Nearly 60M American adults are now working as freelancers, and it's changing how we think about employment, work, and fair pay. I've been both a freelancer as well as an employer of freelancers, and it's personally a model that's proven to be successful for me in the context of starting new companies. For companies, freelancers provide resource flexibility, which is crucial when you don't have historical business trends to make projections on. For freelancers, freelancing provides more flexibility with your life, as well as provides a potential opportunity to work more and make more vs. in a salaried job.
That being said, freelancers still make up a minority of U.S. workers (~36% in 2018), and we're all still figuring this out as we go. Here are some tips for employers when working and compensating freelancers.
Make sure your freelancer is actually an independent contractor.
A freelancer or independent contractor is someone who sells their services to companies on a non-employee basis. Independent contractors are not employees, and therefore, by law, are exempt from benefits as well as pay their own employment taxes. For companies, it's attractive to hire independent contractors because they don't add the overhead, payroll taxes, and compliance issues that a full-time employee would require.
That being said, the "independent contractor" loophole is often exploited by businesses as a way to avoid paying benefits to people who are basically full-time employees by definition. The IRS defines an independent contractor by the following criteria:
As an entrepreneur, I've found freelancers to be a great way to start and grow my businesses at the early stages. Startups require subject-matter experts, but for experienced talent, joining an early-stage startup can be really risky. Also, I'm often hiring freelancers to see if it's viable for the business to grow in a direction that requires their skills. By hiring SMEs as contractors to do a specific project, it gives us an opportunity to explore the idea of working together full-time, IF the project works and the business is able to continue operating in that direction. No one has to put all their eggs in one basket, and a freelance arrangement can be easily cancelled if the intended direction is not viable within a certain period of time. This is also beneficial to the freelancers vs. moving your family, your healthcare benefits, etc. all over to a new company that you end up leaving in 3 months because your skills are no longer relevant due to a pivot.
Think about what you're not paying.
As an employer of freelancers, it's important to consider what you're not paying and passing onto them. Independent contractors, unlike employees, take on their own cost of business. Some of the added costs that a freelancer has to take on:
So what is fair pay for a freelancer?
I operate from a viewpoint that most employers are good people and want to pay a fair wage. That being said, we're capitalists, and I understand the employers' need to minimize cost and maximize results. There is no right answer to this question, since employment is based on supply and demand and markets are always fluctuating based on that supply and demand. However, here are a few suggestions on how to go about it:
Competitive Market Rate Approach
When I want to find the market rate for something, I'll usually ask 3 comparable freelancers what they charge and then take the average as the fair market rate.
Or you can go on a marketplace site for freelancers like Upwork or Freelancer and see if those rates can help you determine what is fair. Note that these sites have a lot of overseas freelancers, for whom the financial situation is completely different due to costs of living, opportunity costs, and tax regulations. If your job requires a US resident or experience specific to the US market, it is entirely unfair to compare them to an overseas freelancer since their rates are not even within your consideration set.
Full Time Equivalent Approach
If you're not able to find the competitive market price for a freelancer because there is no equivalent on marketplace sites or within your network, another approach is to base compensation on what a full-time equivalent would make for this job since there tends to be more public data available on salaries. Here's the calculation:
Other things to consider...
If you're a startup without that's pre-funding or have other financial constraints, it may be difficult to pay anyone their market rate, regardless of what you think they're worth to your company. Some additional suggestions to consider:
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