Is Using Independent Consultants a Legal Risk?
Using independent talent in the Life Sciences is no novel concept, but new legal guidance and government scrutiny is changing the game. Here is a quick list of considerations to make sure you stay on the right side of AB5 and other state and local mandates.
Setting the Stage. Leveraging independent experts provide companies the ability to access highly specialized talent for specific needs without the cost and legal headache of employment. This talent, at face value, is roughly 15-25% less expensive for every hour worked, not including the added cost of health insurance, state mandated paid time off, and the overhead it takes to maintain compliance in the variety of state and local laws. For these reasons, businesses have favored using independent contractors when they don’t need a full-time headcount because simply put, it is easier and more cost effective.
What Changed? The fallout from the Dynamex landmark supreme court ruling is being felt throughout the country. Leading the charge is California who passed AB5 which significantly reduced the scope of who is considered an independent contractor. This made many of the previously deemed “freelancers” considered to now be employees. This one landmark case sent ripples throughout other industries with notable companies such as Uber and Lyft who are up against a major precedent as their entire business model was now under scrutiny. AB5 not only changed the classification for many freelancers in California, but also galvanized other state legislatures to begin to scrutinize and heighten their regulation of independent contractors.
The Cost of Non-Compliance: The cost of not meeting local and state mandates is significant. Some of the penalties include backpay of taxes and additional fines that could add upwards of 10k per incident. All it takes is one disgruntled contractor to file for unemployment to flag your company. In the strictest states, such as California – fines can be compounded and the legal impacts of AB5 can, in some scenarios, apply to relationships prior to the passing of AB5.
What Relationships Does AB5 impact? AB5 and the resulting scrutiny of freelance experts across the country has most impacted the consulting community. Unlike traditional low-to-medium skilled staffing situations, where a staffing firm would employ the worker and assign them to perform work for a client, many companies rely on fractional expertise at a higher and more specialized level – and this is where there is a grey area. For years, leveraging high skilled specialists as consultants was a clear-cut independent contractor relationship, but the tides are turning depending on the state and nature of the work performed. An example of the quintessential situation is if you needed a former VP of Sales to help implement a new territory sales strategy – someone a company leverages for 10-20 hours per week for 3 months to help implement a new initiative. Well… the jury is still out on whether that is a traditional Independent Contractor relationship or an employee relationship. Some of the key factors include where the fractional VP of Sales resides, how the work is performed, and what the other activities the fractional VP of Sales is participating in outside of the client organization. For many companies, this has dissuaded the use of Independent Contractors in recent months, given the risks associated and heightened government crackdown.
OK, So Now What? Given many of the ramifications of AB5, traditional independent consulting is ever changing. The times of calling up a retired colleague and paying them hourly for services is becoming riskier and riskier. A few options have come to light to help companies navigate these murky waters while delivering the same one-to-one value and cost savings that comes with leveraging a specialized independent expert rather than an expensive consulting firm. One solution is the use of an “Expert Network” or “Expert Staffing” provider to reduce liability when using independent specialists. These networks provide clients with curated and hand-vetted consultants matching their desired background and expertise, and then also provide a compliant engagement framework. They will managing areas such as confidentiality and billing, and also act as a barrier between the end client and the individual expert to reduce exposure.
Key Take Aways. (1)Leveraging independent consultants has increasing challenges and risk. (2) Luckily, there are a number networks that enable on-demand and compliant access to specialized labor. UpWork, and TopTal, for example, are growing networks in the tech space, along with industry specific networks in the Life Sciences such as Experts OnTap. (3) Unless you are engaging in a B2B (corp to corp) relationship, leveraging independent expertise is most safely done using a preferred “Expert Network” or “Expert Staffing” provider.