Providing employee benefits to independent contractors

The modern workforce is undergoing a significant transformation, with a surge in contract positions replacing traditional full-time roles. This shift has allowed companies to cut costs by not necessarily providing benefits to these contract workers, saving up to 25% on labor expenses.

However, this strategy is not without its consequences. As contract workers become a more integral part of a company’s workforce, withholding benefits could undermine long-term growth and talent attraction. To remain competitive, businesses should begin extending benefits to their independent contractors and other 1099 workers.

There will be hurdles, of course. As independent contractors, these workers will not be eligible for any group insurance programs, such as life, dental, or vision. To get around this, benefits brokers and HR professionals need to consider a fresh approach to benefits. As someone with more than 30 years of experience in advising organizations on their benefits, I believe that lifestyle accounts are the answer.

Benefits and independent contractors

Not all industries use independent contractors, also known as freelancers or gig workers. Yet for those that do, this workforce segment can be a vital cornerstone of their business. Industries such as construction, technology, health care, and marketing make regular use of gig workers, which provide a high level of flexibility during crunch times. That said, very few businesses – if any – are currently providing their gig workers with benefits. That, I believe, will change in the coming years as more businesses realize they are in a talent war for these critical workers.

Look at it this way. Anyone who works as a freelancer will be well aware that they have seriously limited protection against a sudden loss of income from an illness or injury. Even if they wanted to purchase coverage for themselves, most have poor or limited access to the benefits market. Given these circumstances, any organization that offers employer-subsidized benefits to its gig workers would immediately become a highly attractive employer. And considering that many businesses are currently experiencing a labor shortage, having attractive benefits has never been more important.

As for which benefits companies should offer, I’d advise employers to not get bogged down with health benefits. Employer-provided health insurance, with its large premiums and tax deductibility concerns, tends to take up 80% of the conversation when discussing benefits. This is a mistake that a lot of employers make. They get too tied up by working out the specifics of health insurance and forget about the other benefits such as life insurance, disability coverage, and wellness programs. Those are the benefits you should focus on when looking to attract independent contractors.

Lifestyle accounts

Again, the biggest issue with extending benefits to gig workers is that they aren’t eligible for group policies, typically the bread and butter of employee benefits programs. The IRS says that to be eligible for group policies, workers need to be fully fledged employees, which independent contractors are not. However, gig workers can access individual benefits, which have no eligibility rules. The way to do that is through lifestyle accounts.

Lifestyle accounts are a relatively new approach to benefits that have only arrived on the scene in the last few years. Whereas before an employer would purchase a set of predetermined benefits that a worker would choose from, with lifestyle accounts you’re contributing a set annual amount of your benefits budget to each worker.

For example, let’s say you give $1,000 to one gig worker through a lifestyle account. Gig workers can then spend this money on whichever individual benefits they wish, whether it’s life insurance, wellness programs, or even pet insurance if that’s what they want. Companies can easily provide this level of choice through a benefits management platform, providing not just the funds but also the access that gig workers typically lack.

The one apparent catch to this setup is that these employer contributions would be counted as taxable income to the worker. However, given the low premiums on these insurance products at least when compared to health insurance, the tax issues are insignificant in comparison to the benefits. At most, the tax consequence may be a few hundred dollars annually.

Moreover, any costs or complications from setting up a lifestyle account for each contractor must be measured against what you’re gaining: a satisfied worker who can see you care for them and will be committed to working with you for the long haul. That’s the main goal with benefits and is something the freelancer won’t forget anytime soon.

At this point, it’s worth considering the advantages of extending the use of lifestyle accounts to all workers, both employed and contract positions. This makes sense not just from an administrative standpoint but also increases the job satisfaction of salaried employees. Having the option to acquire additional individual benefits – for instance, supplemental individual life insurance – on top of their group benefits will go a long way in making each employee feel highly valued, thus increasing a company’s talent acquisition and retention rates.

Related: Here’s how to understand and help gig workers

In the coming years, gig workers will become an increasingly essential component of each company’s workforce. While it might be tempting to continue withholding benefits from contract workers for the sake of cost savings, this short-term outlook risks jeopardizing a company’s talent acquisition and retention.

It’s only a matter of time before more businesses fully realize the importance of attracting critical gig worker talent. Those who achieve this through an early adoption of lifestyle accounts will be able to gain an edge in the talent war.

Bob Gaydos, CEO of Pendella