Independent contractors: 5 misconceptions HR may have

As the gig economy continues to grow and organizations seek to build their talent by hiring an independent contractor workforce (freelancers, 1099 workers, gig workers), understanding what’s required of an organization using independent contractors is critical.

For HR teams, this can bring about several questions as to how best to onboard, engage and retain this workforce. Below are five key misconceptions HR may have about independent contractors and how they can be addressed.

Misconception #1: HR doesn’t need to engage with independent contractors

Often, independent contractors are engaged by individual business units, rather than the usual HR recruitment process for full-time employees within companies. This lack of organizational oversight poses potential risks for HR given the changing requirements on worker classification and other regulations governing independent contractors.   

For example, a business unit may engage an independent contractor on a long-term basis and/or have a scope of work that isn’t much different from a W-2 employee. Both of those factors can change that worker’s classification depending on state and local laws. Furthermore, contractors can engage with multiple teams across the same organization at once, which can again lead to classification issues.

In short, worker classification can be complicated. As far as the IRS is concerned, organizations must take into account relationship, behavioral and financial considerations in order to classify workers as independent contractors (a written agreement alone isn’t sufficient). This is complicated further by regulations varying between states, so it’s critical for HR, along with legal, to work closely with teams to put guardrails and policies in place to help mitigate compliance risk when engaging with contractors.

Misconception #2: Contractors aren’t a critical part of the workforce strategy

As predicted by the Freelancers Union, 50% of US workers will be freelancing by 2027 – yet independent workers are often overlooked by HR and payroll. The dynamics of recent events – from the pandemic to a rapidly changing labor market – mean that quitting a full-time job to enter the independent contractor workforce is a much more appealing proposition to many today compared to a few years ago. Acknowledging this trend and properly bringing contractors into an organization should be a critical part of any company’s workforce strategy. When vetted properly, using independent contractors can help your organization be more agile and deliver on clients’ needs more quickly. 

Misconception #3: Having an independent contractor policy is unnecessary

Without a formal contractor policy in place, one of the key risks you can face is business units operating on an ad hoc basis when engaging with independent contractors. They may well be unaware of their obligations to the contractor, the organization, and the relevant tax and regulatory bodies.

HR should work with the legal team to put together policies and guardrails to help guide leaders in engaging with independent contractors. Once this is done, it needs to be supported by processes and technology that ensure these policies are enforced. Utilizing the right technology platform can give HR the visibility needed to help ensure compliance both at the onboarding stage and during the worker’s engagement with the business.

Misconception #4: Organizations can use the same technology for W2 employees and independent contractors

It’s critical to recognize that the technology you need for managing an independent contractor workforce is very different from the technology used for a W2 workforce. Trying to use your existing W2 payroll or HR system to manage your contractors may lead to inefficiencies, poor contractor experience and compliance risk. For example, W2 workforce technology is primarily designed to pay employees on a regular cadence, whereas independent contractors need to be paid on demand as projects are completed.

A dedicated technology platform for managing contractors provides four key benefits at the organizational level:

• Mitigate risk – Ensure contractors meet your business requirements by setting up automated guardrails during onboarding. Automated workflows can verify worker Tax ID and submit 1099 NEC forms to the IRS on an organization’s behalf.
• Easy audit trail – All required worker documentation (NDAs, certifications, licenses), invoices for each project, and annual 1099 NEC forms can be stored in one centralized, accessible repository. 
• Increased visibility – Spend, usage and engagement of your whole independent contractor workforce are easily trackable across the entire organization with real-time reporting.
• Retain your contractor workforce – Provide a positive experience for contractors with easy self-onboarding, fast and flexible payment options, and a mobile app through which they can easily communicate with you.

Misconception #5: Contractors aren’t an important factor when considering your DEI strategy

For HR professionals involved in their company’s DEI strategy, the W2 workforce is an obvious place to start. Diversity across your permanent workforce is, of course, a critical part of any DEI strategy, but it is far from the only way to meet your DEI goals.

Contractors offer a much broader spectrum of diversity along with their expertise – think caregivers who can only offer a certain number of hours per week; veterans who require flexibility in working conditions; retirees who are seeking ad hoc projects; and so on. All these candidates bring unique skills that you may not find in your W2 workforce, while also helping you achieve DEI goals.