Major trends are converging to reshape the makeup of the SMB workforce, as we discuss in Trend #2 of SMB Group’s 2018 Top 10 SMB Technology Trends. One key trend is that the gig economy is growing.
Just what is the gig economy? Basically, Americans are increasingly making more of their income through freelance or contract work, instead of through traditionally defined employee-employer salaried positions. The category includes self-employed, temp workers, contractors, on-call workers and part-time employees, spanning industries from construction to pet care to healthcare, and from professional services, such as web design and programming—not just Uber and Lyft drivers.
The gig economy started to take off in the 2008 great recession. No one was hiring salaried workers, but people who lost salaried jobs needed to make ends meet. To a large degree, the Internet created a new marketplace for people to put their minds, time and hands to work as contractors. At the same time, businesses needed to deal with market volatility, slashed credit lines and necessary layoffs. They hired contract workers rather than staff employees to keep costs down, and get flexibility to scale up or down depending on the amount of work coming in.
10 years later, the economy has rebounded and the unemployment rate is at an all-time low. But the size of the independent workforce continues to grow. A recent McKinsey study suggests that independent workers in the U.S. now account for about 27% of the workforce.
Why the Gig Economy Keeps Growing
FreshBooks, which provides cloud-based accounting software for self-employed professionals recently announced the results of its second annual “Self-Employment Report” to better understand this growth. The study, which surveyed 2,700 people who work full-time, either as traditional employees, independent professionals, or small business owners. Self-employed respondents noted several challenges to going solo, including finding talented staff or contractors, attracting new customers and sourcing money to reinvest in the business.
However, both currently independent workers and what FreshBooks dubs as “next wave independent workers”–those that plan to leave the traditional workforce–see the benefits outweighing the drawbacks (Figure 1).
Figure 1: Views of Self-Employment from FreshBooks Self-Employment Report
And, once people leave the traditional labor force, few go back: 97% of current self-employed professionals have no desire to return to traditional work, and nearly 65% of currently self-employed professionals between the ages of 50 and 65 say that they will choose to work past retirement age.
The report also estimates that 27 million Americans are poised to leave traditional work for full-time self-employment in the next two years, and that millennials will account for 40% of tomorrow’s independent workforce.
Tapping Into the Trend
Like most businesses, more SMBs are tapping into the gig economy (Figures 2 and 3). They are hiring independent workers not only to gain cost efficiency and flexibility benefits, but to help to achieve specific goals. For instance, freelancers from can free up existing staff from mundane work to focus on strategic, high value projects necessary to grow the business, or to help handle a spike in demand for goods or services. Alternately, SMBs can contract workers with very specialized skills to get the expertise they need to pursue a new initiative.
Figure 2: Human Resources SMBs Use for Business Functions
Figure 3: SMB Hiring Plans
Avoiding the Pitfalls
Of course, there are some challenges as well. Companies that hire contractors have to juggle workers who are frequently off-site, schedule their own hours and may have multiple priorities and little experience with their company’s mission. Cloud-based applications can make it easier for contractors and employees to work together, regardless of where they’re working from. Look beyond email and phone to newer solutions, such as video conferencing, stream-based messaging applications (such as Slack), which help people collaborate in real-time.
In addition, the Internal Revenue Service (IRS) scrutinizes tax filings, searching for companies that inaccurately categorize independent worker as contractors. The IRS believes that some of these companies use contractors to do the same work that salaried employees do to bypass paying payroll taxes, Social Security, Medicare, unemployment insurance and other benefits. In general, if you hire an independent worker to do the same job as a salaried employee, then you should classify them as an employee.
The gig economy isn’t perfect. But SMBs have more to gain than lose from the independent labor force. While new employee hires will continue to be preferable for many roles, gig can provide SMBs with a flexible option to help fill temporary labor gaps and to get the necessary expertise to pursue growth opportunities.
© SMB Group 2018