Who to Hire – Independent Contractors vs. Employees

By Legal Protection Business Plan Team, August 5, 2013

Congratulations! You have started a business and things are going well- so far. You are growing, and growth usually only leads to one thing- you need to hire someone to help you out. You’re semi-familiar with the legalities of the traditional employee model, but then a friend recommends that you look into hiring an independent contractor. You’ve heard of independent contractors before, but what’s the real difference between an independent contractor and an employee, and which should you hire?

If you are thinking about hiring someone to do a job, you should be aware of significant differences between hiring a person who is an employee and someone who is an independent contractor. To start off with, an employee has more protection under employee agreements than an independent contractor. Some of these protections include the payment of taxes, minimum wage requirements, overtime regulations, and other benefits that a person gets when classified as an employee. Examples of benefits could include the scheduling of meal and rest breaks, sick pay, workers compensation, unemployment insurance, disability and sometimes even health coverage. An independent contractor, on the other hand, typically does not require your business to provide the above protection or benefits.

If you choose to hire an independent contract just to avoid the coverage requirements, be careful! Sometimes the conditions that determine whether a worker is either an independent contractor or an employee overlap, and if you intended to hire an independent contractor but your worker can actually be classified as an employee, then you could encounter some legal problems.

One of the things the law looks at when determining if a hired person classifies as an independent contractor or an employee is how much supervision and control you have over the worker. If you select an “independent contractor”, but then call all the shots, decide how the job is done, require set hours, provide training, or fire the worker, then the person will typically be classified as an employee. However, if you hire someone with the intent of only controlling the outcome of a job, then then the worker is classified as an independent contractor.

Here are some other considerations for determining the appropriate classification of a worker you hire:

• Will the worker be doing a specific job?

• Will the worker require direct supervision?

• What is the skill level of the worker?

• Whose tools and equipment is used to do the job? (hint: most contractors provide their own tools)

• How long will the job take?

• Is payment based on or paid at the completion of the job?

To put some of these questions in context, let’s look at a real example. Think about what it would be like to hire a contractor to to paint the walls of your office. You contact a painter and he or she comes to see you to assess your needs. You decide on the paint color, the starting date for the job, and negotiate a contract for the work. When the painter arrives on the start date, he brings his own tools and does the job as he has been trained to do. At the completion of the job, you pay the agreed upon amount and go your separate ways.

Now let’s think about the difference if you were hiring an employee whose job was to paint the walls of the office. You would start out by filling out the appropriate employee documents, you would provide the tools for the job, and you would provide instruction for how they are to do their job. If they do a poor job, you have the right as the employer to issue them a warning, or even fire them.

While some employers aim to save costs by classifying workers as independent contractors when they should be employees, you should think twice about doing this. Remember, even if you “classify” someone as an independent contractor and not as an employee, it is not you who ultimately decides the workers classification, but the state agencies who are charged with enforcement. The penalties for the misclassification of independent contractors can expose you to regulatory action as well as a civil lawsuit from your local attorney at law.

To make sure you are not violating any laws by incorrectly labeling one of your workers, you must really understand the difference between an independent contractor and employee and classify your workers correctly. Don’t hesitate to consult an attorney if you have any questions about your hired help’s real classification. Also, a business attorney can help you set up an independent contractor or employee hiring a guide that you can use to help make this determination. You can find information at the California Department of Industrial Relations as well.

 

 

 

Keep in mind that this information is provided to help you make more informed decisions about your business but does not represent legal advice. We always recommend that you speak with an attorney should you have any questions or need more clarity on this subject.

– Legal Protection Business Plan Team

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