What Is the Gig Economy?

The gig economy refers to the trend in the labor force where people work as independent freelancers versus becoming employees of companies as a way to earn a living. These independent contractors move from one gig to the next purely at their discretion. The term “gig” refers to a “one-off” job. Freelancers are hired for the duration of a project, typically short-term in nature. This is a flexible and fluid (and frequently online) platform where talent usage is leveraged on an as-needed basis by employers. It is important to note that there are pros and cons of this trend.

What Are the Benefits of the Gig Economy?

As with most things, there are pros and cons. Here are some of the upsides of this trend.

  • Work-life balance. This seems to be the biggest draw for workers. Gig workers elect when and where they complete their work as well as how much they want to work.
  • Freedom to choose. A subset perhaps of work-life balance, gig workers can accept or decline work as they see fit. In this way, they can spend time on work that is truly fulfilling which can contribute to stress reduction.
  • Cost-savings. Employers will not be subject to paying the payroll taxes that they pay for traditional employees. Employers don’t need to pay for any time beyond when the specific scope of work is complete. The contractors’ payment ends when the work ends.
  • Employee sourcing. HR has the potential to preview talent to whom they may want to offer permanent positions. Gig workers may serve as their own “candidate pool” for employers.
  • Specialization. Employers can outsource special projects that require expertise on a one-time basis versus paying an employee year-round, thus eliminating the burden of training and development required to build specialized skills needed infrequently.

What Are the Disadvantages of the Gig Economy?

At face value it sounds like gig workers have it made. Full freedom. Full control. Or do they? Here are some of the downsides for both workers and employers.

  • Lack of health care benefits. Gig workers will need to find a source of medical and dental coverage for themselves and/or families. They will not have employer-sponsored retirement plans, such as 401Ks, profit-sharing or bonuses. While employers will save money here, they may lose leverage in negotiating benefit coverage with carriers due to the drop in “lives” (headcount) and suffer increases in premiums.
  • Unsteady income stream. The need for gig workers to continually be looking to find the next gig can impact their income and be a source of stress which doesn’t come with the regularly scheduled paychecks associated with a traditional employer. For employers, forecasting and budgeting may become far trickier with a greater percentage of a transient workforce.
  • Possible lower earnings. While freedom and independence are a great benefit, gig workers often tend to work less hours per week and therefore frequently end up earning less. Additionally, no one will take taxes out of paychecks so gig workers will need to have far more discipline around budgeting and be responsible for personal business expenses. The IRS allows income taxes to be paid quarterly and it’s recommended that 25-30% of one’s income be saved for taxes. No more free use of the office supplies, said another way.
  • Tighter rules on contractor status. In the past few years, the IRS has placed more guidelines around precisely how a contractor is defined for tax purposes (see 1099 contractor requirements at IRS.gov). Businesses must ensure they are compliant or risk penalties should they be subject to an unsuccessful audit. For more information on determining contractor status, see the section below titled “How to Handle the Gray Area of Gig Workers as an HR Business Partner.”

Examples of Jobs in the Gig Economy

They take on a litany of roles across almost every industry. Here are just few with which you may be familiar:

Graphic Designer

They work when and where they want. Sometimes they are provided clients through an online platform (Wix.com, e.g.). They supply their own software or other tools and pay their own taxes.

AirBnB

Property owners elect to place vacancies onto this rental platform to procure short-term renters for a fee. The property owners determine the amount of rent, duration minimums and maximums and overall availability.

Consultant

If you have a certain expertise to market, you can find clients on your own or you can join online platforms where, for a fee-share arrangement, you will be provided with client work. Patinasolutions.com is an example of an HR consulting platform.

Freelance Writer

A self-employed person who writes ad copy, articles or other content for others for a fee. There are several websites that provide work for a fee-share arrangement. Writers.work is an example.

What the Gig Economy Means for HR Professionals

Many HR professionals have already begun to feel the impact of this labor trend in many aspects of their roles. Here are just a few of the realities with which they currently, and will have to in the future, manage:

Harder to Find Permanent Talent

According to Forbes, more than a third of the U.S. workforce (36%) are in the gig economy. That represents about 57 million workers. This materially reduces the size of the labor pool that is willing and available to accept traditional employment. More of HR’s time may be required to shift toward recruitment activities.

Harder to Cultivate a Company Culture

Isolation and lack of a sense of permanence can make it very difficult to create a sense of belonging for gig workers. HR will need to find ways to make employees and contract workers feel like they are on the same team. Frequently contract workers do not even come into the office so that further removes them from the social interaction that is enjoyed by others.

Harder to Coach Performance Management

Managers may not be as willing to invest time and resources training and developing workers they know won’t be staying on. This may make work far more transactional in nature and less conducive to nurturing and coaching for peak performance. Appraisal systems will need to accommodate far shorter measurement timelines. You won’t be able to rely solely on the classic annual appraisal.

Negative Impact on Succession Planning

Who will replace executive leadership? Middle management? Key specialists in their field? A fluid labor force doesn’t provide the “bench” of talent that companies rely on for business continuity. New solutions will need to be generated.

How to Handle the Gray Area of Gig Workers as an HR Business Partner

As your company’s HR partner, it is your responsibility to handle the independent contractor lifecycle both professionally and legally. This means you should have a firm grasp of international, federal, and state regulations when it comes to independent contractors’ rights and advocate for proper classification.

Though it may feel overwhelming to stay on top of not only federal and state laws, but also international laws, rest assured that following the steps below is a safe bet to keep you, your company, and your independent contractor protected. 

Step 1: Understand Your Company’s Legal Obligations and Your Independent Contractors’ Rights

The classification debate between employee and independent contractor is global, with regulations varying from country to country, and even from state to state (within the United States). There are two main factors that will impact the laws you need to be aware of:

  • Where your company operates
  • Where your independent contractor performs their work

In the United States, more than 20 states have adopted the ABC test to ensure proper classification:

  • A — Does the independent contractor decide when, where, and how the work is performed? 
  • B — Does the work fall outside the employer’s core products or services? 
  • C — Does the independent contractor have their own legal entity or trade doing this kind of work?

If you answer no to any of the above questions for any of your company’s independent contractors, those contractors are at risk of misclassification and your company is at risk of misclassification penalties. Additionally, if you’re in a freelance HR capacity yourself, be extra careful working with employers in certain states (like California) where misclassification liability can get passed on to you.

Rights and laws outside of the United States vary, but this blog series by Carson G. Burnham is a great country-by-country primer, ranging from Australia to the United Kingdom.

Step 2: When in Doubt, Seek Qualified Counsel

If you did your research but are still unsure, your next best course of action is to seek legal advice from a lawyer specializing in business law or a trustworthy HR practitioner with experience in your specific situation (industry, locations of operation and hiring). 

Step 3: Take Informed Action

Congrats! With legal clarity, you can advocate for and recommend the proper classification of your company’s independent contractors and employees. 

If advocating against independent contractor classification, sharing the legal and financial risks of misclassification with the employer should sway most minds. 

If advocating for independent contractor classification, you can protect all parties by requiring certain documents from independent contractors, such as business cards, business license, a list of other clients, incorporation records, insurance policies, and invoices.