Consider a construction firm that uses an army of sub-contractors to do the work. If it meets its obligations, the construction firm will do checks on the sub-contractor and record and maintain that information. The firm might use specialist software to manage contractor data.
Now compare that to a knowledge-based corporate that uses freelancers. The firm needs the work done yesterday and somebody knows a freelancer who can do it.
A middle manager commissions the task by email. There is no letter of engagement or document that specifies the contractor’s obligations. There is no instruction to the contractor about the ownership of the client’s intellectual property, materials or trade secrets.
It is particularly risky when companies use contractors to provide a service to clients. The contractor effectively represents the company but there are no or limited guidelines on the firm’s policies. Everything happens too quickly with the work.
I am not suggesting that all corporates engage self-employed freelancers this way. Some I’ve worked with over the years provide detailed letters of engagement before the work begins. They take great care to protect the organisation and its clients when using freelancers.
But it is remarkable how many organisations commission freelance work on a whim. Even organisations that require freelancers to sign a letter of engagement before the work begins rarely update the document. I suspect some lose the information over the years.
I don’t know of many companies that maintain a central register of freelancers that work for them – and verify and update that information. Construction, technology and other sectors that have long used sub-contractors seem years ahead of most industries in this regard.
Freelance projects in the gig economy are especially problematic. Because the job might involve a few hours or days, some companies do not see the need to check and verify freelancer information and maintain it. That’s costly and the corporate might see the risk as low.
With a contractor on a six-month or 12-month gig, particularly if hired through an agency, the company is usually much better at detailing the terms of that arrangement, has a standard contract and an administrative employee who collects and maintains the information.
The problem is when a company uses the same freelancer over and over again and they start to resemble an employee. Or when the freelancer has worked for a client for so long they become part of the place and nobody questions if documentation has been signed. Or when an employee who commissioned a freelancer leaves and there is no record of the terms of that work.
As more companies outsource work to freelancers, many will lack processes and controls to manage self-employed workers.
I have seen examples of companies inadvertently treating freelancers like full-time employees for years and getting into a legal fight when they axed them. They had to pay annual leave and a redundancy because nobody managed the freelancer arrangement.
I have also seen disputes over intellectual property and clients. The company assumed it owned the freelancer’s work it paid for, but there was no intellectual property agreement. Or it was incensed when the freelancer took some company clients, but the agreement between company and freelancer did not have a non-compete cause (or there was no agreement).
An emerging risk is cybersecurity. Smaller firms sometimes gives freelancers or other suppliers access to their information systems, but have not verified the supplier’s cybersecurity defences or whether they have cyber insurance – issues that should determine the level of access.
Arguably the biggest issue is brand. If freelancers or contractors represent their client on jobs, there should be clear rules on what is expected. If freelancers work side by side with client employees, regularly or occasionally, they should know the firm’s workplace expectations and standards. They should attend some form of induction.
Freelance workers are on the rise and businesses should consider their risk protocols.
I am not proposing firms go overboard with compliance for freelancers or contractors. Part of the reason they use them is because they are a business rather than an employee and as such can shift risk onto their suppliers. No firm or freelancer wants to fill in onerous forms and do identity checks and the like for micro jobs.
Nevertheless, firms that are using more freelancers and contractors in the gig economy – and have scant processes to manage or monitor them – are asking for trouble. They are horribly exposed if the relationship sours, a legal claim is made, and there is no frame of reference to how the freelancer was commissioned and their obligations.
Tony Featherstone writes on Personal Finance specialising in Superannuation & SMSFs, Specialist Investments.