DISCLAIMER: This post gives a general overview of employment conflicts that might arise when freelancing or hiring freelancers. It is not legal advice, and I am not your attorney. If you require information or advice applied to your unique situation, please make an appointment to discuss it with an attorney experienced with the subject matter. Don’t rely solely on what you read on the Internet.
Freelancing has been common in many industries for as long as most of us can remember. The first freelancers in the United States were writers, artists, and musicians. They worked independently for publishers, magazines, and newspapers, often receiving pay by the piece. This gave them the freedom to set their own hours, spend time developing their art, and work wherever they wanted. Henry David Thoreau, Mark Twain, and Charlie Chaplin were all freelancers. The women who did their laundry and cleaned their homes probably were, too.
Independent workers can provide businesses flexible and cost-effective ways to complete projects when the continued demand is unpredictable. They can also support businesses with professional skills and experience it would otherwise take years for the business owner to gain. For example, I function as a freelancer when I am:
- Arbitrating FINRA cases
- Investigating EEO and Title IX complaints
- Mediating workplace disputes
- Providing legal counsel
- Training or teaching continuing education courses
I understand there are workplace risks, whether you are employed or freelancing and employers or workers. In New York, one of the biggest risks is worker misclassification. If a business misclassifies an employee as a freelancer or independent contractor, it could be subject to penalties totaling $12,000.00 or more. One client came to us with a $500,000.00 penalty against a home-based business that averaged 1/10 of that amount each year.
Freelancer or Employee?
It can be difficult to determine whether a freelancer is truly an independent contractor or an employee. However, there are some factors that can help you make the distinction. Independent contractors operate independent businesses and have formed contracts to perform the services they are providing their clients.
When government agencies have to decide, the classification typically hinges on the worker’s:
- Control over performance of the work
- Opportunity for profit or loss from his independent business
- Investment in equipment or materials needed to perform the services
Clients have probably hired employees when they provide training to freelancers so they can perform their work. Truly independent workers are experts in the work and don’t usually need to be told how goals should be met. They might discuss specifications and logistics with their clients, but they generally plan and manage the projects.
Likewise, workers are not truly independent when clients control the freelancers’ hours, absorb all the profits and losses from the freelancers’ work, and provide all the equipment and materials necessary to do the job.
Domestic Employees and Freelancing
Freelancers can put their clients at substantial risk of penalties and lawsuits when they don’t operate as responsible business owners. Over the past 15 or more years, we have resolved many penalties assessed by the State against individuals who hired full-time or live-in:
- Companions for older family members
- Home health aides
- Housekeepers
- Nannies
In most of these cases, the domestic worker claimed to own an independent business and demanded a 1099-NEC form for income tax reporting. Some did not want or could not be classified as employees because they did not have proper authorization to work in the US. They convinced their “clients” to break several laws and left them exposed to huge financial losses.
The Gig Economy and Freelancing
Technology and the gig economy have made the distinctions between employees and independent contractors difficult to identify. No industry is immune.
New York State has been penalizing even microbusinesses and solopreneurs for misclassifying workers. The costs can be in the tens of thousands–even when you’ve made an honest mistake and there was no actual harm. If there was harm, such as a physical injury in the course and scope of the freelancer’s employment, you could be liable for workers’ compensation benefits and penalties for not having it. The corporation you formed to insulate you from such liability will not keep you from being personally liable, if you are an owner or top executive in the business.
When the State Gets Involved
Events that can trigger a Department of Labor or Workers’ Compensation Board inquiry include:
- A freelancer files a claim under the Freelance Isn’t Free Act.
- Your independent contractor begins to work beyond the scope of the original project, quits, and files for unemployment insurance benefits, listing you as an employer
- While going to or from a sales meeting, your outside sales representative is involved in an accident.
- Intending to hire an employee, you register for an employer identification number.
- You incorporate your business or form a limited liability company and run your first payroll, even if you only pay yourself.
We encourage you to consult an attorney with experience defending worker misclassification issues before you hire any individual worker who you are paying under a social security number. You are at especially high risk of having individuals deemed your employees.
Concerned you’ve misclassified employees?
Learn more about our penalty resolution services