An estimated 75 million Americans are classified as independent contractors, or “freelancers.” Many of them are misclassified employees.
Here’s how to hire them legally in New York State (NYS) and avoid penalties for failing to:
- Provide disability, Paid Family Leave, workers compensation, and unemployment insurance (UI) benefits
- Withhold payroll taxes that pay for various benefits, including UI
- Pay overtime wages or for Safe and Sick Leave
Finding Quality Freelancers
You can find freelancers through platforms, referrals, or industry-specific networks. When vetting freelancers, look for professionalism and entrepreneurial traits. A genuine freelancer will have a portfolio of clients and take the lead on projects. You will not need to train them, nor should you, since they are supposedly small business owners with specialized knowledge beyond yours. From your first interaction, they should exhibit that they can:
- Effectively communicate project details and strategy
- Manage the project autonomously
- Deliver the customized results you want
Avoid freelancers who require extensive training or constant supervision. They are typically better in employment relationships.
Ensuring the Freelancers Understand Their Classification
Many freelancers think of themselves as temporary employees. Some will even use the cringeworthy label “1099 employee.” It’s cringeworthy because there is no such thing. A worker is either a 1099 contractor or a W-2 employee. For years, people have tried to create a hybrid classification that allows employees the freedom to work when and how they want while helping employers avoid the costs of the benefits listed above, but there is no such third class of worker.
Is the worker really independent?
In NYS, a true freelancer is:
- A self-employed individual
- An independent contractor
- An independent business owner with multiple contracts (or potential for them) to provide their services
What steps have they taken to establish independence?
These workers take steps to distinguish themselves from employees and often have:
- Websites or online freelancer profiles on business-to-business matching sites (e.g., Fivrr, Freelancer.com, Upwork)
- Social media accounts for business purposes
- Business cards or other marketing materials
- Tax identification numbers that are not their social security numbers
- Processes for estimating the costs of their work, how the work will be done, where it will be done, and when
Have both of you considered all the applicable laws?
If they don’t have these things, there is a good chance that you are hiring employees. You need to be certain you are complying with all laws, rules, and regulations from the:
- Internal Revenue Service (IRS)
- US Department of Labor (DOL)
- NYS DOL and Workers Compensation Board (WCB)
- Equal Employment Opportunity Commission (EEOC)
- NYS Division of Human Rights
- New York City (NYC) Commission on Human Rights
- National Labor Relations Board and
- Federal Trade Commission (due to the pending ban on non-competition clauses)
If you are hiring workers outside of NYS, we recommend you consult employment law counsel in each state where you are contracting with freelancers, or where they are working. We recognize this can be challenging with remote workers and digital nomads, but the penalties for getting this wrong can personally bankrupt you, not just your small business.
Handing Off Project Management
Too many publications, both in print and online, give tips for onboarding and integrating freelancers. This only adds to the confusion about the distinctions between freelancers and employees. It can also lead to worker misclassification penalties. You wouldn’t give your home plumbing contractor an employee handbook, train her, or conduct formal reviews of her work.
The same is true for your freelancers. They are supposed to be the experts with respect to their services. Step back, and let them do the work–with their tools and processes. Trust them to keep you informed on their progress. If there is a problem that can’t be resolved through discussion and negotiation, your remedy is breach of contract, not discipline or employee termination.
For more insights, here’s a Recruiter.com article Nance contributed to years ago (before we could use the Third Ear Conflict Resolution trade name) and that is still relevant today.