As small businesses struggle in a competitive job market, many are finding a need to hire a independent contractor (a.k.a., 1099 worker, freelancer). In fact, almost nine out of ten (86%) companies say they plan to increase their use of independent contractors in the next year, according to a recent survey by Worldwide Business Research (WBR) Insights. Using this type of workforce gives small businesses more flexibility, allowing them to manage unique projects, engage specialized skills as needed, and obtain auxiliary services that are not core to their business, without the overhead of a permanent employee.
However, managing independent contractors comes with its own set of challenges especially for small businesses which may not have the knowledge or systems in place to help them properly classify, pay, manage and report on how they are using independent contractors.
Why are small businesses hiring independent contractors?
As a small business, your needs may change based on a project, client demand or a host of other factors. Businesses today are hiring more independent contractors for a number of reasons. WBR survey respondents cite the need for specialized skills (37%) and a more agile workforce (34%). Notably, only 29% say the cost implications of benefits required for full-time employees is a factor.
Independent contractors enable you to hire for skills you may only occasionally need. With those skills they can hit the ground running and get a project started quickly. It’s also an opportunity to add skills and experience that can bolster your internal team’s performance and help employees learn.
Challenges of managing an independent contractor workforce
As a small company you’ve got enough on your plate just running the business day-to-day. And if you are like many small businesses, as you’ve grown, your systems haven’t kept up. The value of hiring independent contractors could easily be cancelled out by inefficient processes and compliance issues. In particular, small business owners should be focused on solving for two main areas of contractor management.
Challenge #1: When is an independent contractor really an employee?
With the recent rise in the use of independent contractors, many states are passing legislation to better define the difference between an employee and independent contractor. The U.S. Department of Labor (DOL) published a final rule in March 2024 that changes the test for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).
In the WBR study, respondents acknowledge that staying on top of, and implementing, current laws regarding classification and new hire reporting is one of their biggest challenges. In fact, over half of the respondents (55%) pay independent contractors and employees from the same payroll system. Classifying these payments correctly is important, as misclassifications can result in potentially heavy fines from authorities and paying back taxes, wages and other applicable amounts.
Challenge #2: Can your current system handle hiring more contractors?
Over half (54%) of the respondents in the WBR study claim that, if they were to grow their workforce of independent contractors by 50% today, their current processes and systems couldn’t scale easily without adding more administrative burden. Many small businesses are dependent on a patchwork of tools and systems to onboard, manage and pay their contractors.
Another area of concern is the ability to thoroughly and quickly vet independent contractors to ensure they possess the necessary credentials and qualifications. In many industries this is essential and any lag time can result in lost business.
Without the proper tools and processes in place, small businesses may also run into trouble when it comes time to report on accounts payable/contractor payments and tax obligations.
What can a contractor management system do for you?
If your organization is struggling with managing independent contractors, it may be time to upgrade to a centralized contractor management system. A more efficient system can help you find qualified candidates faster, get them working more quickly and reduce manual processes that tie up your time and cost you business.
1. Streamline and automate processes to free up time and grow the business
A unified platform for managing independent contractors can significantly automate manual processes and improve compliance. It helps companies manage their contractor workforce efficiently, freeing up valuable resources that can be focused on meeting clients’ needs and growing the business.
As an example, ClearVision AV, a supplier of audio-visual services across the U.S, was using a combination of an invoicing program, documents and spreadsheets to maintain their labor cloud and dispatch information. Every work order took over two hours to process, slowing their ability to dispatch technicians and hindering business growth. Even identifying qualified contractors for work orders was cumbersome.
By implementing a comprehensive contractor management system, they were able to streamline the entire work order process from initial request to sending out assignments which resulted in a 93% on-time arrival and completion rate.
2. Find the right contractors with the right skills quickly
The increased use of independent contractors – many of whom may be working in different geographical locations – can make recruiting a huge headache. Finding candidates today often involves using multiple sources like job boards, staffing agencies and marketplaces.
An IT staffing firm that serves clients across the globe was struggling to find reliable field service technicians, especially in smaller geographies. Using a contractor management system with an IT field services marketplace, they were able to access thousands of technicians with the required skills, certifications and performance ratings in the locations they needed. They can now quickly fill more jobs in more places while knowing they are sending quality techs they trust on-site.
3. Onboard contractors and get them working faster
Onboarding requires gathering appropriate paperwork, certifications, verification and introduction to the organization. All this information should flow seamlessly into one place but, unfortunately, in many small businesses, this data sits in different locations, increasing the chance of errors and missed information.
Contractor management technology can provide tools to streamline and automate the majority of these processes. For example, you could customize your online onboarding process and offer a user-friendly mobile application to assign jobs and submit proof of project completion.
Cielo24, a provider of video data solutions in the online education, news and entertainment markets, needs to efficiently recruit, onboard and vet a large volume of freelancers, while also having the ability to quickly identify and engage workers to meet short turnaround times. Using a contractor management system enabled them to create a more sophisticated vetting process which in turn led to better quality freelancers. They are now able to recruit and onboard more quickly, with a 20% increase in daily throughput.
Current technology – like contractor management software – gives small businesses the power to navigate the marketplace like the big players. To give your business the competitive advantage in a tough labor market, consider investing in systems that enable you to hire and engage independent contractors more efficiently.
Meg Ferrero is Vice President, Assistant General Counsel, at ADP.
Independent contractor stock image by Prostock-studio/Shutterstock
