What is Freelancer Compliance? A Complete Guide for Businesses

Content: 

1. What is Freelancer Compliance and Why Is It Important?

2. Why Is It Important to Uphold Compliance?

3. What Legal Risks Do Businesses Face When Hiring Freelancer

4. How Can You Legally Classify Freelancers vs. Employees?

5. What Are the Compliance Requirements for Freelancers Themselves?

6. How Can Companies Stay Compliant When Working with Freelancers?

7. What Role Do Tools Like TalentDesk Play in Ensuring Compliance?

8. What Are the Key Regional Compliance Regulations to Know?

9. How Can Businesses Create a Culture of Compliance Without Slowing Down?

10. Is Freelancer Compliance Worth the Investment?

What is Freelancer Compliance and Why Is It Important?

Freelancer compliance – a dispensable step or a tedious necessity? Neither!

While many see compliance as a complicated part of a contractor engagement, it can end up saving you time, money and reputational damage. And it need not be tedious either!

In this blog, we’ll see how freelancer compliance actually enables your freelancers to do what they do best, while you get to focus on growing your business.

Freelancer compliance is a comprehensive set of rules, regulations and ethical mandates that every company needs to follow when hiring and working with self-employed talent. This includes rules around proper worker classification – which, in turn, influences tax obligations (both yours and theirs), contracts, documentation, data protection, IP rights, labor laws and more.

Why Is It Important to Uphold Compliance?

Not paying due attention to compliance processes can lead to freelancer misclassification. Why is that such a big deal? A wrong classification can change everything when it comes to taxes, data privacy and labor rights. 

Employees are entitled to protections like minimum wage, overtime, paid time off, pension or unemployment insurance payments. Companies also have to make contributions to social security, Medicare and other payments on their behalf as per the law. Independent contractors and freelancers are not entitled to these.

Unscrupulous companies often try to reduce cost liabilities by taking advantage of this. They simply classify their employees as ‘freelancers’ to avoid paying for these benefits. Compliance protocols are put in place to guard against this.

Misclassification is no casual offence – tax and labor authorities across the world are stepping up scrutiny, and imposing steep penalties and fines on employers found guilty.

What Legal Risks Do Businesses Face When Hiring Freelancer

• Misclassification
  Freelancer misclassification charges can be extremely severe, even if it happens due to a genuine lack of awareness of the rules. It is a hiring company’s responsibility to know and uphold whatever rules apply in their region, and they are expected to seek legal and HR counsel to stay abreast of any changes in their country’s laws. This is important because the rules differ from place to place.
  
  In the UK for example, IR35 is the HMRC-prescribed law that determines whether a worker should be classified as self-employed or not. It tracks factors like whether the worker is directly supervised, whether they have to raise invoices to get paid and more.
  
  Germany has Scheinselbstständigkeit (or false self-employment) rules to identify cases of disguised employment. These rules track whether the worker has autonomy over how they work and whether 80% or more of their income consistently comes from one client – among other factors.
  
  
• Back taxes and fines
  If a company is found to have misclassified employees, they are expected to pay back taxes – the taxes they should rightfully have paid, had they classified the relevant workers as employees.
  
  Additionally, they have violated civil laws impacting workers, and this comes with certain fines and penalties. What’s more, they are expected to make things right with the misclassified workers by offering them the unpaid benefits and social security payments owed to them so far.
  
  These payments can really add up! A construction company in D.C. recently made the headlines for misclassifying workers – and they ended up having to pay over $200,000 in civil fines and worker settlements.
  
  
• Intellectual property disputes
  A misclassification dispute can lead to an IP tug-of-war between the workers and employer for the work produced. In the absence of a clear contract, the aggrieved worker may claim IP ownership – causing missed project deadlines, indefinitely delayed release dates and huge costs incurred!
  
  With global freelancers, the legal IP complexities only get more tangled with different jurisdictions.
  
  
• Data privacy breaches
  Every company has to uphold data protection policies, no matter where in the world they are. The EU for example, is governed by strict GDPR laws, and any infringement can cost the company up to 4% of their global turnover.
  
  When hiring freelancers, not having a formal compliance process can open you up to such infringement risks. If your freelancers’ personal information is scattered across different (non-secure) mailboxes and systems, this can be seen as a huge violation of their right to privacy.
  
  Similarly, you will also need to protect all user and client information. Giving your contractors and vendors access to this data through non-compliant means opens it up to exposure – and can attract expensive lawsuits, especially if you are found to have transferred that data across borders. Meta was slapped with an eye-watering fine of €1.2 billion in 2023 for GDPR breaches.
  
  But aside from the financial impact, a company also faces loss of reputation, with clients and users questioning their credibility.
  
  
• Regulatory non-compliance across borders
  Every country has its own regulatory policies that organizations are legally expected to uphold. For instance, some countries may require you to be registered in that location before you can operate there – or at least set up a local entity. In some cases, extra operational approvals may be needed. Unfortunately, ignorance of those regulations is no excuse. It is seen as non-compliance, which may lead to hefty fines.

How Can You Legally Classify Freelancers vs. Employees?

What makes classification complex is that worker status definitions may differ from country to country. Subsequently, there may be different compliance regulations associated with each type of worker.

The US classifies workers as full-time employees, independent contractors, contract employees and more. In Europe, worker status is defined by completely different categories – like fixed-term employees, indefinite employees and so on.

This is why it is recommended that you seek legal support for classification, as employment status can vary based on small nuances. Let’s take a broad look at how the UK’s IR35 differentiates employees from freelancers.

1. Autonomy over work

If a worker is free to choose whether they want to accept or reject a project, they are likely to be categorized as a freelancer. Moreover, having the ability to negotiate the rate, deadlines and the quantity to be delivered indicates they are a freelancer.

An employee does not have the power to turn down projects they are assigned; nor can they ask for more money to take on a certain project within their work hours. If a worker ‘has to accept’ a certain project, it means they are working in a way similar to employees. They will then not be seen as a freelancer after all.

2. Right to subcontract

A self-employed professional retains the right to subcontract the work or send in a substitute if needed. An employee obviously cannot send in another worker in their place. The right to subcontract, thus, may be seen as a clear indication that the worker is self-employed, and not a disguised employee.

 3. No fixed schedule or direct supervision

If a worker retains the right to work independently, without direct supervision, they are likely to be categorized as freelancers. The client has a say on the results freelancers ultimately deliver – not on how they work to achieve those results.

In contrast, employees have to work from the location their employer asks them to be at, be supervised by their managers, and work the way they are asked to.

This is why your managers have to be very careful of what they ask freelancers to do. Requiring them to work from your office, attend daily meetings or present daily status updates may indicate a degree of control over them that gets those workers classified as your employee!

However, whether it is the UK’s IR35 or any other classification parameters of any other country, the authorities usually look at the broader picture. Classification decisions are not made based on any one factor alone.

What Are the Compliance Requirements for Freelancers Themselves?

While client companies need to uphold compliance, there are certain responsibilities that lie with freelancers too. These differ based on what country or jurisdiction they fall under. But commonly, a freelancer compliance checklist should include:

1. Registering themselves. They must register formally with the proper authorities – be it as a freelancer, a sole proprietor, a One-Person Company (OPC) or any other option available to them in their country.
2. Paying taxes and National Insurance. Freelancers must file their own taxes in a timely manner – and make whatever national insurance contributions that apply. Any delays or missed deadlines may have consequences that they themselves will be responsible for.
3. Arranging for proper insurance. Freelancers will need to get the necessary insurance coverage to protect themselves from potential liabilities or professional indemnity. They should get comprehensive coverage that includes:

• Professional liability insurance to protect against errors, mistakes or negligence.
• General liability insurance, covering any physical injury or property damage they sustain while fulfilling a freelance contract.
• Cyber liability to protect themselves against cyber attacks or digital breaches.

Ensuring data protection compliance. They will need to be aware of all the privacy laws that impact their work, and stay compliant with these laws through their contract period. This involves reviewing client data policies and maintaining proper documentation for any client information they have access to. They will also have to treat client data securely – taking care not to leave it vulnerable on unprotected devices, share it through informal apps, or publish it on social media.

How Can Companies Stay Compliant When Working with Freelancers?

How easily you are able to handle freelancer compliance has a direct impact on how successfully you can scale, meet demands with agility, and pivot business strategies as needed.

You don’t need a Chief Compliance Officer or a large in-house team of compliance experts to get it right. Here are some guidelines for putting a smart freelancer compliance process in place:

• Use compliant contracts
  Freelancer engagements should always begin formally – with a contract. An email outlining the requirements does not count as a ‘written agreement’. You need a compliant contract format.
  
  A great contract should clearly outline the project scope, the expected deliverables and the relevant timelines and payment terms. It should also set out the IP terms and the data privacy requirements that the freelancer will need to follow. After the details are mutually agreed upon, the contract should be signed by both parties, marking a formal start to the engagement.
  
  
• Conduct due diligence during onboarding
  Hiring freelancers legally involves conducting proper due diligence. Ensure you conduct KYC and background checks for your self-employed talent before you onboard them and give them access to company information. This involves verifying their identity, checking their credentials and confirming that the work experiences and references they have provided are indeed valid.
  
  
• Verify freelancer status and documentation
  While it is the worker’s responsibility to register themselves, make sure you check their freelancer status before you bring them onboard. Verify their registration details and get written declarations of what country they will be working from.
  
  Collect all the necessary compliance paperwork – like their personal information, tax reference numbers, NDAs, bank details and more. This ensures smoother audits and tax filings later.
  
  
• Avoid supervising freelancers like employees
  While everyone understands this in theory, it’s easy to slip up on this once the work begins. Asking freelancers to give you daily reports, attend team calls or report at a certain time can all be seen as asserting control over them as an employer.
  
  One good way to avoid micromanaging freelancers is by having pre-decided checkpoints and milestones where you can check in with them, review their work and request edits. But overall, as long as they are delivering results at the agreed upon time, avoid any further supervision.
  
  
• Ensure secure data sharing and storage
  When you have deadlines looming, sending your freelancers information on WhatsApp or other informal apps may seem quick and convenient. But doing this without verifying what kind of digital security protocols they have in place can open you up to data loss, cyber attacks and malware threats.
  
  Instead, have a consistent and secure way to share and store information – like an internal communication platform that you can upload the data on, giving your freelancers restricted access. Once the contract is over, ensure you revoke the freelancer’s access to this data.
  
  In the AI era, you will also need to establish protocols for AI usage. Having a contractor putting in proprietary data onto public AI apps can lead to serious breaches without your knowledge. Make sure your workers know exactly how they can and cannot use AI in their work with you, formalizing this in their contracts.

What Role Do Tools Like TalentDesk Play in Ensuring Compliance?

While all your managers may know the right compliance protocols, handling each step manually leaves a lot of room for human error. Steps get forgotten, paperwork falls through the cracks and the gaps are only noticed during audits.

Automating the process is a much easier, simpler and fail-safe way of handling freelance workforce compliance. That is where platforms like TalentDesk come in to help with:

• Onboarding workflows with KYC/KYB checks. We ensure all background verification and due diligence is done, and all the data and documentation you need is collected methodically – before the work begins. No more noticing that you don’t have a freelancer’s payment details on file the day their invoice becomes due!
  
  
• Automated contract generation. This eliminates the need to reinvent the wheel with freelancer contracts every time you onboard someone new. Our contract templates are compliant, comprehensive and include all necessary details needed for seamless onboarding.
  
  
• GDPR-compliant document storage. This means you never have to store freelancer data in non-secure ways – spread across various inboxes and spreadsheets. Our platform stores the data in one place, in the cloud, making the process more organized and GDPR-compliant.
  
  This offers invaluable advantages to companies like Euromonitor that work with a large number of freelancers. As a market research company, Euromonitor is driven by data. Yet, as their freelancer base grew to 1.6K+ workers across 180+ countries, they realized that managing so much freelancer data was no mean feat.
  
  Their Research Operations Head talks about the struggle, sharing how their data was fragmented across separate spreadsheets for freelancer details, performance, payments and more. Each individual team in the organization handled freelancer data this way, generating an unmanageable number of spreadsheets – and no real visibility of what talent they had. This also made GDPR compliance a nightmare. With TalentDesk’s integrated and centralized data management process, Euromonitor was able to streamline compliance in a single stroke.

• Embedded tax and invoice compliance tools. When you have your freelancers emailing their invoices at different times, there’s always a chance one or two get missed out. In contrast, our system consolidates your invoices, letting you pay them all with a single click.
  
  Our platform ensures seamless global payments with no cross-border delays, no currency conversion hassle and no eye-watering bank fees! The system auto-generates payment trails for every invoice, making audits and tax compliance a breeze.
  
  The lifestyle and interior design community Apartment Therapy recently experienced the convenience of this very feature. Working with 300-500 freelancers across 5 continents, the finance, payments and tax aspects of the engagements were really slowing them down. Their Director of Finance, Kevin Hoopes cites how the manual labor involved in payments and the duplication of efforts was costing them time and money.
  
  With TalentDesk’s automation features, the company now saves 2000 hours per year. Hoopes says:
  
  ‘To just be able to pay just one invoice per week instead of managing dozens and dozens of pieces of bank information and tax forms – it’s changed our lives.’

What Are the Key Regional Compliance Regulations to Know?

Working across regions means you will have to stay ahead of the laws across all the countries you operate in! These laws are obviously extremely intricate and nuanced – but let’s have a quick look at a few key regulations by country.

To explore the full legal landscape in each of these countries—including detailed insights on worker classification, tax obligations, and compliance best practices ➡️ download our complete brochure. It's your go-to guide for navigating international freelance regulations with confidence.

How Can Businesses Create a Culture of Compliance Without Slowing Down?

The freelancer compliance process does not slow you down. Rather, it helps you build a foundation that lets you grow with greater speed and purpose, opening up a world of freelancer talent benefits to keep you agile. But first, you have to set up the right processes!

• Build trust through transparency. Ensure all stakeholders are on the same page about how compliance will be handled at an organizational level – and make sure this visibility trickles down to every freelancer too. This way, everybody involved knows just what to expect, and how the processes will benefit them.
  
  
• Train hiring managers on freelancer dos and don’ts. Even a great compliance strategy falls flat if individual managers handle freelancer engagements their own way. Train them on necessary guidelines, ensuring they understand the implications of each step. Without this, managers tend to see compliance as another step to their workdays.
  
  
• Use technology to simplify and scale safe hiring. Freelancer platforms like TalentDesk give you access to global talent pools, making hiring safe and simple. They also streamline compliance, onboarding and payments – freeing up time and mind space.
  
  
• Leverage Contractor of Record (COR) services. This is a third-party service that assumes all your legal, compliance and payment-related responsibilities associated with working with freelancers and contractors. It gives you the peace of mind that comes with knowing you are operating compliantly – no matter what country you engage freelancers in.

At the end of the day, it’s important to celebrate compliant practices as good governance, not red tape. Setting the right foundation lets you enjoy long-term benefits for years to come.

Is Freelancer Compliance Worth the Investment?

Freelancer compliance can seem complex at first glance, with an ever-shifting landscape of changing laws, local intricacies and a steep cost of getting it wrong. But it really is not that difficult to manage – if you go about it the right way.

The key is to streamline the process – and this is where TalentDesk’s freelancer compliance tools prove indispensable. Leverage our decades of specialized experience in the talent compliance space and let our expertise guide you every step of the way.

Done right, the process has huge payoffs. You get to avoid legal risks, sidestep fines and build the capability to scale globally with speed. It’s a great way to cement your position as a disruptive force in your industry!