The Rewards of Hiring Freelancers Far Outweigh the Manageable Risks of Misclassification
Workspan Daily
January 11, 2023
Key Takeaways

  • Understanding freelance talent. McKinsey research found that compared to permanent employees, independent workers were 1.5 times more likely to have undergone training, education and credentialing, suggesting they invest in their skills and knowledge.  
  • Legal logistics. Various laws at the state level in the U.S. and in Europe add an additional layer of complexity to hiring freelancers, which is why employers should seek legal counsel to avoid misclassification.  
  • Source global talent. If you don’t need a project manager year-round, don’t hire a full-time project manager. Instead, hire the best people wherever they are, for as long as you need them, on a remote basis. 
  • A competitive advantage. In a difficult economy, independent contractors present a way to pursue ambitious projects without the financial commitment and responsibilities of hiring full-time employees.  

Whether or not the global economy sinks into recession in 2023, employers are acting like it will. News of hiring freezes, double-digit layoffs in tech and media and daily recession mongering suggest two things are coming: the need to position companies to be agile amid the uncertainty; and the opportunity to engage some of the best talent available.  

The key to engaging this highly skilled and suddenly available talent is rethinking your approach to worker classification. Many employers already contract with independent workers ranging from engineers, developers and data scientists to marketers, creatives and fractional executives like CIOs and CTOs. However, the freelancing market can be surprisingly risky for organizations, which understandably worry about misclassification issues.  

With the right approach, however, organizations can tap into a pool of high-demand freelancers who choose to be independent and offer skills that could fit specific business cycles, projects or fill gaps within your current workforce.  

A Misunderstood Talent Pool 

In some circles, the term “gig economy” or “gig worker” is negative. It can imply a degree of precarity or instability inherent to taking work from an algorithm-powered app. However, that’s not representative of the entire independent worker community. 

In McKinsey & Co.’s latest American Opportunity Survey completed in spring 2022, 36% of respondents identified as independent workers, up from 27% in 2016. That works out to 58 million Americans in 2022. Of those, 72% reported having only one job, meaning their independent work is not just a “side hustle.” About half said they work independently because they enjoy it or prefer the autonomy and flexibility. Compared to permanent employees, independent workers were 1.5 times more likely to have undergone training, education and credentialing, suggesting they invest in their skills and knowledge.  

Employers are increasingly recognizing the professionalism among independent workers, too. A May 2022 survey of HR leaders by MBO partners, a platform for independent workforce management, found that 28% of workers at enterprises are already “contingent.” However, 82% say more than half of these workers are “skilled.” Two-thirds of respondents planned to increase their use of contingent workers over the next 18 months. Those employers said they turn to contingent labor to meet temporary needs (38%), boost productivity (35%) and get things done more quickly (33%), access skills in short supply (28%) or access talent they don’t have (28%).    

In fairness, McKinsey found that a quarter of independent workers do it “out of necessity to support basic family needs” — an important, yet unique segment of freelancers.  However, also consider the freelancers, consultants and solopreneurs who identify as self-employed, provide in-demand skills and set competitive rates. The role they can play in supporting a company’s growth strategy is a huge opportunity for companies to remain agile in today’s economy. 

The Misclassification Problem 

While hiring independent workers can be advantageous, worker classifications in the U.S. and beyond are constantly shifting. They often vary depending on changes in political power, culture, public opinion and lobbying dollars. They affect who or what will pay for healthcare or be taxed for institutions like Social Security and Medicare in the U.S. And they raise questions about what employers owe or don’t owe their employees.  

For example, I once met the founder of a platform that enabled workers to bid on temporary jobs as independent contractors. As the platform gained momentum, the founder and VCs invested tens of millions of dollars to scale up. However, the state of California insisted that the roles available for bidding ought to have been salaried and sued accordingly. The platform faced over $400 million in fines if it lost in court. They shut down rather than take that risk.      

Meanwhile in the United Kingdom, politicians felt that independent contracting was eating into tax revenue. In 2021, they passed an update to IR35, the country’s off-payroll working rules. Previously, it was a worker’s responsibility to determine whether they were eligible to work as a contractor instead of an employee. The IR35 update moved liability from the worker to the company. As a result, numerous employers in the UK stopped hiring contractors, which raised their costs and decimated revenue for talented freelancers.  

The point is worker classifications change frequently and present significant risks, scaring organizations from pursuing independent labor. And companies that get it wrong get sued. Combine this with employers who view “employment” and “employees” with only a traditional, nine-to-five approach and most remain reluctant to incorporate freelancers into their recruitment strategies. 

The Independent Contractor Process 

Given the freelance economy’s crucial benefits in providing companies with the time to prepare for future demands and insulation from labor shortages and inflation, companies need to start updating their definitions of “employment” and analyze which roles need to be done by a full-time employee and what can be done by a part-time worker or contractor. Here’s a recommended approach:  

1. Look globally for the skills you need.
If you don’t need a project manager year-round, don’t hire a full-time project manager. Instead, hire the best people wherever they are, for as long as you need them, on a remote basis. 

2. Aim to self-source talent.
Initially, businesses need to hire freelancers with the same rigor with which they’d hire full-time staff. The long-term goal is to curate a contract talent pool you can tap into as needed. This is called self-sourcing talent. To preserve that pool, however, you must provide enough work for its members. The more you can “prebook” work early and guarantee a minimum amount of revenue for the freelancer, the more likely they are to prioritize your projects.  

3. Run the worst-case scenario.
When companies hire contractors in a recession economy, cost is a factor. The hope is that freelancers, though sometimes paid a higher rate than full-time talent, will deliver a higher-quality result in less time. Inevitably, though, complex projects in development and engineering run long. Figure out what your ROI would be in the worst-case scenario. If the project runs six months instead of three, would the freelancers still be worth it?  

4. Get legal counsel.
As I mentioned, employment models vary across countries and change constantly. Some, like The Netherlands, make it easy to hire independent workers. Others, like the UK, expect employers to justify why someone is working on a freelance basis as opposed to full time. Always seek legal counsel around worker classifications, payroll taxes, work agreements and compliance more generally.      

Don’t Freeze 

In a difficult economy, independent contractors present a way to pursue ambitious projects without the financial commitment and responsibilities of hiring full-time employees. The companies that take a “work in any way” approach and execute flexible employment policies to stay ahead of the changing landscape, can pull ahead of competitors that merely freeze hiring or downsize.  

The potential rewards of staying agile far outweigh the manageable risks of misclassification. 

Editor’s Note: Additional Content 

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