Are you hiring more contractors in your business than ever before? Chances are, you’re among the many small businesses in New Zealand getting new workers on a consistent basis through the booming ‘Gig Economy’ – but it’s not without a price.
With this innovation in hiring, from the previous standard employee system to the now more abundant contingency workers, comes a host of concerns for whether your business is operating in line with the law.
What is the ‘Gig Economy?’
The gig economy refers to the growing number of workers abandoning traditional 9 to 5 employment in favour of working independently on a task-by-task basis for various employers.
Workers are expressing an increasing demand for flexible and autonomous work, prompting many to explore opportunities to work on their own terms, engaging in freelancing or working as independent contractors. Others, unable to secure employment in the challenging labour market, have turned to this type of work out of necessity.
Freelancers are more likely to undertake work for different clients concurrently on an adhoc basis and are paid a fixed price for projects. Others, unable to secure employment in the challenging labour market, have turned to freelancing out of necessity.
For SMEs who have traditionally lacked the resources to recruit and retain the best talent, this increased access to on-demand workers is an attractive one. To capitalise on the benefits of the addition of freelancers into the workforce, companies will require new tools and approaches. However, issues may arise when there is less protection for these workers, and when the definition of who is a contractor and who is an employee becomes murky.
Leading companies must attract and retain the best talent as well as implement systems to manage them and address the challenges of a new workstream.
The business case for workplace flexibility has been well-established and companies should consider providing such arrangements to existing employees.
In Australia for example, the largest freelance category is web, mobile and software development (44%, followed by design and creative (14%), customer and admin support (13%), sales and marketing (10%) and writing (8%). Data revealed that 4.1 million Australians, or 32% of the workforce had freelanced between 2014-15. (Source: A labour market that works: Connecting talent with opportunity in the digital age, McKinsey & Company, June 2015, page 37)
Professionals are now having to rely more on background checks, continuous monitoring and other screening practices to ensure that the gig workforce that is booming in their business meets legality and safety standards.
A recent Gig Economy Survey, conducted by Sterling, a background and identity service, examined hiring trends, identity fraud, and social media, revealing how HR professionals can leverage background checks and various screening methods to improve recruitment confidence in contingency worker hiring. The study also revealed some interesting trends of sham contracting arrangements and the serious effect that this can have on businesses.
Various questions arise regarding how to manage and engage temporary labour effectively:
How to sift through the ever-growing talent pool of freelancers to locate the best talent?
How can companies ensure that freelancers actually have the expertise required?
How to ensure the right talent is working on the right tasks at the right time?
How much compensation should freelancers receive?
How to ensure freelancers are well-versed with company culture, mission, values, history, challenges and procedures?
How to strike a balance of protecting company security systems and granting enough access to freelancers to perform their duties?
How much training and induction should be provided to a freelancer?
How can companies ensure coherence amongst staff with geographically scattered workers?
Who will have the ultimate decision making authority, and how will command chains be structured?
How to mitigate legal risks and protect company IP
Key Trends in the Gig Economy
25% of respondents (small business owners) have a varied range of work arrangements
36% are confused about how regulations and laws will apply to their business
Participants have reported to experience instances of identity fraud. Almost half of the respondents of the study report at least one instance of fraud, bringing the potential risk of litigation and damaging the employer brand.
What is ‘Sham Contracting’?
A sham contracting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contractor arrangement. The most common reason for doing this is to avoid paying employee entitlements.
Sham contracts can actually be unintentional, with the employer misunderstanding the arrangement and generally not understanding the policies and laws behind hiring. It can also be an intentional action, with the employer avoiding paying minimum entitlements such as KiwiSaver holiday and leave, and having to follow a fair and reasonable process prior to termination.
It’s very possible for a company to accidentally find themselves in a sham contracting arrangement. A contractor that has been engaged consistently to deliver services could actually be defined as an employee in a legal sense. This means that for companies who hire contractors on a regular basis, it’s essential to have confidence in where you actually stand and how you are faring against legal standards.
The Definitions and Distinguishing Factors
An employee is a person who is performing work for hire or reward e.g. wages/salary. This is generally called a ‘contract of service.’ An independent contractor, in contrast, is usually engaged for a specific project or task for a set fee.
The responsibilities and rights of these two forms of workers are very different by law. If you’re hiring a contractor, as a business it is your responsibility to know the difference and to be sure that you are employing your workers in line with how they legally need to be characterised.
Distinguishing factors for employees versus individual contractors:
An employee performs work under the direction and control of their employer on an ongoing basis, whereas a contractor has a high level of control in how the work is done.
An employee generally works standard or set hours (note: a casual employee’s hours may vary from week to week). An independent contractor decides what hours to work to complete the specific task.
An employee has on ongoing work brief, with specific goals and actions to achieve, whereas a contractor is engaged in a specific task or project
An employee bears no risk as part of their employment – that is the employer’s responsibility. A contractor bears the risk of making profits/losses on the projects that they deliver (i.e. Contractors generally have their own insurance policy).
What You Can Do to Protect Your Business
You need to have a clear understanding of the following functions and agreements of your working relationship to determine whether a person you are engaging in work with is an employee or an independent contractor.
The following factors need to be considered:
The control that the person has around the work that they do
If they have the right to delegate work to others
Their right to working for other companies
If the arrangement is ongoing or intending to be ongoing
Which party is providing equipment used.
Tax and Kiwisaver policies
Leave entitlements and methods of payment.
Ultimately, the difference between a contractor and an employee is not clear cut. If you’re incorrectly representing to your worker the relationship between your company and that worker, you could be vulnerable to being in trouble for a sham contracting arrangement.
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