Top 4 Legal Issues You Need To Know Before Hiring Gig Workers

The gig economy is booming, with a record-breaking 51.1 million Americans reported as independent workers in 2021 (up 34% from 2020). In the past few years, more and more companies have turned to hiring gig workers and freelancers for everything from marketing to content production. With this shift in work culture comes an important responsibility for employers: knowing their legal obligations when it comes to the people they hire on a contract basis.

To help you navigate these legalities and avoid costly mistakes, we’ve compiled our top four must-know tips for hiring gig workers or freelancers.

1. There is a legal grey area around the differences between gig workers and employees

One of the key legalities to consider when hiring gig workers or freelancers is their employment status or worker classification. The definition of a gig worker is not always clear-cut, and there are many legal grey areas around the differences between gig workers and employees. As an employer, it’s important to be aware of these distinctions and understand the implications of each classification.

Just because you’re making a worker sign a 1099 doesn’t automatically mean they are a gig worker. Similarly, just because you’re hiring an independent worker doesn’t mean you’re misclassifying them. The reason we have seen so many lawsuits throughout the years over misclassification is because of the legal grey area around the differences between gig workers and employees. The IRS even writes that determining “whether these people are independent contractors or employees depends on the facts in each case.”

One of the biggest reasons classification is so important is that gig workers aren’t necessarily entitled to employee benefits such as health insurance, paid leave or overtime. Also, gig workers are required to pay self-employment taxes on their earnings from gig work. This can be confusing for both employers and gig workers, so here are the legal definitions of both employee and gig worker.

The legal definition of an employee

A common-law employee is defined by the IRS as:

“Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”

If you are controlling what the worker does, how they do it, and when they do it, then they are likely considered an employee. Even if you give them freedom of action, what matters is that you have the right to control details of how they perform their job.

The legal definition of a gig worker

Since much of the gig work we’ve seen in recent years only exists because of recent technology, this is where the legal definition of this classification gets tricky. The IRS defines gig work as:

“Gig work is certain activity you do to earn income, often through an app or website (digital platform), like:

  • Drive a car for booked rides or deliveries
  • Rent out property or part of it
  • Run errands or complete tasks
  • Sell goods online
  • Rent equipment
  • Provide creative or professional services
  • Provide other temporary, on-demand or freelance work

Note: This list does not include all types of gig work.”

The term “gig worker” is often used interchangeably with the terms “independent contractor” or “freelancer”. The IRS defines an independent contractor as:

“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. If you are an independent contractor, then you are self-employed.”

Since these definitions are so broad, it makes sense why there is so much grey area around the differences between hiring gig workers and employees. This is also why the laws can be different in different places.

2. The laws for hiring gig workers are different depending on where you are

There are an estimated 1.2 billions freelancers around the world (nearly one third of the total global workforce). When it comes to hiring gig workers, it’s important to understand that different countries have different labor laws for and even some states do, too.

Make sure you are abiding by all labor laws in your state, city, and country before hiring any freelancer or gig worker. California is a perfect example of why it’s important to check your state’s labor laws on hiring freelance workers. Assembly Bill 5 (AB5) was signed into law in California in 2019. AB5 requires the ABC test be used to determine employment status and classification.

One complication that can come from hiring gig workers in other countries is the different specifications for the work environment and expectations: from how much overtime a worker gets to how many breaks they can take and more. For more information on global workforce management, check out our article 5 Tips for Effectively Managing Freelancers Around the World.

3. Getting a legal contract in place is essential to hiring gig workers

Making sure you have a legal contract in place when hiring gig workers or freelancers is not just for peace of mind. Contracts are for both the worker and the employer to protect themselves legally.

When gig workers are hired, they should agree to a contract that outlines what they will be doing. Make sure you know what you’re getting into before signing a contract with a freelancer or gig worker. Be sure to pay them correctly, on time, and give them benefits if they are eligible.

Consider the unfortunate scenario where an independent contractor isn’t holding up their end of the bargain. Since employers can wrongfully terminate both employees and contractors, termination is an important contract provision. Some contract provisions may allow you to terminate your relationship with an independent contractor.

Other contracts to consider are NDA’s and other agreements that can be critical for a secure and successful engagement. These contracts are in addition to required legal documents such as 1099s and W2s that are also essential.

4. The laws are changing rapidly for hiring gig workers

In the first section we talked about the grey area around the legal definition of a gig worker. That grey area is still there because many labor laws were created before the internet and therefore in a very different world. However, the laws are changing rapidly all over the world.

Before hiring gig workers, make sure you’re able to keep up-to-date on new legislation concerning employment law. By staying up-to-date you can ensure that gig workers are treated fairly and that your business remains compliant.

Conclusion

While all of these legalities may make hiring freelancers and contractors seem daunting, keep in mind that flexible and contract work is considered the future of business by many experts. That’s why HR and staffing industry veterans created GreenLight.

GreenLight.ai, the world’s first intelligent worker classification & payroll platform, is making it safe and simple to hire, manage, and pay freelancers and independent workers all over the world, currently operating in 23 countries and growing rapidly. We keep up-to-date on current labor laws, our API makes signing contracts seamless, and our AI-driven classification engine mitigates the risk of misclassification. Schedule a demo today.

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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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