Freelance Nation

One-third of the American labor force is made up of contingent workers who are available at a moment’s notice. Is HR ready to manage a hybrid talent pool?

By Steve Bates Jul 13, 2015
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HR Magazine July/August 2015 Wes Cherisien has never met many of the workers he hires—and he has no problem with that. When he needs something done quickly, he visits a website that links companies with independent contractors who are seeking short-term projects. “You can post a job online, and there will be 20 to 25 applicants within minutes,” Cherisien says. “It’s a great staffing model to use to get miscellaneous projects done.” In fact, it’s key to his strategy for running Windmark Interactive Group, a graphics and Web design company based in the Orlando, Fla., area.

While independent contractors aren’t new, the universe of them is expanding. According to MBO Partners, a Herndon, Va.-based company that provides business services and benefits to freelancers, the number of on-demand workers grew from 15.9 million to 17.9 million from 2011 to 2014, an increase of nearly 13 percent.

The Great Recession, advances in technology and new expectations among workers—particularly Millennials—have fueled a surge in project-based professional freelancers. Once concentrated in specific occupations such as courier or construction worker, freelancers now abound in many sectors: There are on-demand attorneys, software specialists, engineers, writers, graphic artists and even HR professionals. Also plentiful are the online platforms employers can use to find and hire these workers instantly.

The trend reflects a continued move away from the way Americans did work in previous decades, when most employees expected a lifetime job and solid benefits. Today, business needs change quickly and jobs have become much more fluid, driven by globalization, outsourcing, demographic and technological shifts, and other factors. At the same time, the recession has led to stagnant salaries, declining benefits and mass layoffs that have hampered employee engagement. “The social contract between the employer and the employee is wearing down,” says Gene Zaino, president and CEO of MBO Partners.

But that’s not all bad news for workers, who now have more choices than ever. Indeed, it appears that many people want more control over the work they do, when they do it, how they do it and for whom. In the process, the whole idea of work is being reimagined. “People are putting together their lives and work in a totally new way,” says Dan Lavoie, director of strategy for the New York City-based Freelancers Union, an advocacy group for on-demand workers.

The strong and steady growth of on-demand freelancers has caught some HR professionals by surprise. Recent research from Deloitte suggests that, while the demand for critical skills is driving a trend toward greater use of hourly, contingent and contract workers, HR professionals aren’t using this talent pool effectively. Despite ranking workforce capability as a high priority, a growing number of organizations say they aren’t ready to address the issue. “It’s surprising to me how little people in HR realize what’s going on. It’s critical for HR to be looking at this,” says Marina Gorbis, executive director of the Institute for the Future, a nonprofit research and consulting organization in Silicon Valley.

Here to Stay?

Freelancers are not a great fit for every industry or type of work. Manufacturing companies use fewer of them than Silicon Valley startups and other companies rooted in the knowledge economy. Still, Lavoie says, “There is no industry in America that hasn’t been affected.”

In addition to the estimated 18 million to 21 million freelancers, who are also called “solopreneurs” or gig workers, the contingent workforce includes microbusiness owners who consider themselves freelancers, people with regular jobs who supplement their pay with freelance work and temporary workers who are employed by staffing firms. When all categories of contingent workers are combined, there’s a total of about 50 million nontraditional employees—roughly a third of the American workforce. By some estimates, nontraditional employees could represent a majority of the workforce in less than a decade.

But is it a permanent change or a response to temporary forces in the business marketplace? “It’s growing. Will it continue? Who knows?” says Carl E. Van Horn, professor and director of the John J. Heldrich Center for Workforce Development at Rutgers University in New Jersey. A significant portion of the workforce wants—and probably always will want—the peace of mind a full-time job and a regular paycheck bring, he notes.

With the U.S. economy closer to full employment than it has been in several years, some freelancers will likely return to traditional employment. Others may have discovered that they like the freedom freelancing affords and choose to stick with it. Workers have moved back and forth between freelancing and traditional jobs for some time and will likely continue to do so. “There’s always going to be a mix of types of workers,” Lavoie says. But it’s possible that the balance will tip more in the direction of solopreneurs than ever before.

Legal and Regulatory Concerns

Even those who believe the sky’s the limit for the on-demand workforce acknowledge some dark clouds overhead. Lawsuits and regulatory crackdowns are significant threats. Rules from the Internal Revenue Service dictate who is an employee and who is an independent contractor. Generally, if an employer controls how and when a person performs work, the person is considered an employee and is entitled to salary and benefit protections. The U.S. Department of Labor estimates that up to 30 percent of employers are misclassifying employees, and some employment lawyers believe that most Americans retained as independent contractors are actually employees under federal rules.

Increasingly, players in the so-called sharing economy—in which people purchase goods or services directly from one another, typically via an online marketplace—are coming under fire for their extensive use of independent contractors. Car service Uber and home services agency Handy are among the companies that have been sued by freelancers claiming they are entitled to the same pay and benefits as regular employees.

Traditional companies are facing greater scrutiny as well. FedEx and Lowe’s have paid multimillion-dollar penalties for misclassifications, and some small firms have paid large fines as well. Meanwhile, the Labor Department has thousands of investigators looking for employers who might be misclassifying employees as independent contractors.

There’s another wrinkle. Unlike with regular employees, independent contractor pay is not subject to payroll tax deductions. Generally, freelancers submit invoices to employers, receive 100 percent of their contractual fees, and make quarterly income tax payments to state and federal governments. But the federal government never anticipated the rapid growth of the freelance movement and is ill-prepared to ensure that independent contractors pay their fair share of Social Security, Medicare and unemployment insurance taxes, industry leaders say.

Creating and Managing A Hybrid Workforce

An increase in the use of freelancers can also create insecurity among regular workers, who may worry about their job security and resent the fact that certain freelancers garner higher pay and enjoy more flexibility. “You’ll find there is some resistance at the company and individual level,” says Lynda Zugec, managing director of The Workforce Consultants. That’s why HR professionals must recognize these concerns and learn to manage hybrid workforces. Zugec’s company, based in New York City and Ontario, Canada, provides freelance HR professionals to companies for short-term projects.

Finding the right freelancers is another issue. HR professionals rarely scrutinize freelancers’ resumes or perform background checks on them for routine assignments. Fortunately, there are tools that can help. Some online platforms that help employers find and manage freelancers, such as Work Market and Upwork (formerly Elance-oDesk), list projects freelancers have completed and allow clients to rate their performance. According to Jeff Wald, president and co-founder of New York City-based Work Market, the questions that matter most when considering a freelancer’s qualifications are “Have you done this before?” and “Have you done it well?”

While on-demand workers aren’t typically loyal to a single company the way full-time employees are, HR can take steps to create a devoted and reliable network of freelancers. For example, HR can give on-demand workers repeat business or integrate the most valuable ones into the company culture. “HR needs to take the lead in managing this workforce,” says Lisa Disselkamp, a director in the HR Transformation practice of Deloitte Consulting.

The potential loss of intellectual property is another concern. Even if an employer specifies in a contract that the employer owns the freelancer’s work, the freelancer might provide a similar product to a competitor a week or two later. Companies need to guard against the loss of proprietary information, and smart employers are learning that they shouldn’t give freelancers work that deals with the “secret sauce” of the organization, says B.J. Schone, founder of Awesome Boss, a San Francisco-based online service that helps organizations engage and retain employees.

One way to build trust with freelancers is to start them on small, low-risk tasks and then work up to more-important jobs. While there are no guarantees that they’ll do the work exactly as you’d like, the same is true of full-time employees. “You can and will get burned a couple of times,” Schone says. But he adds this about on-demand workers: “They’ve saved my bacon on many occasions.” Once he located a freelance programmer at 10 p.m. to make an emergency fix on a website.

‘So Many Good Candidates’

For many companies, the benefits of using on-demand employees far outweigh the concerns.

At Windmark, the Florida Web design company, speed rules. “There’s so much to do in a day. Everything changes so quickly,” says Cherisien, an HR professional and the company’s co-founder. But when dealing with complex projects and tight deadlines, Cherisien can quickly find quality freelancers. “There are so many good candidates,” he says. More often than not, the task gets completed and he moves on to the next one.

Greg Szymanski, SHRM-SCP, HR director of construction services firm Geonerco Management in Seattle, has about 50 regular employees but uses many freelancers. When he contracts with a consultant to evaluate a tract of land for possible development, he does “a little due diligence” on that consultant. Szymanski is cognizant of the need to monitor—but not micromanage—independent contractors. “You’re dealing more with contract performance than with employee relationships,” he says.

Some small companies rely largely or exclusively on freelance work, and several Fortune 100 companies use on-demand talent regularly. In many cases, organizations can no longer afford in-house staff for some functions, and that’s where HR leaders can help. “They need to take a holistic view of the or​ganization and see where it might be beneficial to use freelancers,” Zugec says. There might be a significant untapped market for on-demand workers in organizations that have not yet recognized the trend or its potential benefits.

HR Checklist

How to Hire Freelancers

  • Determine what talent gaps exist in the organization.
  • Identify work that can be split off into discrete projects handled by on-demand workers.
  • Establish compensation structures for independent contractors.
  • Inform the entire organization about the risks of violating federal rules on independent contractors.
  • Sign off on all contracts with on-demand workers.
  • Determine who monitors freelancers’ progress and assesses their results.
  • Make sure legal counsel approves an independent contractor agreement that withstands federal tax rules and other legal requirements, and that specifies that the organization owns the work produced by the freelancer.
  • Spell out the scope of work and any special insurance requirements for each project.
  • Establish a firm deadline for completion of work; consider dictating interim deadlines or check-in dates.

When considering freelancers, Disselkamp says, ask yourself, “Are you going to use just-in-time workers like day laborers? Are you going to use them like seasonal workers? Are you going to use them like a permanent part of the institution but with hours that vary? There’s no single way to look at this.”

Perhaps the best approach is to start small and build on successes with on-demand talent. “Start thinking about work a little differently,” Disselkamp says. “Think about the type of work that can be packaged. Then take some of these packages of work and look for the talent.”

An increased reliance on freelancers may be driving other HR trends. For example, because many on-demand workers are rated for each project they complete, HR leaders are beginning to think about evaluating the performance of regular employees more frequently as well. The days when performance was assessed only once or twice a year may be numbered. Frequent evaluations could help HR determine where their most engaged and productive workers are. In that way, the hybrid workforce fosters accountability. It “truly is a meritocracy. It’s about the work you do and how well you do it,” Wald says.

“It’s not bad for people to think ‘I’ve got to earn my keep every day,’ ” Zaino says.

In the end, that could be good for HR and for the bottom line.

Steve Bates is a freelance writer in the Washington, D.C., area and a former writer and editor for SHRM.

This article relates to one of the nine competencies on which SHRM is basing its new certification.

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