One of the biggest challenges for companies in the coming years is to develop fair and consistent policies toward employees and freelancers, especially in terms of wage package and per diem, respectively.
The number of freelancers has risen sharply in recent years, and will only continue to rise. Hybrid populations of employees and freelancers (self-employed) will therefore become more and more common. Fair and consistent policies for both employees and freelancers will become one of the main challenges for companies. One such challenge is the automatic wage indexation that applies to employees but not to freelancers (unless their contract provides for it). Then again, if freelance fees must rise with longevity, what increase is fair compared to an employee's pay raise? One thing is certain: starting from gross wages or payroll costs is a no-go, we need to start from net income in the short and long term to make the comparison.
We have arrived at the beginning of Q4/2022 - a period marked by (hyper)inflation. The prospects of the automatic wage indexation to be applied at many companies on January 1, 2023 is making many companies nervous - to say the least: an automatic wage index of as much as 8%. This would continue to rise - within PC200 we finally clocked off at 11.08% as of Jan. 1, 2023.
Regardless of all the discussion surrounding automatic wage indexing, the index means a safeguard for employees' purchasing power. But what do you do if a (large) portion of your employees are freelancers?
The question came from a number of freelancers on HR's plate. Freelancers were not necessarily expecting the same increase in their fees. But still a significant increase. Because they too, as freelancers, as individuals, had been hit in their purchasing power. And they would like to see that safeguarded. (For the lawyers among us: there was no clause in the contracts with freelancers that their fees could be indexed according to some formula related to the increase in longevity).
In short, freelancers did not feel they were treated fairly if their fees did not increase. And as we know: unfairness is a driver for demotivation. And as an employer, you obviously want a motivated population of employees, even if they are freelancers. Brushing off or answering the freelancers' question without the necessary substantiation was an absolute no-go for the HR Manager.
The HR Manager wanted to take this a step further and see if the current system of how freelance fees are calculated made sense. Spoiler alert: it didn't. Why not? The starting point (as many consultants advise, by the way) was salary cost, but salary cost is not a correct starting point.
Essentially, the question is: How can you treat employees and freelancers, regardless of their social status (employees vs. self-employed), fairly with respect to each other?
This is a question that not only the procurement department, but above all HR, will have to consider thoroughly in the coming years if they do not want to miss the boat. Because populations are more and more hybrid composed of employees and self-employed, but also all kinds of other types of employment contracts.
That central question falls into two sub-questions:
Before answering those questions, why bother comparing employees and the self-employed at all?
The answer is: yes.
Although you cannot lump every self-employed person together. The distinction between employees and self-employed is actually outdated. When we talk about freelancers, we should actually make a distinction between self-employed freelancers and entrepreneurs (the latter are of course also self-employed as far as their social status is concerned).
Now, on what basis can you then make a distinction.
Well, there are three relevant criteria for that:
Under the motto "I know one when I see one," in practice, without explicitly using the above criteria, companies can pretty well assess who should be considered a freelancer.
In this case, this part of the exercise was pretty straightforward. Not only could the company in question easily identify the freelancers, it was also best to unambiguously identify which freelancers could be compared to which employees.
Self-employed status and employee status are not comparable in anything but nothing. It is comparing apples to oranges: taxation, pension, guaranteed income, ...
And that's absolutely right!
And yet there is a relevant starting point for comparing the two statutes, namely: what net does the individual take home?
Not only in the short term, at the end of the month or at the end of the year, but also in the long term: what net income does the individual derive from the accumulated pension, both in terms of the statutory and supplementary pension?
So the bottom line is, we need to see three calculations:
Steps 1 and 3 can be computed by a multidisciplinary team of experts. Step 2, on the other hand, requires a sophisticated mathematical algorithm, since you have to calculate millions and millions of scenarios and distill the best solution from them. The good news is that we have built such an algorithm that can handle such complex issues 😎
Based on our methodology and calculations, we were able to show that current freelance fees were already more favorable in terms of short- and long-term net income than indexed employee wages.
With those insights and data, they entered the conversation with freelancers to deliver the (difficult) message that the company would not go along with raising freelance fees as of Jan. 1, 2023.
Those conversations actually went pretty serendipitously. A massive outflow of freelancers did not occur.
Provided that you bring a solid and authentic story, ideally supported by insights based on hard data and/or facts, any message - no matter how difficult - can be successfully delivered.
In short, the company thus gained hundreds of thousands of euros that it could otherwise reinvest in its entire human capital and/or with which it could build a buffer, for should economic hard times arrive.
Can we not bother calculating a fee for freelancers by dividing the wage cost for a comparable employee by the number of working days per year?
That's what many consultants and lawyers do.
But then you have to ask yourself the question of what cost you are starting from. Are you starting from the total employment cost, including indirect personnel costs? Or are you starting from the labor cost itself? And if so, from which wage cost: the gross wage cost or the effective wage cost?
Of course it makes more sense for companies to start from the effective wage cost, because as a company you don't want the cost to go up. But is it then so fair to make the fees of freelancers depend on the (tax and other wage) subsidies that you receive as an employer (just think of the exemption from withholding tax for research and development)?
And if you start from the total employment cost, freelance fees are overstated. And that means that employees are substantially better off as freelancers than as employees. The consequence for companies is that the ever scarce financial resources are allocated economically inefficiently.
Within our methodology, the perspective of the cost to the firm is nothing more than setting a ceiling.
Fair freelance fees are below that ceiling 99% of the time. And so while companies can win on this, freelancers can still achieve a higher net income than their fellow employees.
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