As outsourcing to freelancers spreads, lawmakers and regulators around the world are scrambling to keep pace. Accordingly, companies working the new trend into their business model must be wary of running afoul of a fast-changing legal and regulatory landscape.
Due diligence can be especially tricky for firms that use freelancers located in multiple jurisdictions—even within countries, such as the US, that have federal systems. Plus, governments everywhere from Brazil to Serbia to the UK are moving the goalposts.
Governments often couch the new rules as defending exploited workers. But many independent contractors oppose legislation that would restrict their freedom in exchange for traditional work-related benefits. California’s landmark Assembly Bill 5, for instance, passed in 2019, extends employee classification status to most gig workers. It has been the target of lawsuits filed by groups running the gamut from truckers and Uber drivers to freelance journalists.
The debate can be heated, but many impartial observers believe that it mostly comes down to this math: Governments fear the real or potential loss of tax revenue. Argentinean officials estimate that they are losing billions of dollars in tax revenue from citizens who work remotely with clients abroad, says Jon Younger, co-author of “Agile Talent: How to Source and Manage Outside Experts.” Shortfalls may result even in places with efficient tax collection structures and even where most freelancers pay their fair share, as activists say they do.
Collecting from individuals is not as quick and efficient as a simple blanket payroll deduction, points out Steve King, partner at Emergent Research. John Lee, CEO of Work From Anywhere, says, “Many countries around the world are looking at this as a significant risk, particularly those with high social security spending.”
In Serbia, among other places, legislation aims primarily to boost tax collection from independent workers. Following the California model, other governments want to reclassify freelancers to prevent them from working independently. The California law revived a three-pronged, Depression-era standard called the ABC Test. The controversial B factor states that, to be considered independent, a worker must perform work that falls outside the hiring entity’s normal course of operations. Thus, a book publisher can call an electrician to fix the wiring in its office; but it could not temporarily bring on a freelance translator, since the latter role serves the employer’s core function.
The politicians who back such legislation argue that they are combatting the misclassification of people who should be considered employees under the law. And experts agree that misclassification happens. King estimates that 10% to 15% of independent contractors, or some seven million to 10 million individuals in the US, “should be classified as employees, and most of them would want to be.” Not included in this estimate are gray-area sectors such as ride hailing and delivery drivers. Misclassification is concentrated in a handful of industries, including hospitality, warehousing, and some industrial sectors, he adds. Safety and other labor conditions in these places tend to be substandard and the employers often prey on vulnerable groups such as immigrants.
At least in the US, new legislation would not seem to be needed to prosecute such abuse, however. “Enforcement is uneven and underfunded,” says King, “but the laws are clear on misclassification.”
As some jurisdictions attempt to restrict freelancing, others encourage it. Over 50 countries offer so-called digital nomad visas to serve the needs of foreign remote workers, many of them independent. Some municipalities in Argentina and the US, for example, are starting to offer subsidies for incoming remote workers.
“Some countries are clamping down, but others are opening up,” says Andrew Jernigan, CEO of Insured Nomads. “They’re saying, ‘Please come and spend your money here.’”
