Despite being faced with many challenges this year, the gig economy is still alive and thriving in India. It is forcing employers to redefine their approach to human resource management. According to a report from PayPal, India contributes 1 in 4 freelancers. As a thriving tech and startup hub, it comes as no surprise that 60 percent of independent contractors are under 30 in India. However, as more companies embrace the idea of employing a mixture of staff employees and independent contractors, their ideals of people management must also change. Understanding the key differences between the two lays the foundation for developing successful HR policies for both. Developing effective policies is crucial in achieving that optimal productivity and business benefits employers strive to achieve with the use of both contractors and employees.
Misclassification of employees and contractors results in a domino effect of costs to the business, and some cases the individual. It can cause an inaccurate payment of benefit and income taxes including health care coverage. According to a publication by Innagguard International Employment Law Alliance, employers also risk having to pay penalty fines, worker compensation, and tax repayments.
To avoid this, companies must keep in mind the classification parameters of each individual during the recruitment, management, and dismissal of their workforce. In India, the definition and relationship with a contractor are guided by The Indian Contract Act of 1872. However, HR managers and businesses can also rely on a model similar to the IRS’s 3 category classification model: Financial Control, Behavioural Control, and The Relationship Element.
Stipulating whether the individual operates under instructions and control of the entity and their entitlement to key employment benefits like employer contribution for social security should all be considered when developing HR policies.
In India, employers are required to withhold income tax from their employee’s salary and deposit with the Government treasury within 7 days of the end of the month. Social security contributions are also mandatory and require employers to contribute 3.67 to 12 percent for the Employer Provident Fund and 8.3 percent towards their pension fund.
However, independent contractors are seen as separate entities. One of the most cited differentiators between workers and freelancers has been their entitlement to company-provided benefits such as healthcare or responsibility of tax payments. As a part of the recruitment process, HR departments should develop separate remuneration packages to be used in the recruitment process of both individuals. So while employees are entitled to social security and pension contributions, contractors may be entitled to corporate discounts, use of business software, or access to retirement investing advice.
Constant review of employee and contractor classification criteria is needed to ensure the business does not become complacent in its grading of individuals. As a business grows and pursues different markets, its labor force needs will change and so will the working patterns of its employees and contractors. Therefore, employers and their HR department should maintain updated information on the roles each of them is playing and how they’ve evolved. It improves the chances of spotting a classification mistake and identifying the point where an independent contractor may be displaying characteristics of a full-time employee (such as a change in control or financial compensation) and vice versa.
While contractors and employees each have their benefits and roles to play in a business’s success, it can only be enjoyed if the right management policies are in place. Developing HR policies that support the unique working dynamics of each employment group, businesses can ensure they tick all the right boxes when it comes to employing workers and contractors.
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