Technology
Technology
How to retain workforce flexibility as the use of gig workers and independent contractors faces regulatory attack
- Companies in the TMC sector may lose access to cost effective self-employed contingent workforce arrangements under new regimes unless they remodel how those contingent workers are engaged
- The US, EU and EU Member States, including Belgium and Germany, are introducing regimes that will set a rebuttable presumption of employment status. This risk can be reduced by use of outcomes-based hiring
- AI tools can help TMC companies identify projects better suited to contractors and help companies scope assignments on an output basis
In an era of regulatory attack on the use of "gig" workers and independent contractors, will technology, media and communications (TMC) companies be able to continue to engage tech specialists, consultants and creative personnel on a contract or freelance basis? Could restrictions imposed by legislators and tax authorities worldwide on the use of gig working and contract workers force organisations to return to fully employed workforces? What are the economic trends that have underpinned the greater use of contingent workforces?
Contingent workforce arrangements are a highly valuable resource in the TMC sector, giving organisations access to the right talent at the right time for the right price on specialist or shorter-term projects. Companies also value not incurring the long-term fixed cost of hiring them as full-time employees. Platforms powered by artificial intelligence are accelerating this and allowing organisations to find the most relevant and cost-effective available talent while enabling individuals to maximise their earning potential almost instantaneously.
As a result, the number of self-employed and gig workers is increasing globally. The US Bureau of Labor, for example, suggested that as of October 2022, there were approximately 16.9 million self-employed workers in America, reflecting an increase of 1.9 million since 2015. Similarly in Europe, contingent work generated an estimated €1.464 billion in revenue in 2022.
Contingent workforce arrangements have been avidly adopted in large parts of the TMC sector. For example, social media companies often have more contingent workers than permanent staff. Contractor-friendly roles include data scientists, project consultants and mobile web designers.
A legal brick wall?
In spite of its benefits, the contingent and freelance working model has been a recent target of worker misclassification – also known as "employment tax" – and employment status claims. High-profile targets have included Uber, FedEx and Amazon.
In response to this, international governments have sought to reform worker classification tests. The Biden administration has suggested new rules, while US state legislation such as the AB5 Test introduced in California starts with a rebuttable presumption of employment status. The test then considers three criteria, one being control.
In Europe, the Platform Workers Directive is being negotiated and finalised by EU ministers; the draft legislation is similarly proposing a rebuttable presumption of employment status for platform workers. This approach is being adopted on the Member State level. The Netherlands has proposed a bill introducing a rebuttable presumption of an employment agreement where engagements are paid for on the basis of an hourly rate. In Belgium, a law inspired by the Platform Workers Directive came into force on 1 January 2023 setting out a rebuttable presumption of employment status based on a list of eight criteria. The German government has supported the European Commission's initiative to improve working conditions on platforms.
The employment law and tax measures that have been introduced or proposed could increase the employment rights and tax costs of using contingent workers. Potentially, platforms operating inside the EU may also be obliged to charge VAT on the supply of worker services and obtain staffing or recruitment licences in some countries. With VAT potentially making contingent workers more expensive than "regular" employees for certain types of organisations, platforms will be forced to put up their costs.
Is there a solution?
With some thinking, well-positioned organisations should still be able to use contingent workforce arrangements. The solution will centre on engaging contingent workers with output-based statement of work arrangements and pre-set fixed-price payment linked to delivery rather than "time spent".
Using this type of engagement for workers involved in technical and professional roles will mean most of the new employment law and tax regimes are unlikely to apply. Delivering a distinct project within the specialism of the contractor is more likely to be seen by tax authorities as work done by the contractor as part of their separate business, defeating the presumption of employment status. Allowing independent contractors to deliver work independently without monitoring, supervision or restriction will be key to maintaining their independent status.
The difficulty in reframing contingent worker arrangements to focus on output is that hiring managers typically express a role in terms of the skills and experience required. Most consultancy roles were, therefore, offered on a rate and "job title" basis, which carried with it an implication that the role involved collaboration and supervision. Under new regimes, this could be seen as an employment agreement which is likely to add to employment costs.
How will AI help?
The good news is that technological innovations are increasingly allowing organisations to break down many types of projects into defined deliverables, allowing them to undertake contingent workers on an independent contractor basis.
It seems likely that AI-powered chatbots and virtual assistants will be used by project managers and hiring managers to interrogate hiring requirements so that work is broken down into scoped outputs. Similarly, generative AI systems could be used to assess the relative skills, availability and costs of a new "regular" employee and pre-vetted contractors to help identify projects better outsourced to contractors.
For example, robotic process automation can be used for tasks such as social media management, data entry and copy writing. These may previously have been done by contractors on a time and materials basis. Using such a tool, contractors can focus on more complex projects such as machine-learning engineering and creative work.
Organisations with output-based models for independent contractors, supplemented by an increased integration of AI into their processes, will probably be able to continue to take advantage of the TMC sector's global contingent workforce in the face of current employment law and tax developments.
Further Osborne Clarke Insights
Authors
Kevin Barrow Partner, UK kevin.barrow@osborneclarke.com
Dr Thomas Leister, MBA Partner, Germany thomas.leister@osborneclarke.com
Frances Lewis Consultant, UK frances.lewis@osborneclarke.com
Thierry Viérin Partner, Belgium thierry.vierin@osborneclarke.com