The “gig economy” has become a ubiquitous buzzword, as companies as diverse as Airbnb, Uber, and Care.com have made it central to their business model.
But the gig economy isn’t just for consumer services. It also creates opportunities for businesses to make their staffing more flexible. With the gig economy, employers can hire writers, designers, data analysts and more on a project-by-project basis.
In many cases, this is work that previously might have gone to temps or traditional contractors. What’s the difference between a gig worker and a contractor? Or a contractor and a temporary worker? These terms are often used interchangeably, says Brittany Sakata, associate general counsel at the American Staffing Association. But gig workers, contractors and temporary workers are very different, and those differences are important, as there are penalties for misclassifying workers.
Here’s what you need to know about this growing part of the economy.
Understanding Worker Classifications
Worker classifications impact worker rights like compensation, benefits and overtime. Proper classification is essential for mitigating the risk of violating laws protecting workers, like the Fair Labor Standards Act. Before you can classify nontraditional hires appropriately, you need to understand the differences between gig workers, contractors and temps.
Generally, gig workers are engaged for a specific, limited purpose, Sakata says. Gig workers are often associated with a tech platform or employed by a staffing agency, says Edgar Ndjatou, principal at Officium and executive director at Workplace Fairness. If gig workers or freelancers are contracted through a platform or a staffing company, you generally don’t need to file tax forms on them.
Contract workers perform a similar function by performing a specialized role. But unlike gig workers, contractors are usually hired as 1099 workers. They sign a contract to do a specific type of job or project for an organization. “A true contract worker has their own business or LLC,” Sakata says, and contractors typically bring their own tools and expertise.
Temporary workers are W2 employees who are brought on for the short term. The nature of their role is temporary, like a holiday gift-wrapper or other seasonal employment. Temps don’t receive benefits and are often hired for a specific job duty or to relieve a backlog, Ndjatou says.
Determining the Right Fit for the Role
Whether you classify a new hire as a gig worker, a contractor or a temporary employee comes down to the level of control the employer exerts over the worker. Can the worker set their own hours, or do they have to work a set schedule? Are they bringing their own equipment, or are they relying on yours? The standard classification tool is the IRS 20-point checklist, but no one factor on that test is determinative, Sakata points out. “It’s always best to look at what the worker’s going to be doing and how much discretion they're going to truly have,” she says.
When hiring additional help on a project-by-project basis, it’s best to have a good, structured job description for the role. “The first step is assessing what your need is,” Ndjatou says. A highly specialized position that doesn’t require a lot of supervision could go to a contractor. If the role requires training or materials, on the other hand, the relationship is subject to your control and should be classified as a W2 or temporary worker.
There’s been a debate in recent years regarding benefits for gig workers. Legislation to that effect has passed in California under AB5, which uses the ABC test to determine the right worker classification. The U.S. Department of Labor recently proposed a new rule for clarifying employee and independent contractor status, and there is proposed legislation requiring portable benefits for gig workers.
Developing the Gig Economy Infrastructure
Before hiring gig workers, contractors or temporary workers, it’s important to plan your worker infrastructure. Even if you don’t expect to hire additional temporary workers, plan where they might fit into your business operations, Ndjatou suggests. Establishing the infrastructure helps you determine what type of worker you would need to hire before that need arises. This minimizes the likelihood of misclassification and reduces time-to-hire.
Generally, the lowest risk option — especially for employers in California — is to partner with a staffing company to bring on gig workers, Sakata suggests. Find a staffing company that employs its gig workers and offers them benefits, as well as appropriate wages and compensation. This minimizes the employer’s risk of misclassification or lawsuits.