As freelance outsourcing becomes more widespread, legislators and regulators around the world are trying to keep up. Accordingly, companies introducing a new trend into their business model must be wary of coming into conflict with a rapidly changing regulatory environment.
Due diligence can be especially challenging for firms that use freelancers located in multiple jurisdictions—even countries like the United States with a federal system. Moreover, governments everywhere from Brazil to Serbia to the UK are changing targets.
Governments often frame new rules as protecting exploited workers. But many independent contractors oppose legislation that would limit their freedom in exchange for traditional job benefits. For example, California’s landmark House Bill 5, passed in 2019, expands employee classification status to most gig workers. He has been the target of lawsuits filed by groups ranging from truckers and Uber drivers to freelance journalists.
The debate may be heated, but many impartial observers believe it largely boils down to this math: Governments fear an actual or potential loss of tax revenue. Argentine officials estimate they are losing billions of dollars in tax revenue from citizens who work remotely with clients abroad, says John Younger, co-author of Agile Talent: How to Source and Manage End Experts. Tax shortfalls can arise even where there are effective tax collection structures, and even where most freelancers pay their fair share, activists say.
Collecting taxes from individuals is not as quick or efficient as a simple general payroll deduction, said Steve King, partner at Emergent Research. John Lee, CEO of Work From Anywhere, says: “Many countries around the world view this as a significant risk, especially countries with high social welfare costs.”
In Serbia, among other places, legislation is aimed primarily at increasing 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-part standard from the Great Depression called the ABC test. Controversial Factor B states that to be considered independent, an employee must perform work that is outside the normal course of business of the employing entity. Thus, a book publisher may call an electrician to repair the electrical wiring in its office; but he could not temporarily hire a freelance translator, since the latter position performs the main function of the employer.
Politicians who support such legislation say they are fighting the misclassification of people who should be considered employees under the law. And experts agree that misclassification does happen. King estimates that 10% to 15% of independent contractors, or seven to 10 million people in the U.S., “should be classified as employees, and most would like to be.” This estimate does not include gray sectors such as taxi services and delivery drivers. Misclassification is concentrated in a few industries, including hospitality, warehousing and some industrial sectors, he adds. Safety and other working conditions in these places tend to be substandard, and employers often prey on vulnerable groups such as immigrants.
However, at least in the US, new legislation does not appear to be required to prosecute such abuses. “Enforcement is uneven and underfunded,” says King, “but the laws are clear about misclassification.”
As some jurisdictions try to restrict freelancing, others encourage it. More than 50 countries offer so-called “digital nomad visas” to meet the needs of foreign remote workers, many of whom are independent. For example, some municipalities in Argentina and the US are starting to offer subsidies to new remote workers.
“Some countries are tightening measures, but others are opening up,” says Andrew Jernigan, CEO of Insured Nomads. “They say, ‘Please come and spend your money here.’