The employment ecosystem has changed radically in a number of years, with more independent contractors working than ever before. The freelance economy can benefit individuals and businesses alike. Freelancers enjoy unparalleled flexibility and control over their careers. Companies have the opportunity to hire top talent from all over the globe without the overhead costs or long-term commitment associated with onboarding a full-time employee. As freelancing transforms the way we work, it also brings with it new questions about traditional processes—ones related to compliance and your company’s daily operations.
What is compliance?
To operate legally, businesses must follow the relevant laws and regulations governing them. Compliance refers to how well a company meets those legal obligations. Obtaining a business license and paying taxes are common examples of compliance. Government authorities at every level set laws, but it’s also important to be aware of other factors. Where your business is based, how it’s structured, what industry it’s in—these varying aspects come with varying requirements.
What does compliance look like on the state, federal, and international level?
From the local to international levels, government authorities and industry-specific organizations each have various regulations in place to make sure independent contractors are classified correctly, that their worker rights are protected, and that the right taxes are collected. That means you need to know a number of different rules to stay in compliance at every level. It also means that the rules can sometimes get confusing.
One of the most important considerations? Classification. Are your workers employees or independent contractors?
The DOL uses the ABC Test, only considering an individual an independent contractor if all three factors are met:
- Absence of control - the individual is free from control and direction in connection with performance of the service, both under the work contract and in fact. In other words: the hiring company may not direct on how to perform the work.
- Unusual business - the individual performs service outside the usual course of your business.
- Customary engagement - the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the service they’re performing for your business.
For employment tax purposes, the Internal Revenue Service (IRS) uses a similar common law test examining the degree and control of independence:
- Behavioral control: Does the company control or have the right to control what the worker does and how the worker does their job?
- Financial control: Does the company control business aspects of the worker’s job? (ie. How they’re paid, whether they’re reimbursed for expenses, and whether they provide their own tools and supplies.)
- Type of relationship: Are there written contracts or benefits typically offered to employees like insurance, paid vacation, or pension plans? Will the relationship continue on a long-term basis? Is the worker performing a service that’s a key aspect of usual business?
As the freelance economy has expanded in recent years, the question has become more complicated for state and federal governments. As presidential administrations have changed, so have the DOL’s guidelines for worker classifications. Most states use either the ABC test or the common law test, but some states, like California have their own test variations and laws to classify workers. Local governments sometimes have their own laws too—New York City adopted the Freelance Isn’t Free Act in 2017 to enhance protections for freelancers. And if you have an international team, then you not only have to be aware of other countries’ compliance laws, but also have to submit the right paperwork for tax filing purposes.
How do you keep track of compliance while growing your business?
As your business grows, your compliance responsibilities regarding your workers grow too. With all of the fluctuation in various standards and legislation, remaining compliant can feel tedious and daunting—but it’s always important. And there are a few basic steps you can take to ensure you comply with all of the rules:
- Stay up to date on changing laws - Approach compliance like an ongoing process. Identify which regulations apply to your business, understand the implications, and monitor for any policy changes. Preparing will keep you one step ahead.
- Correctly classify your hires - As the freelance market expands, it invites increased scrutiny on worker classification. That also invites increased risk of audits for misclassification. To avoid fines and penalties from government organizations, ensure that all of your hires get classified correctly, every time.
- Use formal contracts - Increased flexibility might be a primary benefit of working with freelancers—but just because you want a job done quickly doesn’t mean cutting corners in the hiring process. Align your contracts with any relevant compliance laws and use them for all independent contractors.
- Pay workers on time - Issues of non-payment or delayed payment have long been one of the most critical pain points between independent contractors and clients. Many operators use software or payment schedules designed for full-time employees that make it easy to issue inaccurate payments for contractors—or miss them completely. Centralizing your payment info with a freelancer management system ensures that you can track projects and approve payments seamlessly.
Take the stress out of compliance with Rise
With multiple levels of government regulations and ever-changing legislation, following compliance laws can quickly become a source of stress and overwhelm. But with the right tools, you can keep your business compliant—and do so with ease.
That’s why Rise’s Pay Platform has a built-in compliance layer for independent contractor engagements. Onboard talent. Create customized pay schedules (fixed, hourly, one-offs) with frequencies to fit your needs. Fund your entire payroll on time, every time. And to simplify your payment processes, Rise acts as a third party agent. We handle the paperwork so you don’t have to. Centralize everything: contingent workforce, payments, compliance, and contracts.
We know innovative work needs tools made for the future, not built from the past. Our all-in-one hub is designed with the freelance economy in mind. And it’s all waiting for you on Rise.