Here are some must-know legal, ethical, and practical considerations that the gig economy employers have to know about to establish a complaint business-contractor relationship.
If you’re an employer in the gig economy, you must know just how twisty and complicated it can be to not just onboard an independent contractor but to retain their services in a compliant manner for the long haul. The good news is that you’re not alone and there are a variety of practices to help ease the process. Many businesses have had issues with their set of independent contractors for a long time.
While the post-contract business arrangement is just one side of the coin, the pre-onboarding considerations, where the employer has to quickly rundown on the various risks of independent contractors and the compliance processes successive to the brainstorming is, well, very tedious.
Employers usually focus on just onboarding the freelancers to get the work started; overlooking the legal trouble they could be slumped into if the contractor is not happy with working for/with you.
The following legal and practical considerations will allow you to review your internal protocols prior to hiring an independent contractor and show you various ways to handle certain complex scenarios, where regulatory implications are not just optional but critical.
So, let’s get to it.
Classifying Your Need AND The Resource: Employee or Independent Contractor?
It’s not just the tax obligations of hiring an independent contractor that lure a lot of employers initially, but it’s also the no-strings-attached approach that freelancers offer. It’s a business-to-business arrangement that works for employers that do not want to deal with the tax and legal obligations of dealing with a full-time employee.
However, some businesses may rush into the idea but expect the independent contractors to replicate the services of a full-time employee and that’s where the conflict arises.
Try to break down your objectives into feasible goals for the short term and understand if your business model would function seamlessly with a full-time employee or an independent contractor.
The following guide will help you obtain clarity on the kind of resource your business would need and the comprehensive tax obligations for both scenarios in detail.
Consider the tax obligations before hiring any resource. It is essential for businesses to understand that both an employee and an independent contractor come with their own set of regulatory importance from a federal perspective. And while a full-time employee might seem like a safer bet, loopholes to misclassify employees as independent contractors could cost your business plenty.
Tax Withholding: Best Practices To Consider
The IRS specifies that employers must withhold a standard percentage of the payments due to the contractor and report the same in the information returns. The legal name and TIN must be specified in the W-9 form and the 1099 forms.
It is mandatory for employers to withhold federal taxes from the employee compensations and report the same on the information returns (and send a copy of Form W-2.
For this reason, the IRS advises against misclassifying the employees as independent contractors, and temporary contractors as employees.
Imagine if, in the latter’s case, neither of the parties withhold the payments due and the IRS takes notice; IRS audits, penalties, and the whole non-compliance ordeal will swing open at full speed. Learn more
Workers’ Compensations
Even though the specifications of the procedures may vary, the laws remain the same across a majority of the states. Employers must provide medical and health coverage to their employees. This must be determined prior to employee onboarding.
Often employees choose independent contractors on this clause to escape the costs of providing health coverage to employees, proceeding to misclassify the employee as an independent contractor.
However, misclassifying an employee as an independent contractor can be costlier and even permanently jeopardize the reputation and goodwill that a business builds along.
Penalties for not providing health insurance to employees can be hefty and it’s best not to test those waters.
If you’re planning to hire an employee, it would be useful to verify the extent to which the coverage would help your employee during uneventful scenarios.
Workers’ Safety
This includes regulating the number of hours an employee is clocking in for their shift and the employer compensating the employee for the hours worked. The Fair Labor Standards Act and other state laws are stern on this practice.
It is essential to provide sanitized, clean, and safe working conditions for employees to perform the work. But the comprehensiveness of the safe working conditions does not end here. It also includes establishing an environment that is physically and mentally compliant for employees to perform the work.
The ignorance of such ethical practice could lead to hefty financial penalties, civil liabilities, operational prohibitions, and even imprisonment.
Anti Harassment Training
Similar to its function on safety standards, employers are required to provide anti-harassment training to their employees to establish a strict and professional working environment for everyone.
Employers can even provide policy documents, handbooks, and even offer certificates for completion of the training modules to encourage the employees to attend all sessions of the training. This certificate can later be even used as proof of training by the employer.
Employers must make this training accessible to all employees in every way feasible so employees can refer to the policy and the training as needed and check if any of the themes are applicable to them.
The above rules also apply to temporary staff and independent contractors who work with the employer for a short term.
Indemnification
Indemnification laws apply to both the employer and the employee. However, a fair and comprehensive agreement between both parties makes way for a compliant business arrangement.
For example, determine if a third-party verifier is necessary to validate the credibility and legal status of the temporary staff. Layout the legal process or the exit strategy should both parties deem the business arrangement to be redundant or not relative in the future.
Background checks, criminal history screening, drug tests, and more can be conducted by the employee and/or third parties. Does the employee consent to such tests and if so, to what extent will these checks affect their profile or credit history? It is useful to figure out the details prior to onboarding temporary workers or independent contractors.
Bonus Point: Business Confidentiality & Nondisclosure
Trade secrets and business confidentiality are of primary concern for employers who work with external resources on a daily basis. Some employers require the employees to sign a nondisclosure agreement or trade secret confidentiality agreement even for just a day’s work.
Not figuring out these details sooner and overlooking the risks could end up hurting the employer’s reputation and business.
Determine the common point of consent and have both parties (the employer and the contractor/temporary staff) sign the written documents and even record the event of document signature as evidence to such an agreement.
While the documentation of proof of agreement may seem complex or unnecessary now but it will come in handy in tricky situations and legal scenarios where evidence is the key to winning the case fairly.
Useful Reads:
- 20 Tax Tips For Gig Economy Employers To Stay Compliant
- How To Get Your Small Business Ready For 1099 Tax Season?
- States Now Require The Gig Economy Companies To Report With Form 1099-K
- Gig Economy Companies Now Process 1099s More Efficiently This Tax Season With Tax1099
- Employee Misclassification: How It’s Costing Gig Economy Companies Millions Of Dollars In Penalties
- Tax Guide For Small Business Owners – Which Form Should You Send To Employees And Contractors?