Are You a Freelancer or Do You Depend on Them? Take Action to Protect Your Business Relationships from the PRO Act

As busy entrepreneurs, freelance professionals, and parents, it’s easy to lose track of all the potential legislation pending in Washington. That’s especially true right now, with school closures and pandemic-related restrictions forcing many of us to rethink our business models. 

But, a bill called the PRO Act is winding its way through the legislative process and, if passed, could have severe repercussions for freelance professionals and the small businesses that depend on them.

Whether you are a freelance professional or you hire them, this legislation could affect your business model. If it becomes a law, the PRO Act could limit job opportunities for mothers, retirees, and college students who depend on the freedom and flexibility that comes with contract work. And, the new rules will make it more difficult for small businesses to find the flexible, dedicated, and professional support that makes it possible for them to thrive.

In this blog, we’ll tell you more about the bill and how you can take action.

 

What is the PRO Act?

The PRO Act stands for Protecting the Right to Organize (PRO) Act (S. 420/H.R. 842).

It’s the most comprehensive labor relations legislation since the National Labor Relations Act (NLRA) of 1947. The bill contains a variety of provisions that affect contractor workers and employers. (Here’s a summary from the U.S. Chamber of Commerce.)

 

How the Bill Affects Contract Workers

Most concerning, it requires workers who are now classified as independent contractors to be treated as employees who are free to form a union. While many freelancers are likely not interested in starting a union, the prospect of unionization and the requirements to treat freelancers as employees could have serious consequences for freelancers and the businesses that hire them.

Currently, independent contractors are exempt from labor laws and can’t form a union to bargain with an employer. If enacted, the definition of “employee” would expand to the point that it endangers freelance professionals’ livelihood.

Work is likely to be restructured well before workers can even consider organizing. According to Michael LeRoy, an expert in labor law at the University of Illinois Urbana-Champaign, by encouraging businesses to circumvent the law in two ways.

First, the law would incent some employers to automate jobs that can be done remotely. 

More concerning is that businesses would be forced to avoid working directly with contractors, who they’d have to treat as employees. The most likely way they’d do this is by using an agency, who serves as an employer for the contract employee. 

For example, when a small business owner decides to hire a freelance virtual assistant or social media manager, the owner will turn to an agency to avoid having an employee on the books. The agency would serve as the “employer” and charge a fee to both the business and the freelancer.

The net effect will be to reduce the freelance professional’s negotiating power, raise prices for small businesses, and reduce the contractor’s income because they are now sharing their fees with an intermediary. It’s hard to see any winners, beyond the agency, in this scenario. 

When we think of all the small businesses and home-based mom professionals we’ve worked with over the years through HireMyMom.com, we know firsthand how these rules could backfire and hurt freelance professionals and small businesses.

 

What Problem is the PRO Act Trying to Solve?

Sometimes companies misclassify employees as independent contractors to avoid costs associated with having employees. In many cases, these workers function as full-time employees for the business. But, because they aren’t considered employees, the employer does not pay the associated costs, such as unemployment insurance premiums and payroll taxes.

While we can understand the motivation to change that dynamic, this bill goes about it the wrong way. 

According to Forbes magazine, genuine independent contractors don’t want to be considered employees. They have many clients and prefer the flexibility and freedom of independent contractor status. 

This perspective reflects our experience as well. We’ve worked with thousands of employers seeking mom professionals and mothers looking for meaningful work that lets them show up for their families on their own terms through HireMyMom.com. In many cases, a contractual relationship is the best scenario for all parties. This law will harm both sides of this equation. 

In fact, this bill could disproportionately affect our job seekers–especially the virtual assistants, copywriters, project managers, bookkeepers, and social media managers, who have successfully launched businesses and are thriving as independent contractors.

 

What’s Happening with the PRO Act

On March 9, the U.S. House of Representatives passed the PRO Act. The Senate can now choose to consider the legislation. President Joe Biden has voiced support for the bill becoming law.

The PRO Act has a long history. It was initially introduced in May 2019 and failed. In May of 2020, it passed the U.S. House of Representatives, but the Senate did not pick it up. Now that Democrats control both the legislative and executive branches of government, the bill has better chances of moving forward.  

 

Take Action 

Reach out to your elected representatives and let your voice be heard.

Let your representatives know that you depend on the freelance economy and want to ensure it isn’t negatively impacted by the PRO Act.

 

 

 

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5 Things You Need to Know Before Hiring an Independent Contractor

5 Things You Need to know Before Hiring an Independent Contractor

Hiring an independent contractor is a big step. It often means that your business is growing and that you are ready to take the next step to bigger and better things. Now that you’ve found the right person and agreed on a scope of work, it’s time to roll up your virtual sleeves and get to work, right?

Not so fast.

While the paperwork required to hire a contractor is much less than a regular employee, there are still important documents that must be completed and collected. Here’s an overview of the who, what, why, where, and how of forms needed when you hire an independent contractor. 

 

Who Qualifies as an Independent Contractor

Let’s start with the who. Any person or business you hire to do work on your behalf, but not as an employee is an independent contractor. 

Usually, independent contractors are in a different business than your own. For example, freelancers like artists, editors and writers are often independent contractors. Independent contractors can also include outside companies doing work for you on an ongoing basis. Think cleaning service, an attorney, or a tax prep person. Basically, independent contractors include anyone you are paying for services and who is not an employee.

The Internal Revenue Service (IRS) has set guidelines for determining if someone is an employee or an independent contractor. As a rule of thumb:

  • You pay independent contractors for the result of their work. 
  • You pay employees for the ability to control how the work is done.

 

Why Independent Contractor Status Matters

When you hire an independent contractor, you aren’t required to withhold federal or state taxes or Social Security and Medicare taxes (collectively known as payroll taxes) from their pay. That’s because rather than paying them a salary or a wage, your business is paying another business for services.

Independent contractors are self-employed/owners of their own business and are responsible for reporting their income and paying the associated taxes. (You can learn more from irs.gov.)

When you hire people as employees, you are responsible for withholding the appropriate payroll taxes. This applies for part-time, full-time, and seasonal employees.

 

When to Call the Pros

Issues around employment status and taxes can be thorny.  The IRS offers some guidelines for making this determination. But, it’s wise to consult an attorney or accountant with specific questions or for advice when hiring people or businesses to do work on your behalf. While this article is a good overview of your obligations when hiring independent contractors, we aren’t attorneys and we don’t practice law here at HireMyMom.com. 

 

Start a File for Each Contractor

Before we talk about which forms to collect from your contractor and when, let’s take a step back and consider why it’s important to collect them. While you aren’t required to share information about your independent contractors with the IRS, there are still good reasons for keeping a file on each contractor. 

  • Maintaining project overviews and any feedback you share with the contractor, helps you keep good records about your projects– including how and when they were completed, who did the work, and what you paid to have the work done.
  • If you are ever audited, you can easily pull information about each contractor to share, as needed. 
  • Keeping a contractor file makes it easier for you to connect with contractors in the future. 

 

Collecting the Right Forms

Collecting the correct forms from independent contractors is often an overlooked step that offers important benefits for your business and the contractor you are hiring. Securing the correct forms at the beginning of your relationship can set you up for greater success later. It’s easier to have the information on file before the project begins when you and your contractor are in more constant communication. 

Collecting the forms early gives you peace of mind that you’ve checked all the boxes with your independent contractor.  According to The Balance Small Business, there are several forms to collect and keep on file, including: 

  • A completed W-9 tax form. This form and directions to complete it are both available online at irs.gov and should be on file before you pay the contractor. Once you collect the W-9 form, hold on to it for your files in case you need to share it with an auditor. (You don’t need to send it to the IRS.)
    • While you don’t need to withhold payroll taxes from an independent contractor, you are responsible for issuing them at 1099 Form for Non-Employee Compensation at the end of each calendar year. 
    • Independent contractors use the 1099 Form to report their business income to the IRS.  
  • A contract. When you start a new relationship with an independent contractor, establish the terms of your engagement with a written contract. The contact should:
    • Outline that the person you are hiring is an independent contractor and not an employee. It’s important that the person you are hiring understands that you will not be withholding payroll taxes because he/she is not an employee.
    • Stipulate who owns the finished work product. (This is especially important for creative services such as art work or design.)
    • Outline the scope of work to be performed.
    • Document billing rates, invoicing, payment processing and timing. Settling on this at the beginning of the project can make for a more productive relationship.
  • A resume and reference information. You know why you hired this person to do work on your behalf, but keeping a resume and reference information on file makes it easier for others to review, if needed. You may even have your contractors complete an application so you can easily access pertinent information about them in the future.

 

Additional Forms to Consider

In addition to the items outlined above, your business may dictate the need for additional forms, according to The Balance Small Business. For example:

  • A non-disclosure agreement (NDA). Sometimes called a confidentiality agreement, this gives you confidence that your independent contractor is not sharing your business plans or trade secrets with competitors or other businesses. 
  • A non-compete agreement puts restrictions on the contractor’s ability to take your customers or clients to a competitor. These documents tend to outline specific actions and timeframes where the restrictions apply.  
  • A non-solicitation agreement keeps an independent contractor from working for your competition while also doing work for you. This can be tricky because sometimes you want a contractor with expertise in your industry, which means he/she also works for other similar businesses.

Consult a lawyer if you are considering asking your contractor to sign any of these items. State laws vary considerably. Working with an attorney can help make sure that any steps you’re considering are legal and advisable based on your state, objectives, and situation.

 

We’d Love to Hear From You

Tell us how you found your independent contractor and the success you experienced.

 

 

Disclaimer. The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice.

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