Employee or Independent Contractor?

Deciding to hire an independent contractor can often be advantageous and cost-effective for a small business.  Although an independent contractor often performs similar duties as an employee, your obligations toward an independent contractor are minimal compared to an employee.

Unlike employees:

• An independent contractor is not subject to minimum wage and overtime requirements.
• An independent contractor generally is not eligible for employee benefits such as vacation, health insurance and retirement plans.
• An independent contractor is not covered by employment discrimination statutes.
• You are not required to provide an independent contractor with workers’ compensation insurance.
• You need not pay any portion of an independent contractor’s Social Security or Medicare taxes.

These benefits will save you money and hassle.  But, if a worker is not truly an independent contractor, the results can be severe.  Potential liabilities include payment of back taxes, interest and penalties to the IRS for a period of at least two years, as well as back pay, front pay, cost, attorneys’ fees and compensatory and punitive damages in litigation expenses.  In short, the consequences of misclassifying employees can be devastating.

To ensure proper classification of your workers, the guiding principle to remember is control and who has it. For a worker to be classified as an independent contractor, he or she should be both physically and economically autonomous of your business.  Independent contractors control the process of when and how they do the work.  You have the right only to the ultimate result of the independent contractor’s work, not the means and methods used to accomplish the result.

Although using independent contractors can be an effective way to minimize costs and increase the efficiency of your small business, you must properly classify your workers.  While control is not the sole means of establishing independent contractor status, it is a determining factor which could make the difference between ongoing business success and bankruptcy.

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