Why Talent Platforms Should Use an Employer of Record for W-2 Assignments

The gig economy has experienced explosive growth over the past decade. In 2023 alone, 18.3 million gig workers in the U.S. generated $1.4 trillion in revenue, according to Staffing Industry Analysts (SIA). This shift has redefined how businesses and individuals approach work, with talent platforms playing a central role in this transformation.

Talent platforms are digital platforms that connect businesses with workers for short-term or freelance jobs. These platforms cater to a wide range of industries, including retail, hospitality, light industrial, healthcare, and software development, and often have a mobile app to facilitate work. Talent platforms have substantially outpaced the growth of temporary staffing: in 2022, platforms were growing at 50% per year, five times the rate of the overall market.

Part of this growth has been due to talent platforms' reliance on 1099 independent contractors (ICs) to fill roles, instead of W-2 employees that are used in traditional temporary staffing. The IC model emerged to meet the need for speed and flexibility in the gig economy, allowing businesses to scale quickly and workers to find opportunities easily.

However, while the rise of platform-based work was so rapid and new that existing regulatory frameworks struggled to keep pace, state regulators and litigation have started to become a challenge for many talent platforms, especially those operating in states like California, Illinois, Colorado, New Jersey, Massachusetts, New York, and others.

In some cases, both the clients using the platforms and the platforms themselves are under scrutiny. Common complaints that lead to regulatory action include unpaid overtime, lack of sick pay, and failure to provide workers' compensation—issues that arise when workers are misclassified as ICs instead of employees.

The penalties for misclassification can be severe, with fines ranging from $5,000 to $25,000 per violation, in addition to back wages.

This regulatory shift, combined with clients' growing demand for more compliance and security in labor practices, is driving a push toward W-2 employment models.

For talent platforms, this transition from a 1099 IC model to W-2 employment is complex and requires careful navigation. This is where an Employer of Record (EOR) becomes a valuable partner, allowing platforms to implement W-2 employment without disrupting their core operations. An EOR becomes the legal employer for W-2 assignments in a separate entity, and handles compliance, payroll, benefits, and other employment responsibilities, while platforms can focus on growth and service delivery.

The Challenges of Transitioning to a W-2 Model

Shifting from a 1099 IC model to W-2 employment is not just a matter of altering payment structures. It involves a complex web of employment regulations, including:

1. Onboarding Requirements: Verifying employment eligibility, conducting background checks, and managing necessary documentation, notices, and training.
2. Payroll and Wage Compliance: Adhering to federal, state, and local laws regarding minimum wage, overtime, tax withholdings, and making timely payments.
3. HR Compliance and Benefits Administration: Managing employee benefits such as health insurance, retirement plans, and paid time off. Compliance with laws like the Affordable Care Act (ACA) requires offering certain benefits to eligible employees. Additionally, platforms must handle workers' compensation, unemployment insurance, and adhere to labor laws regarding discrimination, harassment, and workplace safety.
4. Ongoing Regulatory Requirements: Keeping up with changes in legislation and ensuring continuous compliance across multiple jurisdictions.

Managing these responsibilities internally can be overwhelming and resource-intensive for talent platforms, especially those handling a high volume of workers through mobile apps. The sheer volume of workers necessitates efficient systems that can seamlessly handle massive amounts of data.

The Solution: Partnering with an Employer of Record

An Employer of Record assumes the legal responsibilities of employing workers on behalf of the talent platform. This partnership allows platforms to offer W-2 employment without the associated administrative burdens. An EOR handles all aspects of HR compliance, payroll, benefits administration, and regulatory requirements, enabling platforms to focus on their core competencies.

What to Look for in an Employer of Record

When selecting an EOR, talent platforms should consider the following features:

• Built for Contract Staffing: The EOR should specialize in managing temporary and contract workers, understanding the nuances of flexible staffing arrangements and the unique needs of gig workers.
• API Integration Capabilities: To handle the sheer volume of workers efficiently, the EOR must offer robust API connections. This enables seamless integration with the talent platform's mobile app, automating critical processes and reducing manual workload. Unfortunately, most EOR providers lack this capability, which can lead to inefficiencies and scalability issues.
• White-Label Solutions: The ability to match the platform's branding ensures a consistent and professional presentation to both clients and workers. A white-label EOR solution allows the talent platform to maintain brand integrity while outsourcing employment responsibilities.

Conclusion

The evolving regulatory landscape necessitates a proactive approach from talent platforms. Embracing an Employer of Record like Ascen not only mitigates legal risks but also enhances operational efficiency. By offloading the complexities of employment compliance and benefits administration—and leveraging API integrations to handle the volume of workers—platforms can continue to deliver exceptional value to their clients and workers. This strategy ensures sustained growth and competitiveness in a dynamic market, allowing talent platforms to focus on what they do best: connecting businesses with the talent they need.

If you'd like to see how Ascen can help your talent platform shift to W-2, please book a demo here.

This article was originally published on the Ascen website.