Independent Contractor is a tricky classification, because its definition varies state to state. The traditional employment relationship is defined by salaries or hourly payments, set hours, a hierarchical relationship between the employer and employee and, in most cases, benefits. An independent contractor doesn’t have the same restrictions or duties as an employee, but they sacrifice security and benefits for the added freedom. When a company brings on an independent contractor but places the same restrictions on them, it becomes a case of misclassification. While this is the rule of thumb, it’s important understand your state’s specific classification criteria to avoid legal and financial ramifications.
Why The Fuss?
The cost of hiring a traditional employee is significantly higher than bringing on an independent contractor due to the cost of training and benefits. Misclassification is taken seriously because of the money businesses stand to save by misusing the independent contractor classification to avoid employment laws. However, while there are cases of malicious misclassification, it can happen just as easily by accident. Cases of misclassification are becoming more common - and indeed more publicized - as the gig economy continues to modernize the independent contractor classification, and push the boundaries originally baked into its definition.
Despite it’s recent publicity, the independent contractor classification isn’t a new one. In fact, it predates the early 20th century laws that shaped employment as we know it today. The National Labor Relations Act (NLRA) of 1935 and the Fair Labor Standards Act (FLSA) of 1938 together guaranteed the organization of unions, minimum wage, overtime pay, and disallowed minors from working. Slightly before even this, however, was the creation of the 1099 tax form in 1917. This 1099 tax form is what independent contractors use now, although it has been updated over time.
Freelance work has always existed in hand with employment, because it has always benefited workers and businesses. The use of independent contractors allows more flexibility and the avoidance of fixed costs. The lower hiring costs, coupled with the fairly ambiguous early definition lead to more stringent enforcement of worker classification in the 1970s. In 1978, Congress established “safe harbor” rules for independent contractors under Section 530 of the Revenue Act of 1978. Section 530 acts as a safeguard for businesses, allowing for multiple reasonable bases for classifying a worker as a 1099: judicial precedent, recognized practice in a specific industry, or a previous IRS audit which found the classification proper.
The Independent Contractor classification, when used correctly, can be beneficial to both the worker and the company. However, it still leaves many workers without the social safety net built into employment. Companies at the vanguard of the gig economy are beginning to change that, by offering an Independent Contractor alternative to workers’ compensation, known as Occupational Accident Insurance. As more businesses begin to adopt gig economy replacements for employment benefits, the future of work will not only be flexible, but safe and insured as well.
This guest blog was provided by tilr. tilr is a marketplace for job seekers and companies. tilr’s technology automates the recruitment process by focusing on skills rather than job titles or resumes. When a job seeker's skills match what a company needs, an offer is made. This ensures companies get qualified, pre-vetted candidates, saving them time and money. To learn more about tilr, please visit www.tilr.com.