Why HR Needs to Know When You're Engaging Contractors
Blended talent models are the new norm. The complicated nature of worker classification rules and various other laws that apply to independent contractors make it crucial that all relevant stakeholders are consulted when a freelance worker is being engaged.
Engaging contractors and freelancers is becoming common in the business world. ADP Research estimates up to 25 percent of workers around the world are gig workers, and an Upwork survey put the number of freelancers in the U.S. at 64 million, about 38 percent of the nation's workforce.
The world of work is changing, and organizations should learn to leverage the freelance economy and integrate freelancers in their workforce strategy.
Sometimes, individual teams and departments take on this task in a silo — approaching and hiring contractors on their own without keeping HR informed. But as HRMorning reports, one of the top misconceptions about working with freelancers is that HR doesn't need to engage with them.
Hiring a freelancer without input from HR can open your organization to a range of serious compliance problems, including worker classification, which is subject to various state and local laws. Let's discuss some of the risks that are at stake and the steps organizations can take to help stay protected when engaging contractors.
Risks of engaging contractors without informing HR
Independent contractor laws and regulations often differ from those for traditional employees, and navigating the compliance issues of engaging freelancers can be challenging. Not disclosing these engagements to HR and other departments like finance and legal can create a compliance risk.
In general, workers are classified as either a W2 employee or a 1099 independent contractor. Misclassifying your workers can be expensive and have a domino effect on an organization's compliance with other federal, state and local laws.
This is the root of the reason HR needs to know when you engage a contractor or freelancer. People who are 1099 workers are responsible for paying their own self-employment taxes and usually aren't eligible for company-sponsored employee benefits. Contractors are often not subject to many of the traditional labor laws, and they generally have more control over the work done than employees. However, HR should still ensure contractors are paid properly on behalf of the business and that these payments are reported to the IRS using the 1099-NEC and other applicable 1099 series forms when required.
It's one problem if HR doesn't know a contractor has been engaged, but it can become a bigger problem if the way that contractor is working isn't labeled correctly. Misclassifying a worker as an independent contractor when they are, for all other practical purposes, your employee could make the organization liable for back taxes, worker's compensation coverage, unpaid wages and benefits, vacation time and fines and penalties. The business could also be found in violation of various labor, anti-discrimination and other laws and could have to go back and correct inaccurate tax reporting.
In addition, state and local laws can vary when it comes to employees versus independent contractors. Consider the following scenarios:
- Written agreements. New York recently enacted a law requiring businesses in the state to enter into written agreements with most independent contractors or freelancers who provide at least $800 in services.
- New hire reporting. Federal law does not require businesses to report the engagement of independent contractors in the same manner as employees, but at least 20 states do require it. The data that must be reported often varies from state to state.
- Garnishments. State laws around garnishments for independent contractors differ, with some states requiring organizations to comply with child support orders and other creditor garnishments.
What to do if contractors weren't reported to HR
More than 100 different worker classifications tests are currently used at the federal or state level in the U.S., and additional differences exist across laws, scenarios and jurisdictions (potentially even with respect to the same worker). If your organization has engaged contractors without reporting them to HR, it's important to advise HR and your other internal stakeholders as soon as possible. Also consider contacting experienced legal and tax advisors to determine if your business is out of compliance with worker classification, wage garnishment, new hire reporting and other independent contractor laws. Although some damage can't be undone, it's important to mitigate your risk as soon as possible to prevent compounding issues.
Head off compliance problems
Organizations should bring in all relevant stakeholders prior to engaging contractors. When stakeholders are aware of workforce plans, they can help craft a strategy to meet business needs in a compliant manner. By being proactive, you also can mitigate the risk of misclassification and other compliance issues.
Consider taking the following steps when engaging contractors:
- Consult experienced counsel. Work with experienced counsel to ensure you understand which federal, state and local laws apply to your business and to get expert advice on your particular facts and circumstances.
- Document your actions. Document the reasons you made the worker classification decisions you did, create a written agreement with your freelancers setting forth the details of the work arrangement and retain records of ongoing relationships.
- Evaluate processes and procedures. Reevaluate your workforce and your procedures on a regular basis. Just because someone was previously classified as an independent contractor doesn't mean circumstances won't change. Maybe your business model has changed, or the worker provided services to your organization for an extended period. These relationships are dynamic. An initial classification decision can be appropriate at the beginning of the relationship but could change down the road.
- Utilize freelance management technology. Use a freelance management system (FMS) designed specifically for independent contractors to help manage your freelance workforce. A comprehensive, dedicated FMS can help you mitigate risk by automating guardrails to ensure freelancers meet your business requirements. It also can enable the furnishing and filing of IRS Forms 1099-NEC at year-end, collect and store contractor agreements, produce an invoice audit trail for every freelancer transaction, pay on demand (as opposed to a traditional payroll schedule), and withhold garnishments from contractor pay.
Empower HR when engaging contractors
Because of the complicated nature of worker classification rules and various other laws that apply to independent contractors, it's crucial that all relevant stakeholders are consulted when a freelance worker is being engaged. When HR teams set parameters for a business to follow, they can help ensure the business remains in complacent. And in the process, they empower themselves to make the most of the benefits of working with a blended talent model.
