I’ve been an independent graphic designer and photo editor for the last three-plus years. Along the way, I’ve seen my clients audited by the US Department of Labor (DOL) regarding their usage of freelancers. As a result, some clients have said that to continue our client-vendor relationship, I must clear certain minimum business organization standards. The first requirement was pretty simple: I must have my business organized as an LLC. Being a Sole Proprietor at the time, I filed the LLC paperwork and moved on. Since then, I’ve transitioned from operating as an LLC organization to an S-Corp. As a result, I’ve got about independents pressured into employment.
Why is the government busting my client’s chops about their freelancers?
I assumed that the DOL was lumping graphic designer contractors in with more unskilled and (stereotypically) exploited contractor positions. We’ve all heard of jobs structured as independent contract labor that really should be full-time work with benefits, minimum wages, worker’s comp coverage, etc. It seemed strange that the government was trying to “protect” me from my clients. Clients with whom I have negotiated rates and working relationships that I find very fair. I command a good rate for my work. I am insured. I save for retirement. I say ‘No thank you’ to this ‘help.’ It’s easy for me to imagine the government being dumb enough to enforce policies “saving” me from my hard-won independence by blindly misapplying labor policies designed to protect a truly exploited class of workers.
Eventually, I realized the audits were unlikely intended to protect me from my clients. They likely have more to do with tax revenue. When a small-business person performs a task formerly done by an employee, that small-business person can use all the corporate tax loopholes a larger business can. Perhaps more than that, the government may be displeased with businesses using contractors to stay below certain head-counts. This can help them avoid the red tape that comes with growth (FMLA seems to be the target law here)
The DOL has a blog post on the topic of Contractor versus Employee status. From where I sit, the DOL is trying to minimize contractors, regardless of how good a deal they may be able to negotiate for themselves because it screws up tax revenues. Businesses get preferential tax treatment. When a business directs a significant volume of work to other businesses (contractors), less revenue flows to the government. The consequence being: a motivated contractor finds it more difficult to enjoy the advantages (tax & otherwise) of being independent of their client.
Who is protected be these audits?
I’ve worked with freelancers who clearly wish they were employees and behave as such. For example, I worked on the west side of Minneapolis at an agency with a guy who drove in from Wisconsin every day (about a 50-mile commute) and never even claimed the milage on his taxes as a deduction because he didn’t feel he should take business deductions.
Some freelancers have no interest in finding new clients and growing their businesses. Therefore, they don’t attempt to fill their schedule with the most lucrative & interesting combination of clients & projects, preferring to stick with a single client through thick & thin.
They are probably misclassified workers.
Maybe these people like the DOL’s crackdown on misclassified employees. As such, perhaps they’d love the government to force companies to hire them as W-2 employees.
Independents pressured into employment
But for every wannabe W-2 employee/freelancer I’ve worked with, there is another entrepreneurial small business person. These business people negotiate a fair rate, pay their taxes and run their freelance practice like a real business, competing in the marketplace for work.
It bugs me that the DOL seems to have intimidated the creative industry into pushing successful, well-compensated small business people into employees. Small (often single-person) businesses should be encouraged, not pushed to employee status. Every freelancer is a potential design agency start-up, as long as these independents pressured into employment can resist the push clients afraid of DOL compliance audits.
If you read the fine print, the DOL says they feel every situation is different, and there is no single litmus test that can guarantee compliance. Of course, that is unworkable IRL. Remember my client who said all I needed to do was organize as an LLC, and I’d be okey-dokey? The application of this policy was quite arbitrary in my case. This opacity makes it unclear how to proceed. If I wasn’t the stubborn fuck I am, I might have rolled over and accepted the W-2 alternative I was presented with. These audits will intimidate creatives, a class of workers not stereotypically known for their regulatory savvy.
What are your thoughts about the rash of DOL audits of design agencies?
Are you a freelancer who wishes to be an employee?
Are you a freelancer pressured into employment against your wishes?