Embedded IC Compliance: How Bubty is Transforming Freelancer Engagements

Michael Matherly - Head of Global Compliance at Bubty

Finding the right freelancer for the work a company needs to get done is only half the challenge. Often the greater challenge is an operational one - how to compliantly engage and pay the freelancer. 

Many companies unnecessarily pay 15-25% or more higher talent engagement costs by avoiding the independent contractor segment altogether. Most do so due to a lack of internal ability to identify and properly control misclassification risk. Or, they aren’t aware that there is a freelance management system with fully automated risk management capabilities to minimize their risk and minimize their overall talent engagement costs. Or, they aren’t aware there are multiple ways to engage freelancers as independent contractors, compliantly. 

Bubty’s Embedded Independent Contractor Compliance Solution 

Bubty’s freelance management platform has solved these freelance engagement challenges with an embedded independent contractor compliance solution that accurately screens freelancers and uses its proprietary risk-based routing to ensure the freelancer is optimally and compliantly engaged. And Bubty does so without sacrificing its industry leading real time cycle times or by withholding indemnification protection from our customers. 

Below we make the case for and explain how we deliver this differentiated solution to Bubty customers and partners. But first, we address the question of Why. Why is an independent contractor compliance solution a necessary component and best practice in today’s freelance management strategy?

Because Misclassification Risk is Here to Stay

Simply stated, employee misclassification risk, the greatest risk companies face when engaging freelance workers, isn’t going away in the foreseeable future. Rather, the regulatory environment is tightening and that is expanding the risk exposure companies face. Employee misclassification is when a freelancer is improperly engaged for a specific assignment as an IC, instead of as an employee. What exactly is the risk exposure? Back taxes and benefits, fines, penalties and brand reputation damage can add up quickly for a single court or agency adjudicated reclassification from independent contractor to employee. For enterprises engaging large freelancer populations the risk and potential cost impact is exponentially greater. 

When it comes to explaining employee misclassification risk to prospects and customers, we receive a lot of good, basic questions:

• Why does this risk exist? 

• Why have governments and tax authorities across the globe passed new classification legislation in the last couple of years? 

• Why are governments increasing enforcement efforts?

The short answer is money. The longer, more thoughtful answer requires some context. The global demand for freelance talent continues to outpace all other segments of the human workforce:

• Freelancers are 47% of the global workforce today;

• By 2027 freelancers will outnumber full-time employees;

• Enterprises enjoying the benefits of multi-regional and global talent continue to drive demand. 

Growth in the freelance segment is fueled in large part by a shift away from full-time employment. And that is having a very real impact on tax revenues across the globe. Government collection of income taxes from freelancers is off approximately 20% (data varies widely) due to

• Lower taxable income - Higher business deductions lead to lower taxable income for freelancers;

• Underreporting - There is a higher occurrence of underreported taxes with the self-employed; and

• Lower tax rates - Greater freedom to classify freelancer business income into income segments with lower tax rates.

Lower tax revenue, however, is not the only driver behind increased misclassification enforcement. Governmental agencies, not just in the US but across the globe, have a level of care duty to their constituents, the employee workforce. Protecting workers from employer abuse is a key objective of government and agency classification rules. It is why in the US we see the DOL (Department of Labor), workers compensation commissions, unemployment insurance commissions and other agencies initiate and vigorously pursue employee misclassification claims. Employee protections range from minimum wage, over time pay, workplace safety, workers compensation coverage, access to healthcare, and civil rights. 

For the most part, independent contractors are not afforded these same protections. Bubty supports both government and company efforts to ensure the propriety of employee classification determinations and the protection of worker rights. It is in large part why we have developed the embedded independent contractor compliance solution, to ensure proper classification for our customers AND their freelancers.

What Are the Classification Options When Engaging Freelancers?

Freelancers are non-agency contractors that provide their work or services to client companies on a temporary basis as either an independent contractor (IC) or as a contract employee (also known as payrolled contractors, employer of record placements or W-2 contractors in the US). The legal distinction between these two freelancer types is where the risk and complexity resides. 

Avoiding the engagement and use of ICs because of misclassification risk is often referred to as “no IC” policies (i.e. no 1099 contractors in the US). But this too can be very costly to the organization. Not only do these kinds of policies effectively negate an organization's access to over half the available freelance talent in the market, but these restrictive policies can end up costing the company more to get the work done, and unnecessarily so. When companies hire freelancers as contract employees, they pay 15-25% or more than similarly qualified ICs. 

There’s More Than One Way to Engage an Independent Contractor

The primary objective of Bubty’s embedded independent contractor compliance solution is to give unprecedented visibility and easy access to the variety of options for safely engaging freelancers as independent contractors. It would be easy enough for us to simply respond to any level of misclassification risk with a recommendation to engage the worker as a contract employee. That’s the safest option but it is also the most costly option for engaging your freelance talent. Instead, Bubty’s automated independent contractor screening and scoring functionality, combined with our proprietary risk-based routing and segmented service approach to independent contractor compliance, will yield up to 4 fully protected engagement options to choose from so our customers can engage the talent they need while more easily and intentionally managing risks and costs.  

The Bubty optimization effort begins with a risk compliance filter where we identify upfront freelancer or small vendor engagements that represent negligible or no classification risk to the customer. If there is essentially no risk - for instance, an S-corp vendor or a $300 honorarium -  then we simply bypass the independent contractor screening process and recommend a direct engagement between our customer and the freelancer. If the filter indicates the presence of measurable misclassification risk, then Bubty conducts our automated classification screening of the assignment and the freelancer; automated scoring and routing logic (configured to align with our customer’s risk and budget preferences) then routes the freelancer to the optimal engagement model for a fully automated onboarding experience. And we always give our customers the option to override our recommendation and engage the freelancer as they choose.

Here are the engagement models we make available to all our customers and support with our embedded services and indemnification:

1. Direct Engagement (Uncovered) - When minimal or no misclassification risk is identified, then there is no need for the customer to leverage an intermediary (for instance, an agent of record) to engage the freelance talent. Direct engagements save the customer talent acquisition costs without adding any misclassification risk. The Direct Engagement onboarding will culminate with a statement of work between the customer and the talent. 

   
   

2. Direct Engagement (Covered) - When low to moderate risk is the result of our independent contractor screening, our recommendation is for the customer to engage the independent contractor directly as well, but Bubty stands behind the risk assessment with indemnification. Again, this is a lower cost independent contractor engagement model that best serves the customer for this particular risk use case. 

   
   

3. AOR Engagement - When moderate to high risk is the compliance screening score result we recommend the Bubty AOR team engage the independent contractor on the customer’s behalf. Bubty’s agent of record service provides a risk-mitigating intermediary layer of protection that shifts the misclassification risk away from the customer and to Bubty as the hiring entity. At this risk level, direct customer engagement of the independent contractor represents a level of risk exposure the customer should not undertake.

   
   

4. EOR Engagement - Sometimes the level of misclassification risk in an assignment is simply too high for either Bubty AOR or the customer to take on. To ensure true optimization of risk-acceptable talent engagement models, Bubty has integrated EOR (employer of record) onboarding into the platform. And to ensure full visibility, especially globally, EOR determinations have country-specific total cost estimates built-in to the onboarding process so that the customer can control the use of this higher cost engagement model.

Our Commitment

A key operating principle of Bubty Compliance is that we serve and support our customers in the manner that best supports the customer and the customer’s business model. In order to abide by that principle, we are committed to offering and promoting all possible freelancer engagement options that support our customers, even the ones where we do not earn any additional revenue. 

If you would like to learn more about how Bubty’s embedded compliance solution is making one of the best new FMS platforms on the market even better, then please schedule an initial discovery call with our Head of Global Compliance by clicking here.