By now we all know about the gig economy, but the legality of working with freelancers (aka: independent Contractors) can be tricky for business owners. Although working with independent contractors is by no means a new concept, it is much more common now than it was even 10 years ago. While working with freelancers can be a great way to get specific projects completed for your business, it can open your business to legal problems you may not have considered.
The Difference Between An Employee and An Independent Contractor
There are two main ways to work with someone at your company. You can hire “employees” or contract with “independent contractors.” The Department of Labor outlines distinct legal differences between the two. In the application of the FLSA, an employee is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves. (DOL FACT SHEET 13) Please note that the DOL has been updating the criteria they consider when determining if a worker is an employee or freelancer – read more about that here.
When employees are hired at your company, you typically have control over their work, and how they do their job. Employees may receive benefits like health insurance and paid time off. When an employee is hired, the company will pay payroll taxes on that employee and withhold income tax, social security, and Medicare from their wages paid. They will report their income via a W-2 form.
Independent Contractors are often referred to as freelancers. These people are hired typically for project-based work. Independent contractors typically work for several different businesses and do not typically work full time for one business. If a freelancer does work full time for one employer, it can be a red flag that that person should actually be an employee. Independent contractors are required to pay their own taxes and report income via a 1099 form. The Department of Labor and the IRS have factors that they use to determine whether an employer has hired an independent contractor or employee. DOL Factors focus on the following:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
According to the DOL, other factors are immaterial to the analysis. They include the place where work is performed, the absence of a formal employment agreement, and whether an alleged independent contractor is licensed by state/local government. (DOL FACT SHEET 13)
Before entering into any such relationship, an employer should review their plans with an employment attorney to determine whether the person is correctly classified under the law. Incorrect classifications can lead to back pay, fines, penalties, and interest.
Common Legal Problems From Working With Freelancers
While the DOL has indicated that a contract is not dispositive, it is critical to have an actual written agreement with the contractor for the work to be completed. A contract defines the scope of work, timeline, and the needs of the organization. You should take this as an opportunity to establish deadlines and expectations with your independent contractor to ensure that the job is completed as required. It also makes it clear to all parties that he or she is, in fact, an independent contractor.
The second problem is not understanding the relationship. As an employer, it is incumbent upon the organization to understand that it can not assert significant control of an independent contractor. An independent contractor can work from anywhere, can start at any time and should have their own tools. Additionally, there generally cannot be restrictions on how many employers the contractor can work with at any given time. (In some cases, non-compete agreements are allowed in IC agreements). An employer who attempts to assert significant control over an independent contractor wades into dangerous territory. Additionally, your contractual relationship with an independent contractor should be with a company (i.e. an LLC), not an individual. An independent contractor agreement with an individual can be a red flag that this is a misclassified relationship.
The third problem is not having the contract and relationship reviewed by an attorney. As attorneys, it is our job to ensure that the contract is not only legal, but includes important terms that allow for termination, amendment, or revision of the agreement. These are often overlooked by business owners and can cause them to be unable to end a relationship when they are ready to do so.
The contract should also cover aspects such as: Is there an indemnity agreement? What liability is passed on to the business owner? Whose insurance applies? Without this being established, it can be unclear who is responsible in the case of wrongdoing by the freelancer.
Changing Laws For Freelancers
Laws governing the work of independent contractors are held at the federal and state level. The Department of Labor enforces the Fair Labor Standards Act which governs the employment relationship. However, states often give more rights to employees under their local and state laws. It is imperative to check the local, state and federal laws before hiring employees and/or engaging with independent contractors. For example, recently changing legislation in California has impacted companies that work with freelancers in that state. Although this does not currently impact Louisiana, the trend is that “what happens in California sets the trends on what else happens in the rest of the United States.” Working with an attorney on your contract with a contractor ensures that your business is up to date on changing legislation.
Do you need help writing or reviewing contracts for employees or contractors? Get in touch.
The information contained in this blog is provided for informational purposes only and should not be construed as legal advice. The content and interpretation of the law addressed herein is subject to revision based on the latest developments in the law. Only information provided in attorney/client relationship created by an executed engagement letter should be relied on as legal advice. You should not act or refrain from acting upon any of this information without entering into such a relationship either with TLG or with other legal counsel.