What do you do when you start or expand a business, but do not want to deal with the hassle of hiring employees and complicating your day-to-day tasks with tax withholdings, Social Security contributions, unemployment, disability, and workers’ compensation insurance? Can you just call a worker an independent contractor at the outset of your relationship with him or her and avoid those headaches altogether?
Not quite. An employee by any other name is still an employee if he or she acts like an employee. It doesn’t matter if you hand the worker a 1099 IRS form instead of a W-2 form; if the worker does the things an employee does, he or she is likely an employee.
Why is the distinction between an employee and independent contractor important for your business?
It is vitally important to both a business and the people it hires whether the business is hiring employees or contracting with independent contractors. Many of the laws dealing with labor are restricted to the employer-employee relationship. If a business has employees, it has a barrel full of laws with which it must deal and adhere.
What acts make someone an employee and not an independent contractor?
If a person you pay to do work for you takes orders from you about how to do the job, when and where to do the job, and who will assist in doing the job, that person is probably an employee. Further, if the job the person performs is part of an on-going business concern you operate, then giving that person a 1099 will not magically change this employee into an independent contractor.
How do you create an independent contractor relationship?
The first step in creating independent contractor relationships is in the very name itself: an independent contractor works pursuant to a contract, that is, a formal written agreement between the business and the contractor. This agreement can outline many of the details of the work to be performed, but it does not create an employer/employee relationship because the business pays an agreed price for work to be performed and, more importantly, does not control how that work is to be done.
What’s the difference between an employee and independent contractor relationship?
To illustrate the difference between an employee and independent contractor, let’s look at an example of a typical situation.
Great Property Mgmt. wants to paint a building on one of its properties, so it hires a painting company, Pretty Walls Co., to do it. The business enters into an agreement with Pretty Walls Co. that describes the work to be performed, the time in which it will be performed, and, of course, the price Pretty Walls Co. expects to be paid for its service. There may be other clauses in the contract about the work to be performed – specifying a certain type or color of paint, detailing the colors of certain areas on the premises, or even stating that the work cannot be performed during certain hours – but, ultimately, it is Pretty Walls Co. that decides how the job will get done. In this case, Pretty Walls Co. is an independent contractor for Great Property Mgmt.
Compare that relationship with the relationship Pretty Walls Co. may have with its own painters. In this case, Pretty Walls Co. has several painters on staff that they regularly send out for projects. Pretty Walls Co. does not just send people out to projects; they are told when they must appear for work each day, the number of hours they must work, the manner in which they must do their work, and the order in which the work must be done. On top of that, Pretty Walls Co. provides painters with the tools, equipment, and training needed to do the work, and the painters are subject to the direct supervision of on-site supervisors while performing the job for Great Property Mgmt. Because Pretty Walls Co. is more involved in the activities of the painters, the painters are, more likely than not, employees of Pretty Walls Co.
Note that the legal relationship between Great Property Mgmt. and Pretty Walls Co. is radically different than that between Pretty Walls Co. and its painters because of the distinctions between an independent contractor and an employee. For example:
- Great Property Mgmt. is not responsible for withholding any taxes from its payment to Pretty Walls Co. or making Social Security payments for Pretty Walls Co.’s employees while Pretty Walls Co. must do all of that and more for its painters.
- Great Property Mgmt. is not responsible for adhering to numerous laws about how the work site is to be maintained (per Occupational Safety and Health Administration rules), how Pretty Walls Co.’s employees are to be paid (wage and hourly laws), or for paying medical bills for the painters who are injured on the job (workers’ compensation).
- Great Property Mgmt. is likely not liable if employee painter from Pretty Walls Co. injures a third person or damages a third person’s property while performing his or her job.
- Absent a contract clause that says otherwise, Great Property Mgmt. is likely not going to pay Pretty Walls Co. for any losses Pretty Walls Co. suffers because of the job, but Pretty Walls Co. must pay its employees no matter how much it loses or makes on the job. Note that an independent contractor has a direct financial stake in each job while an employee does not.
What are some things you should do if you want to hire independent contractors for your business?
Depending on how complex your business is, getting proper legal advice on whether your business can – or even should – hire independent contractors should be considered. Once the decision has been made, however, you should focus on the development of an independent contractor agreement or written contract that each independent contractor will sign, and that outlines your relationship.
What are some possible consequences of making a mistake about an employee’s independent contractor status?
Hiring independent contractors can be a great savings to a business, but only if they are truly independent contractors. The cost of a mistake is severe, usually involving payment of taxes that were not withheld, payment of overtime and other costs to the employee, and the associated penalties and interest that accompany these kinds of violations.
While there are numerous benefits to hiring independent contractors versus employees, an error in properly identifying your relationship to those who work for you can be costly. If you still have questions about your relationship with your workers, contact our employment attorneys to discuss the specifics of your situation. You can reach us by phone or by completing the Contact Us form on this page.