The nature of work is changing. Gone are the days when employees stayed with one company for decades. Today’s workers tend to change jobs every few years. Many favor working from home over going to an office. And a growing workforce contingent is foregoing an employer-employee relationship in favor of gig work, or freelancing.
Independent workers make up an estimated one-third of the employed population in the United States. Originally associated primarily with low-skilled labor such as delivering food and ride-hail driving, the gig economy is now increasingly attracting skilled and highly skilled workers. Flexibility and freedom are key motivators for independent contractors. Freelancing benefits employers as well, helping them to quickly add talent as needed, with lower overhead and fewer regulations.
But the line between employee and contractor is not always clear. It is also shifting as the state and federal governments attempt to regulate the gig economy. Companies that employ gig workers need to be mindful of changing regulations to avoid legal exposure.
The Evolving Gig Economy
Gig work is increasing, and it is here to stay.
According to Pew Research, 16 percent of Americans say they have earned money at one point through an online gig platform by doing jobs such as driving for a ride-hailing app, making deliveries, or performing household tasks.[1] However, contract work on gig platforms (e.g., Uber, TaskRabbit, Door Dash, and Amazon Flex) only tells part of the gig economy tale.
While the freelancing workforce is highly diverse, skilled freelancers—those in fields like business consulting, computer programming, marketing, and information technology—make up a growing sector of the gig economy. In a 2021 report, the freelancing marketplace Upwork revealed that the most highly educated workers are freelancing more than ever.[2]
Freelancers who provide skilled services increased from 50 percent in 2020 to 53 percent in 2021. Overall, 51 percent of freelancers have postgraduate degrees, while 31 percent have a high school degree or less. Highly skilled and educated freelancers are now strongly represented in fields that include arts and design, marketing, and computers.
Overall, 36 percent of the workforce engages in freelancing, says Upwork. That is the same figure McKinsey arrived at, which equates to fifty-eight million Americans. From 2016 to 2022, the number of Americans identifying as independent workers increased by 9 percent.[3]
The Benefits of Using Freelancers
Freelancers cite career ownership and the ability to work remotely as the top reasons they pursue independent work. Nearly half say that they can earn more freelancing than in a traditional job.
Freelancers may be able to command a higher wage than full-time workers because, in the final tally, they are more affordable. Employers are not required to pay for benefits or payroll taxes for contractors. They do not have to give freelancers paid time off, bonuses, workers’ compensation, and other perks. The only fixed cost for hiring a freelancer is an hourly rate or set project fee.
This lower overhead can prove to be a relative bargain. Hiring freelancers can also offer the following additional benefits:
- the ability to bring in specialized experts for unfilled roles, either on a shorter- or longer-term basis
- assistance during transition periods, such as a seasonal rush or an expansion to a new location
- access to a larger, nonlocal talent pool, especially if the role is remote
- more agile hiring due to fewer delays in sourcing, and less guidance, onboarding, and training from management
- help with urgent, short-term projects that require talent to hit the ground running
- faster deliverables because the freelancer is focused on a single task or project
- a fresh, outside perspective that can break through institutional blind spots
As many companies struggle to fill jobs during a period of unprecedented quitting—known as the “Great Resignation”—gig workers may become more attractive.[4]
But independent workers have drawbacks and are not a cure-all for labor shortages. The initial savings from hiring a gig worker can be offset if there is a cost overrun. In addition, it is not always easy to supervise how productively a freelancer uses their time.
Freelancers are also not as invested in the company as employees. Unlike full-time workers, most freelancers are juggling numerous gigs that compete for their attention.
New Regulations Loom for the Gig Economy
Companies generally have fewer legal obligations to contractors than they do to employees. However, the federal and state governments have begun to crack down on companies that misclassify workers.
Misclassification occurs when a business treats a worker as an independent contractor when they should be treated as an employee. Some companies purposefully misclassify workers to avoid paying taxes, providing benefits, and complying with other wage and hour law requirements. Others are ignorant of who is legally considered a gig worker and who qualifies as an employee.
Generally, whether a worker is an employee or a contractor depends on how much control a company exerts over a worker. But different states have different standards for making this determination.
California adopted the “ABC” test in 2019 for determining a worker’s status.[5] A ballot measure carved out exceptions for gig companies like Uber and Lyft, and it was recently upheld by a California court.[6] Uber and Lyft tried a similar tactic in Massachusetts, another state that has adopted the ABC test, but their efforts were blocked by the courts.[7]
More than thirty states use the ABC test, including Alaska, Connecticut, Illinois, Nevada, New Jersey, and Washington.[8] Experts say that gig companies could bring legal challenges to gig worker classification in some of these states.[9]
Gig economy legal battles are not just happening at the state level. In 2023, the Department of Labor published a new proposed rule that addresses worker classification under the Fair Labor Standards Act (FLSA), which establishes minimum wage, overtime pay, and other federal labor protections.
The rule would rescind the previous test from 2021, which examines two core factors, and replace it with a more complicated six-factor test. If adopted, it will result in more gig workers being classified as employees and would likely make worker misclassification legal claims against businesses more common. In addition to the Labor Department, the National Labor Relations Board[10] and the Federal Trade Commission[11] have also joined the misclassification fight. Federal legislation addressing gig workers has also been introduced.[12]
For the Internal Revenue Service (IRS), when a business decides that a worker is an independent contractor, they must have them fill out a Form W-9 and issue form 1099-MISC to report freelancer payments. Businesses that pay multiple contractors are additionally required to file Form 1096 summarizing the 1099s they prepared.[13]
Discuss Your Gig Worker Legal Questions with a Business Attorney
As the nature of work changes from full-time and long-term employment to part-time and short-term freelancing, regulators are stepping in to prevent gig economy abuses. This rapidly evolving regulatory environment could lead to more fines and lawsuits against businesses that misclassify workers.
Outside of these regulations, businesses that hire freelancers should execute agreements to protect themselves. Contracts should specify terms such as the work to be performed, payment, delivery dates, and dispute resolution. Confidentiality, noncompete, and nonsolicitation clauses may also be necessary. Last but certainly not least, businesses must comply with their obligations to the IRS when hiring freelancers.
Our business attorneys can help you comply with evolving independent contractor rules and regulations, both state and federal, so you can take full advantage of the gig economy. If you intend to hire gig workers, please contact us to ensure that you are legally prepared.
[1] Monica Anderson et al., The State of Gig Work in 2021, Pew Research Ctr. (Dec. 8, 2021), https://www.pewresearch.org/internet/2021/12/08/the-state-of-gig-work-in-2021/.
[2] Dr. Adam Ozimek, Freelance Forward Economist Report, Upwork, https://www.upwork.com/research/freelance-forward-2021 (last visited Mar. 20, 2023).
[3] André Dua et al., Freelance, Side Hustles, and Gigs: Many More Americans Have Become Independent Workers, McKinsey & Co. (Aug. 23, 2022), https://www.mckinsey.com/featured-insights/sustainable-inclusive-growth/future-of-america/freelance-side-hustles-and-gigs-many-more-americans-have-become-independent-workers.
[4] Maury Gittleman, The “Great Resignation” in Perspective, U.S. Bureau Lab. Stats.: Monthly Lab. Rev. (July 2022), https://www.bls.gov/opub/mlr/2022/article/the-great-resignation-in-perspective.htm.
[5] Worker Classification and AB 5: FAQs, Cal. Franchise Tax Bd., https://www.ftb.ca.gov/file/business/industries/worker-classification-and-ab-5-faq.html (Dec. 22, 2022).
[6] Siladitya Ray, Uber and Lyft Don’t Have to Pay Gig Workers Benefits, California Court Rules, Forbes (Mar. 14, 2023), https://www.forbes.com/sites/siladityaray/2023/03/14/uber-and-lyft-can-treat-drivers-as-independent-contractors-california-court-rule/?sh=1b805ad77dec.
[7] Lisa Kashinsky & Eleanor Mueller, Massachusetts Court Shuts Down Gig Work Ballot Measure, Politico (June 15, 2022), https://www.politico.com/news/2022/06/15/massachusetts-court-shuts-down-uber-and-lyft-backed-gig-work-ballot-measure-00039465.
[8] Employee or Contractor? The Complete List of Worker Classification Tests by State, Wrapbook (July 15, 2022), https://www.wrapbook.com/blog/worker-classification-tests-by-state.
[9] Levi Sumagaysay, From Treatment of Gig Works to Tip Transparency, the App-Based Economy Could See Changes in 2022, MarketWatch (Jan. 1, 2022), https://www.marketwatch.com/story/from-treatment-of-gig-workers-to-tip-transparency-the-app-based-economy-could-see-key-changes-in-2022-11640900832.
[10] NLRB Invites Briefs regarding Independent Contractor Standard, Nat’l Lab. Rels. Bd. (Dec. 27, 2021), https://www.nlrb.gov/news-outreach/news-story/nlrb-invites-briefs-regarding-independent-contractor-standard.
[11] FTC to Crack Down on Companies Taking Advantage of Gig Workers, Fed. Trade Comm’n (Sept. 15, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/09/ftc-crack-down-companies-taking-advantage-gig-workers.
[12] Leah Shepherd, Federal Bill Would Offer Some Legal Protections for Gig Workers, SHRM (Aug. 1, 2022), https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/gig-workers-independent-contractors-bill.aspx.
[13] I.R.S. Pub. No. 1096, Annual Summary and Transmittal of U.S. Information Returns (2022), https://www.irs.gov/pub/irs-pdf/f1096.pdf.
