When it comes to freelancer compliance regulations, there is a lot to keep up with. Learn about the five critical aspects of freelancer compliance HR pros should know to help decrease organizational risk, writes Shahar Erez, CEO of Stoke Talent.
When you look at today’s employment landscape, not much looks the same as it did just a couple years ago. For starters, you have probably had to make some massive pivots in terms of your workforce composition, thanks to the curveballs the COVID-19 pandemic has thrown your way. In addition, your company is probably increasingly relying on the gig workers, freelancers, independent contractors, and consultants to get things done.
Freelancer Compliance Regulations: Why Companies Need To Keep Up With Them?
It’s not just your company. IOpens a new window n 2020, 59 million Americans considered themselves freelancersOpens a new window ; that’s 36% of the U.S. workforce. That number is expected to surpass 90 million by 202Opens a new window 5. At this rate, freelancers will account for more than 50% of the workforce by 2027.
Despite the obvious benefits of utilizing freelancers — like increased flexibility, the ability to hire subject matter experts for targeted projects, and reduced overhead costs, for a growing number of organizations — freelancer compliance regulations have become a blind spot for finance, legal and HR teams.
Why? In many instances, these non-payroll workers are hired and managed ‘under the radarOpens a new window ‘ by departmental leaders without getting properly onboarded through the HR and IT systems, posing potential risks to the organization.
The truth is that it is easier for hiring managers to find a talent, hand them a specific project and ask finance to pay their invoice upon completion, rather than going through the legal, finance and HR departments. However, it is becoming increasingly important to do it the right way as companies’ risk exposure rises as governments and tax authorities are focusing on the growing freelance economy.
This is why it’s critical for HR leaders to take the time to learn about current regulations, and how they should be handled.
Below are five critical aspects of freelancer compliance regulations HR pros should know to help decrease organizational risk.
1. Always have a contract
You’d be surprised how many hiring managers are working with freelancers without a contract, because it’s an urgent job, a small project or just because they know the freelancer and do not want to waste time with formalities.
However, a growing number of countries around the world are putting into place policies that require contracts to be established between freelancers and their clients.
For example, New York City’s “Freelance Isn’t Free†actOpens a new window mandates that all freelance agreements over $800 require a written contract, prompt payment for services and protection from retaliation. Meanwhile, similar measures have been established in the UK, Australia and even the PhilippinesOpens a new window , making contract use mandatory between freelancers and their clients.
So, what does this mean for your business? For starters, to stay aligned with freelancer compliance regulations around contracts, you’ll need to:
- Ensure contract templates are compliant with current laws in your region
- Determine which types of professionals within the law’s requirements
- Ensure the payment mechanisms you have in place are set up to pay your freelancers in a timely manner
- Educate your recruiters, HR department and hiring managers regarding the current laws
In short, you’re going to want to make water-tight contracts an aspect of your freelancer hiring process.
2. Timely payments should become a priority
Payment is a big bone of contention between today’s freelancers and organizations, as many organizations have historically exploited the lack of enforcement around timely freelancer payment.
In fact, a full 44% of freelancers have experienced issues getting on-time payments, according to the Freelancers Union as reported by Fast Company.Opens a new window
This is perhaps why one of the main provisions of legislation like New York City’sOpens a new window “Freelancing Isn’t Free†is quick and timely payment.
But again, too many organizations settle for haphazardly managing this process through spreadsheets and emails, which can lead to late, inaccurate or missed payments. The best way to remedy this is to centralize and automate your freelancer payment information, which can easily be achieved through a freelancer management system (FMS)Opens a new window . This allows you to track and approve project milestones and automatically pay freelancers once their job is complete quickly and easily.
3. Intellectual property ownership needs to be specified in a contract
One of the most common mistakes I see companies make is assuming they own the intellectual property (IP) of all the work done by the freelancers they hire.
Unfortunately, it’s not that simple.
“A freelancer will, as a starting point, own any IP they create,†point out the professionals at Sparqa LegalOpens a new window . “This is the case even where you specifically pay a freelancer to create something for you.â€
If intellectual property is important to your company, you need to know what to look out for when assessing your relationship with independent contractors.
The good news? It is possible to clearly state to whom IP ownership will belong once work is created and submitted. But remember, this means that contracts must be a part of your regular freelancer onboarding procedures. If there’s no contract — or if the IP provisions of the contract are unclear — this puts the freelancer in a strong position to win any potential suits that crop up in relation to intellectual property.
Therefore, when drafting up agreements with your independent contractors, you should make sure there is a clearly outlined provision that transfers IP ownership rights to your organization.
4. Ensure your independent contractors are properly classified
With a booming freelance economy comes increased regulation — and consequently, more attention from the U.S. legal system to the point that in many states including California, New York, New Jersey, Illinois and more — independent contractor classification has been put under a microscope. For companies, this means the risks of being audited for worker misclassification have increased.
The problem? The determination of how to classify workers has been an ongoing battle on the federal, state level and even the IRS. Different classification tests are used based on the freelancer’s location, and legal teams are finding it hard to keep up. This means that in companies that are not properly documenting and managing their freelance workforce, there’s a higher likelihood misclassification will happen. If the IRS feels you intentionally misclassified an employee, you could incur hefty financial penalties — or even a year in jail — and jeopardize your company’s reputation, so it’s critical to define and implement a process that ensures proper classification.
5. You must adhere to General Data Protection Regulation with freelancers
When it was implemented in 2018, the General Data Protection Regulation (GDPR) sent many organizations scrambling to establish frameworks to safeguard customer and employee data. While GDPR rules are, at this point, clearly defined for full-time employees and HR policies are typically architected with that in mind, many organizations still don’t know how to approach GDPR when it comes to freelancer compliance regulations.
The truth is that freelancer data — including data collected during the hiring and onboarding process and beyond — needs to be treated with the same level of protection as customer data. You should never store it in a spreadsheet, but instead store it in a secure system that’s encrypted to decrease the risk that it’ll be copied, printed out, shared or breached in any other way.
I recommend using a single, compliant freelancer management system (FMS) to store and manage all your freelancer-related data. This can serve as a protected hub for all freelancer data and makes it easier to share data with authorized individuals when needed, then remove that access once they are finished working with your organization.
The Bottom Line
 When it comes to freelancer compliance regulations, there is a lot to keep up with — and the buck ultimately stops with you in terms of how well your organization does (or doesn’t) adhere to them. However, implementing solutions like a freelance management system, in addition to having an awareness of these five crucial — and often overlooked — aspects of freelancer compliance, will put you ahead of the game, and help decrease your exposure to risk and could save you thousands of dollars.