Managing Independent Contractors in the New Gig Economy

According to Intuit, which owns TurboTax, there are approximately 4 million gig workers in the US today, but that number is expected to nearly double to 7.7 million by 2020.  This data is from an ongoing research project between Intuit and Emergent Research.  (The US Bureau of Labor Statistics has recently conducted its own survey of alternative employment arrangements but their data will not be out until 2018.)  Many of these independent contractors are working gigs in their spare time and on weekends.  This allows them to supplement their income while doing something that they oftentimes enjoy more than their 9-5.

According to nation199.com, independent contractors can be segmented into free agents that work in the gig economy fulltime; casual earners that augment their primary income with freelance work; reluctant—which have been laid off or cannot obtain regular full-time employment for some reason; and the financially strapped folks that are augmenting their primary income—not by choice but by necessity.

These free agents, independent contractors, freelancers (whatever you want to call them) are performing many jobs that were previously only part of the standard full-time employment realm.  Some examples include web designers, virtual assistants, programmers, management and marketing consultants, accounting, construction trades, and drivers for the likes of Uber and Lyft.

With all of these options, you’ll likely want to hire an independent contractor soon, if you haven’t already.  There are many pros and cons related to working with this type of contractor:

PROS

  1. It’s less expensive to hire someone on a temporary basis to perform a certain task than to hire an actual employee and pay the full-time salary, benefits, and taxes that are required.
  2. There is no long-term commitment in the gig economy. The freelancer is working on a specific project only.  If you have another project when this one finishes, then you can easily hire them again.  If you don’t, you don’t have to lay them off and do a bunch of paperwork.  You just let them know and they go on their way.
  3. You can purchase specialized knowledge that you would otherwise not be able to afford. Subject matter experts (SME) aren’t free.  And rightfully so.  They have experience or training that not everyone else has, and they have every right to charge for that expertise.  Hiring an SME full-time could drain your piggy bank quickly.  Then you also have to keep them busy to make that investment pay off.
  4. Hiring an independent contractor in this global marketplace using online tools allows you to capitalize on global competition to hire someone that has the skills that you need even if they wouldn’t ever want to live within your service area. Many of the jobs in the gig economy can be performed totally online and without ever meeting your contractor.
  5. An expert in their field, they will probably not need a lot of training which, as we all know, is expensive and time-consuming.
  6. If you structure your agreement correctly, you can also reduce your liability by hiring an independent contractor. Your commercial insurance policy often covers work performed by contractors but not work performed by your own forces.

 

Of course, with all of these positive factors you have to expect some negatives as well to balance things out.  Otherwise there wouldn’t be any discussion—everyone would be an independent contractor.

CONS

  1. When you hire an independent contractor, you lose a lot of control over that individual and how and when they complete their work. Depending on the type of work being outsourced, this could be a real deal-breaker.  Many customer service jobs, for instance, must be completed in a certain location and during a certain timeframe.  These are not jobs that can be outsourced.
  2. One of the hallmarks that the IRS uses to determine if the individual is an independent contractor or an employee is whether that person is free to work for your competition and on other projects. This can be a real risk for your organization when it comes to proprietary information and trade secrets.  Once again, a good agreement can help mitigate this risk but it won’t go away completely.
  3. With the freelancer free to work on other projects and for other companies, you can’t dictate that your project comes first. You have to have a discussion with your contractor and work with them on the schedule instead of just forcing your agenda on them.
  4. The benefit of no long-term commitment has a corollary in that the independent contractor isn’t committed to you either. If a better deal comes along, they are likely to move on and not be available when you need them again.
  5. The outsourced contractor shouldn’t need a lot of training in the actual field that they are working in, but they will need training specific to how your organization works. And this training will have to be repeated for every independent contractor that you hire.

 

Now that you understand the risks and rewards of hiring a freelancer, what are the big things to be aware of if you decide to proceed?

PITFALLS

  1. Not having a written contract. I always like to say that “Good contracts make good friends.”  As long as everyone is on the same page with the services to be delivered and as long as those services are delivered to everyone’s expectations, a contract is unnecessary.  But as soon as someone’s expectations are not being met or someone tries to take advantage of the situation, THEN a contract is imperative.  A contract should include:
    1. Written scope of work
    2. Timeline for completion
    3. Total compensation
    4. Payment schedule
    5. Specific exclusions
    6. Job-specific conditions
    7. Notice that this is an independent contractor and not an employee

  1. Treating the independent contractor like an employee. The IRS is very critical on these matters and their default position is that everyone that works for you is an employee unless you can prove differently.  Some specific things to consider are:
    1. Providing tools and supplies. You provide these for employees. Independent contractors supply them for themselves.
    2. Paying by the hour. Employees are paid by the hour. Independent contractors are typically paid by the completed project.
    3. Reimbursing expenses. Independent contractors should include these in the negotiated cost.
    4. Requiring set hours. As stated above, independent contractors decide for themselves when to work on your project to get it completed by the due date.
    5. This is never good but it is especially bad if you’ve hired a contractor to provide certain service. Let them manage themselves and get out of their way.

 

The process that you go through when hiring an independent contractor, and managing their work, has a direct and meaningful impact on the results.

PROCESS

  1. Clearly define what you need in your own head before you even begin looking for someone that can perform the job. It doesn’t do any good for you to hire someone that can’t perform the task that you really need.
  2. Figure out what you are willing to pay for this service. Do some internet research.  Think about what you would have to pay for an employee to perform that same work.  Do the math to come to a reasonable rate.
  3. Post that ad or, even better, talk to your network and find a recommendation. Ideally, you will go through an interview process to find that best fit for you and your organization.  Other places to find independent contractors are Craig’s List, Fiverr, Upwork, and com.
  4. Write out the agreement. You can download the agreement that I use here.
  5. Once you have an agreement, thoroughly explain what you want, how you want it, and when you want it. The independent contractor isn’t in your office full time to gain context and institutional knowledge about how things are done, goals of the organization, and how their part fits into the bigger picture.
  6. Manage the contractor during the service period. Require regular reporting on where they are in the process to keep up to date on whether the schedule is going to be met or if the contractor is in jeopardy of missing critical deadlines.
  7. Give the independent contractor regular feedback, but don’t micromanage them. Make sure that there are continuously headed toward your mutual goals, but don’t get overly involved in the day-to-day activities.
  8. Once the project is complete, review the work for errors or omissions and then pay them per your agreement. Many freelancers have trouble with cash flow and getting paid promptly can make a huge difference in whether they want to work for you again or not.
  9. Tell your network about good independent contractors that you’ve worked with. The  best way to reward a good job is to share your experience.

In summary, outsourcing some projects or tasks can be a good way to reduce your risk and save some cash, but you still have to manage the process.   As long as you stay informed, and keep good communication lines open, it can work.

As Peter Drucker said:  “Do what you do best and outsource the rest.” [source]

 

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