According to a recent earnings report released by Intuit, creator of TurboTax, the gig economy accounts for 34% of the current workforce. That number is expected to rise to 43% by 2020. Granted, Intuit’s numbers encompass every sort of freelancer–from traditionally independent jobs like plumbers and carpenters to tech-age gigs like web designers and copywriters. But the ratio of the latter tech-age workers will only continue to grow as more and more companies turn to independent contractors as a cost-effective measure for securing top talent.
With this hiring strategy comes a major caveat: the Fair Labor Standards Act. Determining whether or not a particular worker qualifies as an employee or independent contractor can prove very costly in the compliance department, and not every scenario is cut and dry. Add to that the fact that most startups are inexperienced with hiring in general, and you can see how fledgling companies can unknowingly endanger their futures by not properly satisfying regulations.
The Department of Labor, however, provides a fact sheet that helps companies comply with the FLSA, but even this resource requires some further extrapolation. Though we are by no means HR legal experts (and you should always consult appropriate legal counsel and accounting services when making these decisions), we’d like to discuss each of the six criteria outlined in the DOL’s fact sheet in order to help you begin to understand the legal differences between employee and independent contractor.
- “The extent to which the work performed is an integral part of the employer’s business.”
- A worker’s tasks and responsibilities are integral to the business if they’re part of the production process or a core service that the business offers.
Employee Example: A graphic designer is in charge of creating all the images for a marketing company’s ad campaigns.
Independent Contractor Example: A graphic designer creates blog post images for a car dealership’s monthly blog.
- “Whether the worker’s managerial skills affect his or her opportunity for profit and loss.”
- Is the worker in charge of hiring and/or supervising employees in any way? If so, does the worker’s abilities to supervise affect his or her pay in any way?
Employee: Casey, a graphic designer, must hire a few graphic designers to whom she’ll delegate half of her workload. If the design team as a whole meets its quarterly goals, Casey will get a bonus.
Independent Contractor: John, a tech journalist for a local startup, must hire another tech journalist to help him write weekly articles for the startup. John and the person he hires will perform the same exact work and neither will assume authority over each other.
- “The relative investments in facilities and equipment by the worker and the employer.”
- To be considered an independent contractor, a worker must make an investment in his/her own responsibilities that is comparable to that of the employer unto itself. Investing in personal equipment alone doesn’t necessarily qualify as independent contracting, as this equipment might just be the basic tools required to perform a responsibility.
Employee: Jamaal, a photographer, always upgrades to the latest iPhone, because that allows him to take quality candid photos for his company’s social media channels.
Independent Contractor: Amanda, a writer, decides to buy a tripod for her iPad so that she can take photos to supplement the blog posts she writes for a local startup.
- “The worker’s skill and initiative.”
- This is all about open market competition. Is the worker financially dependent upon one company, or is he or she free to work for multiple companies at once?
Employee: Joel, a copywriter, works for a marketing company that competes for jobs with local businesses
Independent Contractor: Trina, a programmer, is the go-to website builder for multiple local businesses.
- “The permanency of the worker’s relationship with the employer.”
- Here’s one of the gray areas on the list. An independent contractor may be working indefinitely for a business, while an employee may only be hired seasonally.
Employee: Ethan performs clerical work via temporary placement through staffing agencies.
Independent Contractor: Larisha has agreed to work indefinitely at ten hours per week writing social media posts for a pediatrician practice.
- “The nature and degree of control by the employer.”
- This is by far the biggest gray area. Who determines pay and work hours? Who determines how the work is done? How much freedom does the worker have in terms of pace and environment at which the work is done? Is the worker free to work for other companies? Can the worker hire a helper?
Employee: Steve works remotely as a marketing coordinator for a software developer.
Independent Contractor: Shana must come into her company’s office in order to interview the pertinent people when writing the press releases she’s been hired to write.
Always Consult Your Legal Team
In the end, the type of workforce a startup plans to hire heavily influences how the business will be set up legally (i.e., LLC vs. S corporation vs. C corporation). As we mentioned above, always consult appropriate legal and accounting advice before making these decisions. And here, at tekMountain, one of the nation’s emerging innovation and entrepreneurial centers, we enjoy a vast collaborative network of legal and financial experts that can help businesses of any size choose the best route for hiring and maintaining a workforce.
Contact tekMountain today to learn more about how your company can benefit from hiring a variety of worker statuses.