The sudden growth in the gig economy means more people than ever choose to make their income as independent contractors. There are around 1.1 billion freelancers worldwide. From the position of an employer’s business, it’s a great opportunity to have the finished work within a short period of time. In this article, we will have an in-depth look into which laws must be followed by businesses when working with freelancers, contractors, and independent workers.
What is the difference between freelancers, independent contractors, and employees?
The main differences in these types of positions are strictly connected to taxes and the costs of public tributes. Independent contractors are private entrepreneurs who run small-sized businesses, selling their expertise and skilled services. With full control over their business, independent contractors may work in their own schedule, scope and with as many clients as they wish. Collaboration between a hiring company and an independent contractor is a business-to-business relationship based on mutually agreed terms.
At the same time, since contractors are not considered employees. The hiring enterprise is not obliged to pay payroll taxes or provide employee rights. Same with other benefits such as overtime compensation, taxes, health insurance, or sick days. This means that independent workers need to manage their own premiums. Furthermore, they are required to file self-employment tax, social security, and so on.
It’s important to note that the law doesn’t discern between freelancers and independent contractors. Both will be defined as self-employed individuals that provide their services to numerous clients on a flexible schedule. In most cases, the term “independent contractor” or “independent worker” is used to define freelancers who work within the structure of a company. It’s crucial to define these boundaries as soon as drafting the potential contract to avoid further miscommunications such as misclassifying an employee.
Employee misclassification occurs when an independent contractor works under conditions that can constitute as an employment relationship. To avoid misuse, most laws try to define each status clearly and further regulate companies that hire gig workers with an independent contractor employment status.
As misclassification can result in civil penalties and even end in court. Since some of the definitions are rather broad (for example, as in the Fair Labor standards act). It’s crucial to define the type of services and work the independent contractor performs in a mutual agreement drafted before starting the collaboration.
Examples of laws delineating the differences
- Fair Labor Standards act– broadly defines the employee based on the employer-employee relationship, in which the worker is considered to be an employee if they are economically dependent on the company rather than on their independent customers.
- HMRC (Hm Revenue and Customs, UK) – states that persons can be deemed self-employed by state agencies if they run their own business, take responsibility for its success or failure and file their own taxes and social security claims.
- California Assembly Bill (AB5)— an employee classification system in which all workers have assumed employees unless the hiring company can meet all requirements. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact. The worker performs work that is outside the usual course of the hiring entity’s business; and The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
When hiring international talent, it’s highly recommended to draft a contract clearly stating the independent contractor’s rights and status. The mentioned contract should be proof of the independent contractor’s status with all necessary details regarding the relationship between the enterprise and the independent contractor. It should contain information on the work scope, feedback process, how the freelancer will receive payment, and regulations regarding income tax. The contract will also protect your company’s interest in case of a breach or misjudgment in industrial relations. If you want to get more information on how to hire and pay internation freelancers, read this.
Useme offers a simple solution for your business! With Useme, your company can easily work with freelancers around the world. We take care of the employer’s responsibilities and send a tax invoice to you. This way, you can start the cooperation quickly and save more time!
What should I know as a hiring business?
When working with freelancers and independent contractors, it’s important to remember the final laws to be followed will be determined by the location. Beside the location, your business should pay special attention to the following details:
Tax obligations—while the employer has no tax obligations towards freelancers with an independent contractor status. It is always required to provide the worker with a special form stating the amount paid out in the fiscal year. A good example of such tax forms is the 1099-MISC statement provided by the client to most freelancers in the United States, or according to the new law, a 1099-NEC form for non-employees.
Contract obligations—will vary depending on the employers’ registered location. A contract should state the names and mailing addresses of both parties, as well as an itemized list of provided services and means of settling accounts. Regulations regarding contracts, such as New York’s Freelance Isn’t Free Act, help to protect the legal rights of gig workers on the labor market. Clients must provide a written contract for all freelancers who perform a job of at least $800 value within a 120-day period according to the law.
Copyright and ownership obligations—regarding intellectual property rights and ownership of work created by freelancers. In most cases, the freelancer will retain the ownership until they receive the payment’s effective date. Failure to secure ownership rights by the client may result in copyright infringement when using a web design or content created by the independent contractor. Most countries recognize the right of corporate authorship, an exception to the general copyright rule stating that if the work was commissioned, the employer is considered to be a legal author.
These are some of the things you need to know when it comes to laws, regulations and paying freelancers.
You can easily work with freelancers to save more time while growing your business. To ensure that all labor standards regarding freelancers are met, we recommend consulting a lawyer that will help create an enterprise action plan for onboarding new contract workers. While in most cases, the laws are standard, they might have different clauses depending on location and be further reformed to keep up with the rising popularity of gig-worker.