Independent Contractor Compliance Blog

Over the weekend I read an interesting article about a fledgling industry referred to as “e-labor.”  The article predicts this new way of engaging freelance workers is growing and “…its success will mirror that of e-commerce…”

Source:  The Economist print edition, May 13, 2010.

http://www.economist.com/business-finance/displaystory.cfm?story_id=16116919

What is E Labor (e-labour)?

It is a form of “freelancing” that has become more common in the past decade as an alternative to the traditional, full-time employment and salaried jobs. This new form of work applies mostly to the high end technology driven work, not to unskilled or low skilled workers. It affords highly skilled individuals the ability to operate exclusively from home because these days:

• Practically everyone has their own PC at home,
• High speed internet access has become nearly ubiquitous, giving most people the ability to download almost any software or data base,
• Businesses have the ability to keep track of the worker’s efforts online.

This combination of technologies is sometimes referred to as “The Cloud.”

Many of these e-workers are being classified as “freelancers and independent contractors” even though they are essentially doing the same work previously performed by employees in the office.

According to the article,”…in America alone…there will be 14m (million e-freelancers) by 2015. Experts reckon this number will keep rising…”

Technology is probably the main driver.

The article notes that “…companies have begun to take advantage of the combination of super fast internet connections combined with cheap, web-based, sophisticated software that makes it easier to monitor and manage remote workers.”

It’s an E-Dream come true! So what’s the government’s problem?

The article itself gives insight to the government’s opposition. It is no secret that the IRS and state tax agencies, do not like anyone “off the information grid.”  Therefore making services that were employee based suddenly freelance (another word for independent contractor) will immediately send up Red Flags for these enforcement agencies. These e-relationships will be closely scrutinized for misclassifications.

What factors would make someone an “E-Employee” in the government’s eyes?

There is not yet much case law in this area to be sure; however, it’s a safe bet the government’s first stepping stone to determining if someone is an e-freelancer/IC or just an e-employee will be the traditional common law factors applied to this new e-work-world.

For example, the article notes that, “employers are likely to outsource important projects only if they can track their progress closely…”  It provides examples of existing tracking abilities such as:

• A feature that takes a screenshot of a worker’s desktop six times every hour, combining them to form a “work diary.”
• A feature that measures overall time spent using a keyboard and mouse.
• Another feature that guarantees workers of payment for any work they complete, saving them the hassle and risk of their own collection efforts.

The new technology also provides the dangers of misclassification.

As wonderful as these features are, the government is likely to look at such technological abilities as examples of exerting direction and control over the worker and over the worker’s financial destiny. These features will make the e-workers look like traditional employees-not freelancers or independent contractors-(IC’s).  The principle company (or the third party e-labor provider) who controls the worker with these tools will look like the employer to the government.

The IRS and state tax enforcement agencies will likely expect the payments to these e-workers to be handled, tax-wise, just like wages paid to regular employees unless there is convincing proof they are truly IC’s.

So if you are thinking of utilizing e-labor, you need to do it right. It is possible to have E-IC’s, but you need to recognize the rules the government will apply to them and be able to prove you are in compliance.