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Contractor Or Employee? How To Stay On The Right Side Of The Law In The Freelance Economy

Last week, we caught up with Patricia Bramhall, founder of Tydak Consulting Services, a technology services company, who shared her thoughts on the freelance economy from her firm’s point of view.   

PatPhoto2Pat is a recognized thought leader, speaker, and expert in IT Service Management (ITSM) and is certified in Information Technology Implementation Library (ITIL).

This week, Pat and I dive deeper into on-demand work from the perspective of the employer.

Now that so many freelancer platforms have sprung up, many employers think they can hop on the on-demand bandwagon.  Not so fast, though!   

In case you’re not entirely familiar with what makes someone an “employee” (under the eyes of the law), you should definitely consult your state’s guidelines.  EDDIn California, you can find the “Employment Determination Guide” here: Or, if you feel like relaxing this evening with some juicy IRS reading material, check this out:

For reference, Pat and Tydak’s nine-page consultants’ contract has a host of provisions for the freelancer, including:

  • using their own office equipment
  • setting their own hours
  • using their own car (and providing adequate auto insurance)
  • not working full-time for a single company, on an ongoing basis, for longer than one calendar year
  • and much more.  

You should also be aware of reporting requirements.  California’s Employment Development Department (EDD) requires that if you hire an independent contractor, who is an individual or sole proprietor—and pay that person more than $600 total—you must report doing so within 20 days.  More on that here:

ContractThe EDD has been making small businesses in California shudder in recent years.  Indeed, the contractor vs. employee witch hunt is no longer reserved just for “big companies.”  It’s a smart move to protect yourself on both sides with a legal contract that clarifies the consultant/freelancer/contractor relationship you are both getting into.  Be aware, though, that just because you’ve called someone a freelancer, that doesn’t necessarily mean that they are–even if the freelancer agrees to the verbiage, too.

A friend of mine who has been working freelance for years relayed a story whereby a business asked her to sign a contractor agreement, and then proceeded to tell her that she must be on-site from 9:00 to 5:00…thereby immediately negating her status as a contractor!  

The bottom line is that not properly classifying an on-demand worker as an employee often results in fines, penalties, and back taxes.  A July 2011  newsletter of the American Bar Association stated that “a federal study contends that an estimated 3.4 million employees are classified as independent contractors when they should be reported as employees.”  

I’m sure that number has skyrocketed in the past five years…and these waters will only become muddier.  This seems like a negative note to end on, but rest assured this is not the only post on this particular topic.  Be sure to check out last week’s overview of the freelance economy from the employer’s perspective and next week’s post on best practices for the new on-demand workforce.

So, readers, how does all of this sit with you–be you a freelancer or employer?  What do you wish you had known earlier?  What’s still confusing?  Post your comments below!

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