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There are many pros and cons that must be considered by those thinking of hiring independent contractors, and if those are not factored into the hiring decision, there may well be legal consequences. Of course, it is always wise to go over your plans with your attorney, so this article is not to be construed as legal advice but rather some business alerts that need to be considered before making a decision. Of course, the first thing to do is to consider the job that is to be done, the duration of the assignment, the pros and cons of choosing a permanent employee and the pros and cons of hiring an independent contractor. Then, you need to make certain that your classification decision will hold up if it is challenged by either your state's or the federal auditors. Why Would You Want to Hire an Independent Contractor? The reason that drives most companies to decide to hire independent contractors is a simple one money. There is no doubt that there is a definite financial advantage, and in most cases, the company does save money for a wide variety of reasons. Let's consider some of the expenses that are almost always incurred when a regular employee holds a position. ·There is the 7.6% of the employee's total pay that will be your share of the Social Security and Medicare taxes. Obviously, this cost is one that cannot be avoided. ·There is also state unemployment compensation insurance to cover, and that amount will vary from state to state. But, it must be considered and cannot be avoided. ·There is also worker's compensation insurance to be paid. ·If you provide health benefits, then that figure must be identified and factored into your analysis. ·Retirement is another cost that is often ignored when the hiring analysis is being done, but if retirement is offered in one form or another, it must also be considered and added into the equation. Actually, those who have researched compensation, tell us that in most companies the compensation package often equals 33 1/3%+ of the annual salary of a given employee. This figure must also be added to your payroll cost. Flexibility Is A Major Factor
There are a number of reasons why employers want the flexibility that staffing with independent contractors can give them:: ·Seasonal work patterns. ·Fluctuating workloads for various reasons. ·Specific tasks that need to be accomplished but not on an ongoing basis. ·Freedom from legal problems if it is necessary to let the worker go. ·Workforce expansion and contraction as needed or wanted. ·Specialized skills provide greater flexibility and also immediate productivity. ·Reduction in training time and related costs. Fewer "Rights" Issues Independent Contractors do have protection under some laws, but the rights guaranteed to the employee are far greater in number and can result in numerous legal claims that are both monetarily costly and time drains. Because Independent Contractors are not employees but selfemployed business people, there are fewer laws to consider. For example, the independent contractors are not covered (at least only to a very limited extent if at all) by the following laws: ·Minimum wage laws (in some states certain jobs do have a minimum pay rate). ·Race, national origin, color, religion, gender, etc. laws. ·The right to form or promote a union. ·Family leave time. In states where permitted, employees can sue for wrongful termination, but such laws only protect independent contractors if a contract was breached and that breach can be proven. Why Wouldn't You Want to Hire an Independent Contractor It sounds as if it is the best of all possible words to use independent contractors instead of employees, but you need to look at the other side of the coin to be sure that is true for you and your company. Let's consider some of elements that must be factored into your final decision. Independence Is a Key Reason People Become Independent Contractors Independent contractors see themselves as independent business owners, and they are. You cannot oversee their work nor dictate the approaches they use in the same way you would for an employee. Let's look at some of those differences:
·They, not you, decide the best way to operate and perform. If you do interfere in the process, you may well have the IRS deciding that you have an employer-employee relationship with the person. Of course, that means that all of the costs outlined above are now going to be incurred for this individual or these individuals. (One of the major companies in the Silicon Valley learned this to their horror when they identified their trainers as independent contractors but required that corporate training materials be used, that the trainers maintain a given work schedule, and provided them with offices, phones, etc. The IRS stepped in and disallowed several years' worth of deductions). ·When you enter into a contract with an independent contractor, that contract is binding on both the contractor and your company unless one or the other party violates its terms. Although you may well have a right to fire an employee, such is not the case with an independent contractor unless he/she violates the contract. ·Although you can reassess assignments, and the employee's assignments can shift and change, you do not have that option when dealing with an independent contractor whose services are outlined and limited by the terms of the written agreement. If you decide you want other duties performed and fire the independent contractor when those duties are not performed, you may well be liable for damages. Medical Coverage Unless you carry a very unusual policy, it is highly unlikely that an independent contractor would be covered on your policy, yet workers' compensation coverage would take care of any employee who is injured on the job. Of course, in return for that coverage, the employee gives up his/her right to sue you for any injuries incurred. Such is not the case with independent contractors who can sue for damages if they are injured on the job because of your carelessness. (Years ago my company was sued when the independent contractor claimed that due to our carelessness, furniture had been placed in her way causing her to fall and injure her back. Since no one was present when she fell, we were found guilty and made to pay ongoing medical expenses until we learned that the employee had been practicing this ploy for a number of years. We were released from liability. However, we were out thousands of dollars before it was over, there was no insurance coverage, and the cost of suing her for the monies was greater than the loss. We then had to get the contract voided through legal channels.) Copyrights - Yours or Theirs? Work done by an employee on company time (and sometimes during off hours) belongs to the employer. Such is not the case when such work is created by an independent contractor unless there is an agreement between you and the independent contractor providing for the work done to be copyrighted under your or the company's name. A number of companies build that language into their agreements. (For example, a major training company whose name has changed several times in the past few years, has independent writers develop their role plays and sometimes the actual workbooks that will be provided to their clients, and their contract language goes beyond what is normally used. They have contracts that note that ANY work produced by the writers during the contract period (which is on going and has no definite cut off date) will belong to the company. Since the writers are not on staff nor are they guaranteed any given amount of work,
this would mean that work done for any other clients or for themselves would be the property of the training company. For some unknown reason, there are writers who are willing to sign and accept the fact that the company notes that "we never enforce this agreement, so you don't have to worry."). It would be very unwise to emulate that company's practice since it would be a very questionable one if there were a lawsuit. Scrutiny Is Intensified When Independent Contractors Are Used The government has a vested financial interest in your having as many employees on your staff as possible. After all, they are more likely to know who made what income in a given time period and are thus better able to get their taxes collected from employees than they are from independent contractors. It is less likely that employees will be working "under the table" It is for that reason that there are relatively frequent audits conducted to make certain that your reported independent contractors truly are independent and have assignments and supervision patterns that fall within the required guidelines. Much to the surprise of many business owners, it isn't only state and federal taxing agencies that conduct audits. Let's look at those who might have an interest in how you are dealing with the issue: ·The IRS (no surprise) ·The state's taxing agency (again no surprise) ·The Department of Labor which has an interest in wage levels and hours worked ·OSHA which looks at safety law compliance ·The National Labor Relations Board ·The state's unemployment compensation agency ·The state's workers' compensation agency The various agencies have repeatedly voiced concerns about those individuals who "work under the table," and their concerns cover a variety of areas, but money is often the driving force. Misclassifying your employees can be costly since it can result in stiff penalties being levied against your company--penalties that may well offset the monies saved in the first place. Summary: While the actual monies paid to the independent contractor may be higher than those paid to an employee, this fact needs to be weighted against other factors such as: ·Performance time needed ·Level of expertise sought
·Need, if any, for training time for an existing employee ·Space and tools needs ·Immediacy needs ·Fringe benefits ·Demographics of the existing worker pool ·Estimated project time span Remember, there is almost no job that cannot be performed by an independent contractor, so it is up to you to determine the advantages and disadvantages of entering into a contractual agreement with such an individual.
Elizabeth Kearney, Ph.D. Sits on four boards, writes a column for a monthly newspaper, is founder of Kearney & Associates: The ExpertsÂ’ Alliance, and identifies issues for which solutions are sought and then she and the members of her Alliance design and deliver related programs and/or consulting services. Liz specializes in strategic planning, effective leadership, and this awardwinning author and professor was a John Hopkins Fellow. Three of her books were Fortune Bookof-the-Month Club selections, and her latest book, Women Who Paved the Way, is already in its second printing. Liz was selected in 2003 & 2004 as Businesswoman of the Year by the National Business Advisory Council and by ABWA. She was one of fourteen business owners who were honored in Washington, D.C. in March of 2005, and in the same year, she was presented with the Ronald Reagan medal for her work with small businesses and their related issues.
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