Freelancers have always been an important part of the marketing agency environment.

The reasons for this fact have changed depending on the industry culture and the economy at any given time – sometimes the best creatives choose the personal autonomy of establishing their own freelance brand, in other cases a booming economy and the battle for talent it creates means independent contractors command higher fees than employees, and in the case of economic recession, it’s a choice some agencies had to make for the now-freelancer to create leaner business operations.

Whatever the cause, independent contractor relationships are now a fact of life for just about every agency. Recent changes in many state laws, though, have created additional rules beyond the longstanding IRS tests for independence that agencies need to abide to avoid having their freelancers classified as employees.

Most states fall into one of these categories:

“ABC Test” States – the toughest compliance states for Independent Contractors, of which California is the most notable.  The most challenging part of the ABC Test is that the freelancer cannot be classified as independent if the services they provide are within the scope of the services the agency regularly provides, and they must be engaged in an independently established business that provides those services. Given the nature of marketing agency work, these are nearly impossible criteria.

“Control and Direction” States – these states follow a classification system similar to that used by the IRS, focused on how much control the agency exercises over the work and environment of the contractor.

“Unique Test” States – this handful of states has its own individual tests or criteria.

So, what’s an agency to do to reduce its risk of noncompliance with these independent contractor rules? Here are a few things that can help:

1. Have a written contract with every freelancer. Whether it’s for a quick copywriting assignment or a longstanding project relationship. Every. Single. One. You need this agreement for many other reasons (IP ownership, for one), but it’s a critical tool for independent contractor compliance.

2. Require invoices from every contractor, NOT “timesheets.” Your agency’s staff may be timekeeping champs, but there are different rules for independents. Your freelancer and the agency should have a system of invoices, arms-length billing terms, and every other formality you would have in place with a vendor.

3. Do NOT issue agency equipment to the freelancer or ask that they provide their services at your office.

4. Engage contractors who have more than your agency as a client, or the ability to engage with others. Positioning your agency as the only “customer” of your freelancer can create a perception of employment over independence. Favor freelancers who have a roster that includes other paying clients.

5. Engage an entity, not an individual. For that freelance talent that you plan to regularly engage, consider requiring that they engage with you as an entity (such as an LLC), not as an individual person. This creates an entity to entity transaction and eliminates the question of whether the agency has engaged individual services. HOWEVER, this step won’t be helpful without good faith adherence to suggestions 1-4.

6. Crunch the numbers. In some cases, and in some places, it will simply make better sense to employ a person than to try to engage with them as a freelancer. And there are other ways to build in flexibility and cost controls into the arrangement if this individual’s abilities are important to your agency.

We’ve spent a lot of time recently thinking about alternate business models for agencies (we’ve even published a very short handbook about the topic), and freelance talent is one of the most frequently implemented alternatives we see agencies implement.

If this sounds like your agency too, spend some time thinking proactively about compliance before you onboard your next freelancer.