For many businesses, the remote working landscape, accelerated by COVID-19, has made it easier for HR to hire from anywhere, leveraging skills and talent in new locations around the globe. The thinking is clear. By relying on freelance contracts and gig economy operating models, organizations can skip the costs of incorporating locally where their workers are living. They will also save money on the costs of managing an employee, which the Boston Business Journal estimates to be between 1.25 and 1.4 on top of base salary.
Unfortunately, it’s not as simple as it sounds. Building up a global workforce of freelancers might feel like a smart alternative to the costs of setting up entities in numerous locations for one or two candidates, but it can actually cause more problems than it solves. Let’s dive into the areas of concern.
A recent study by Deloitte showed the reliance that organizations are placing on what it calls “alternative labor”, which includes freelancers, contractors and gig workers.
Understanding the Depth of the Legal Issues Involved
However, worker misclassification is a complex issue. In the US alone, the Federal Government, State governments, and various governmental agencies have different tests to decide whether a worker is an employee or a freelancer. You may be compliant with one standard, and liable by another.
Common classification requirements for freelancers include:
- Short term working arrangements
- Easily definable tasks that are standalone
- Full control over their own terms, such as hours, location or rates
- Multiple clients and working arrangements
There can also be legal issues within your day to day work when utilizing a freelance or contractor model. One example is intellectual property. When building out a contract for the gig economy, it can be easy to forget important clauses such as non-disclosure or retained rights. Under standard copyright law, rights to any content are held by the person that creates them, so this needs to be waived in a written contract before the work can be handed over to your organization and considered your own.
Even when a contract is worded accurately, it can be hard to enforce clauses such as non-compete or non-disclosure with regards to freelancers. In fact, the very act of asking a freelancer to sign a non-compete may be enough to convince compliance regulators that this worker is in fact more of an employee than a contractor.
Translating this into Dollars and Sense
Of course, legal ramifications come with a monetary value attached. Under Federal and State law, if you’re found to have misclassified workers, you may need to pay 100% of the employment tax back to the government, as well as federal income taxes, social security taxes, and 6.2% of unemployment tax. Under the Federal Fair Labor Standards Act (FLSA), employers can be held liable for failing to pay for overtime, or for sidestepping minimum wage requirements through using freelancers.
In severe cases of misclassification, organizations might find themselves involved in a class action suit by their workers, such as this high-profile example where FedEx had to pay out $228 million after attempting to save on labor costs by misclassifying its drivers.
Added financial risk comes from the freelancer model, too. As the control is in the hands of the contractor, it can be tough to adequately forecast ahead of time how much your employment costs will be. There’s also an element of added expense in managing freelancers, including varied pay schedules, currencies, and costs.
Do Your Freelancers Feel Motivated to Work for You?
It’s important to take some time to consider the social risks to utilizing a freelance model for employment as well. Most studies show that a freelancer’s job satisfaction is closely tied to how much money they are making. In other words, they aren’t in it for the love of the company. This can have a direct impact on their loyalty, morale and connection to your brand. For many growth companies expanding globally building a company DNA is key, which is likely to be hampered by making use of freelancers.
Even if you put effort into building a relationship, freelancers are likely to be working within the same industry with competitors or industry partners. In this situation, confidentiality can be an issue, even if a freelancer has signed an NDA. After all, how can you ensure that the knowledge they’re learning from working with you doesn’t help them add value elsewhere, even with the best of intentions?
There Must Be a Better Way!
If you’re starting to think that it might be better to just employ workers in the country you’re headquartered in, you’re not alone. However, there is a third option, and it’s not one that everyone knows about. If creating an entity is too costly in a new location for just a few specific workers, but you know that onboarding them as freelancers would put you at risk of misclassification – you might find that EOR is a perfect choice.
EOR, or Employer of Record, is a solution built for this exact purpose. As an employer, you create a separate contract with the EOR, and they then outsource the employment of this staff member to a local partner in the location where they are based. The partner takes over on the practical side, handling tax, compliance, operational overhead, and benefits, while the employee will have the same experience as they would on payroll.
An estimated 56% of companies allow some form of remote work, with 16% working without an office option available at all. There’s no doubt that the distance economy is well and truly here, and there are a lot of benefits on both sides, including reduced operating costs and overheads for the organization, and more flexibility for the staff. However, leveraging these benefits means tackling liability head on, avoiding shortcuts, and finding a model that doesn’t end up coming back to bite you in the form of compliance risk, operational cost, and legal headache.
Does it sound like EOR might be the working model you’ve been looking for? Let’s discuss your options.