How to Stay Compliant Hiring Independent Contractors

The freelance economy is booming. According to a study by Upwork, freelancers now constitute 36 percent of the workforce in the United States. That’s more than 57 million people! With numbers like that, it’s no wonder that businesses are looking for ways to tap into this growing pool of talent. But while hiring freelancers or independent contractors can be a great way to get work done quickly and efficiently, it’s important to remember that there are risks and complexities associated with working with them. Keep reading for tips on how to stay safe and compliant while utilizing independent contractors.

1. What is an independent contractor?

An independent contractor is an individual or entity that provides services to another business under terms specified in a contract. They are typically hired to complete specific tasks or projects, and are not considered employees of the company they are contracted with. This relationship can be beneficial for both parties – businesses can get the work they need without having to commit to a long-term employee, and contractors can enjoy the flexibility of working on their own terms.

The legal definition, from the IRS, of a self-employed person or independent contractor is as follows: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

Now when people are referring to independent contractors they could be calling them gig workers, freelancers, or contingent workers. The term “gig worker” is most commonly used to describe workers in the gig economy, which is where short-term contracts or freelance work are commonly found instead of traditional permanent jobs. And “freelancer” or “independent professional” is someone who is self-employed and not committed to a particular employer long-term. The “contingent workers” are part of the extended workforce, which is a company’s strategy to utilize workers who are not employees, in addition to its full-time and part-time staff.

2. The benefits of hiring independent contractors

There are many benefits to hiring independent contractors. For businesses, it can be a cost-effective way to get work done quickly and efficiently, especially as more talent marketplaces emerge. And for contractors, it can provide the flexibility and freedom to work on their own terms.

Some of the benefits of hiring independent contractors include:

  • Cost savings: When you hire an independent contractor, you only pay for the work that is completed. There are not the same overhead costs associated with them as employees.
  • Time savings: Independent contractors are usually hired to complete specific tasks or projects. This can save businesses the time and hassle of training new employees.
  • Wide talent pool: Independent contractors have the freedom to choose when and where they work and this flexibility has encouraged many people to become contractors, thus widening the talent pool.

The benefits of contract work are a leading force behind the projected growth of the gig economy. It’s expected reach 455.2 billion USD in 2023 – up 53.8 billion USD from the projected gross volume of 2022, according to Statista.

3. The risks and complexities of working with them

While there are many advantages to working with independent contractors, there are also some risks that businesses need to be aware of. The most common risks associated with hiring independent contractors are as follows.

Compliance Risks

It’s important to make sure that you are compliant with all laws and regulations when working with contractors. This includes ensuring that they are properly classified and have the necessary permits and licenses for the work they will be doing. These laws are changing frequently and it makes it very difficult for companies to maintain compliance.

Another compliance risk to be aware of is the potential for misclassification. This occurs when a company incorrectly classifies an employee as an independent contractor. This can lead to heavy fines and penalties from the IRS. The IRS states: “It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.”

Onboarding and Payroll Complications

There can be complications with onboarding and payroll when working with contractors. For example, you will need to set up a system to track their hours and payments. You will also need to make sure that they are paid on time and in accordance with the terms of their contract. This can be a complex and time-consuming process, especially if you are working with multiple contractors.

4. How to stay safe and compliant hiring contractors

There are a few key things that businesses need to do in order to stay safe and compliant when hiring contractors.

Make sure you’re correctly classifying them

First, you need to make sure that you are classifying them correctly. This means understanding the difference between employees and independent contractors and making sure that they fall into the correct category. This is where an EOR with an AI-driven classification engine can help.

Automate onboarding and payroll

Another way to stay compliant and safe when working with contractors is to automate onboarding and payroll. It can be difficult to manage the payroll of workers around the world, so automating onboarding and payroll with an EOR built for the Future of Work can help.

Utilize an EOR

An EOR can help you stay compliant in a number of ways. They can help you classify your workers correctly, track their hours and payments, and automate onboarding and payroll. They are also experts in employment law and can keep you up-to-date on the latest changes.

GreenLight is an EOR and AOR with the world’s first AI-driven classification engine. We can act as your legal, HR, and tax expert, helping you stay compliant with all relevant laws and regulations. Book a demo today to learn more about how we can help you protect your business from the risks and complexities of working with contractors.

5. Tips for finding the best freelancers and contractors

Now that you know the benefits and risks associated with working with contractors, you may be wondering how to find the best ones. Here are a few tips:

Check out online talent marketplaces: There are a number of online marketplaces that connect businesses with freelancers and contractors. Here’s our list of the Best Places to Hire Freelancers, Contractors, and Gig Workers.

Get referrals from your network: Ask your friends, family, and colleagues if they know any good freelancers or contractors. They may have someone in mind who would be a perfect fit for your project.

Armed with these tips, you’ll likely be able to find freelancers and contractors in no time. Just remember to stay compliant and protect your business by working with an EOR.

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Alex Steeno

Alex Steeno

Senior industry analyst, adviser of multiple hypergrowth agencies, SaaS, and tech-enabled service platforms, Alex Steeno regularly contributes insights related to industry trends, growth marketing, and management consulting.

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