signs of illegal activity? Let's dive in.
Employers are loving freelancers because they are a massive money-saver. Freelancers don't get unemployment insurance, healthcare, or workman's comp. In fact, freelancers work for less, saving companies up to 30% just in wages alone. Add in the benefits that they don't receive, and it seems freelancers work for practically nothing.
Additionally, most freelancers don't know their rights. Here are some guidelines:
1. Freelancers are to be paid per job, not a monthly or yearly amount, or the IRS considers them an employee. Every freelancer should receive a 1099 form from each company.
2. The company cannot control how work is done. Freelancers can work when they want, where they want, using their own ways. A company cannot insist on specific office attendance, attending meetings, or insist on shift times.
3. The majority of materials a freelancer uses should belong to the freelancer. Use of office supplies and equipment should be very limited.
4. It's illegal to prohibit freelancers from working for other companies.
5. Little to no training should be required. Ideally, they should be able to start the moment they accept a job. If significant training is required, the IRS and many state labor boards may consider them an employee.
6. Include information on whether or not the freelancer has any employees, partners, or helpers, and if the freelancer is operating under another name.
7. Neither party has an obligation to continue the working relationship after completion of the agreed upon services, and neither party is required to consider the other party for future services.
What happens to a company who treats their freelancers this way? Lawyer Joy Child shared that it could open the company up to misclassification lawsuits. The company could be held liable for payroll taxes, penalties, and interest. Microsoft is an example; they were sued and had to pay $97 million, including legal fees. If there is no contract in place and the freelancer has requested one before starting work, the company can be sued for that as well.
As of 2016 under the Freelance Isn't Free Act signed by Mayor de Blaiso, freelancers in New York can sue for double if they are not provided with a written contract that specifies terms, including that they are to be paid by the agreed upon terms or, if not specified, 30 days after completion of services.
What should be done? Companies should conduct a compliance analysis (or hire a company to do this) and promptly reclassify anyone who fits the description of employee or freelancer and take appropriate steps to ensure no further misclassification occurs. If the company is treating a freelancer as an employee but wishes for that person to remain a freelancer, then an agreement should be worked out to correct the issues that classified them as an employee.
Contracts between the company and the freelancer must include both parties' names and mailing addresses, an itemized list of services to be provided and their value, the rate and method of compensation, and the date payment is due. In some cases, email communication may save a company in court if they can show terms agreed to outside of the contract, but this should not be assumed. It is best to ensure all information is included in the contract. As an added precaution, include what should happen if the work delivered is not satisfactory, including if more work is to be done by the freelancer. Is it an extra cost, or is it included in the original quoted price? Is it included, but only up to a point? To protect both parties, ensure this is in the contract and agreed upon before work begins.
Freelancers aren't bad; they're just mismanaged. Be sure to protect yourself and take the proper precautions. Keep an eye out for next blog post where we discuss interns and how most of them are also illegal.
Prime Financial Recruiting offers services to the secured lending industry, including factoring, asset-based lending, and purchase order finance.