Technology Can Help You Comply with Worker Classification Changes

By Tam Harbert June 8, 2021
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​With new state and federal legislation that sharpens the need for employers to correctly classify and track independent contractors, technology vendors are stepping forward to help.

Last year, California implemented AB 5, a law that makes it more difficult for companies to classify workers as independent contractors. Several other states have passed or are considering similar laws.

At the federal level, a similar provision, called the PRO (Protecting the Right to Organize) Act, is part of the infrastructure bill now before Congress. Meanwhile, the Biden administration has blocked a Trump-era Department of Labor (DOL) rule that would have made it easier for companies to classify workers as contractors. Taken together, these moves demonstrate a tougher enforcement stance on misclassifying independent contractors. Companies that violate the new rules could incur serious legal consequences and financial penalties.

Stoke Talent, a startup founded in 2019, recently added a "worker classification engine" to its freelance management system. The overall system helps companies hire, onboard, track and manage invoices, and ensures they comply with legal and tax rules. The worker classification engine, based on analysis of thousands of past misclassification cases, uses algorithms to spot and alert companies to potential problems, said Shahar Erez, CEO and co-founder of the company.

"Our solution offers automated and continuous monitoring of the relationship between the company and its non-payroll workers, so we can raise a flag once a problem starts and enable the company to fix it before they breach [workforce classification laws]," he said. The algorithms analyze more than 25 data points in the independent contractor relationship, including location, relationship duration, corporate equipment usage and primary communication methods. If it identifies a risk, artificial intelligence makes recommendations for how to mitigate it, such as hiring the contractor as a full-time employee or taking a three-month break from using them, Erez said.

Even without the need to monitor for misclassification, companies need to get a better handle on their contingent workforce, he added. "This entire area is completely broken," he said, noting that some companies are managing contractors by spreadsheet. "Even if there are no compliance issues, companies need to track this from a budgeting and management perspective."

Many companies have no idea how many contractors they actually use, said Brian Kropp, group vice president and chief of research in Gartner's HR practice. Independent contractors are usually hired by individual business units, with no involvement from HR, he said. "So the big concern for HR is, do you actually know the size of your contingent workforce?"

Another contingent-workforce management system, from GreenLight.ai, also uses algorithms to properly classify workers, said Jason Posel, founder and CEO of the startup. He says the product tests worker classifications based on U.S. DOL and Internal Revenue Service definitions. It examines multiple variables, including the role of the worker, whether the individual can demonstrate that he or she operates independently and free from the company's control, and how the individual receives payment from the company. The algorithms also check for state-specific requirements, such as those in California's new law, Posel said.

However, vendors admit it's hard to keep up with every new rule and regulation. Countries across the world are cracking down on contractor classification, but the U.S. is the most complicated of all because of the mix of federal, state and sometimes even local regulations, Erez said. "It's a matrix that no person can really figure out. That's why it's much easier for a machine," he said. Nevertheless, there is significant overlap among the various rules, he added. "Maybe we aren't up on every recent change," he admitted, but the system does alert companies to many specific requirements, such as a New York City law requiring employers to pay contractors within 30 days of receiving an invoice.

Vish Baliga, chief technology officer of SAP Fieldglass, which has offered a contingent-worker management product for two decades, has seen an increase in customer interest prompted by these regulatory changes. New freelance talent providers are popping up around the world, many of them specialized for particular geographic areas as well as niche skill sets, he noted.

SAP Fieldglass adapts to changing worker classification rules in a couple of ways, he said. The product offers different components that are based on particular categories, such as pay rates. France, for example, looks at several different aspects of pay rate in determining who's an independent contractor, while the United States looks at just one. In addition, customers can configure the product—either themselves or by using a SAP-managed service provider—to screen for specific country, state or local requirements.

Tam Harbert is a freelance technology and business reporter based in the Washington, D.C., area.

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