In tough economic times, employers look for ways to be more efficient and profitable. This may mean taking a closer look at hiring an independent contractor. An independent contractor is a person/business who contracts to perform services for others but doesn’t have the legal status of an employee. Employers will need to weigh the pros and cons of hiring an independent contractor. In addition, employers will need to make sure their decision to hire an independent contractor will pass muster with state and federal auditors. Here are some of the pros and cons for an employer to consider when hiring an independent contractor.
PROS
1. An Employer Saves Money
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The employer won’t pay for benefits, including health and disability insurance, vaction time, sick days, overtime and retirement plan-benefits.
- The employer won’t pay the employer’s share of social security and medicare taxes and won’t contribute to state and federal unemployment insurance funds.
- The employer won’t have to pay for training for an independent contractor. Independent contractors already have experience in their fields and require no specific training from employers.
2. Flexibility
- An employer doesn’t have the issues of hiring and firing and morale.
- An employer can hire an independent contractor for a specific task or project, knowing that the independent contractor will be gone when the job is finished. This is especially beneficial if the employer’s workload fluctuates.
- The employer gets specialized expertise for a short period of time without having to pay for training.
3. Reduced Exposure to Some Lawsuits
- Independent contractors are not subject to many laws designed to protect employees, including overtime and minimum wage requirements.
- An employer is not subject to complaints for job discrimination and wrongful termination.
CONS
1. An Independent Contractor Can Sue for Negligence
- If an independent contractor is injured on the job then the independent contractor can sue. Typically, when an employee is injured on the job, s/he can’t sue because they are covered by workers’ compensation.
2. Less Control
- Independent contractors can decide when, where and how the work is done. They don’t have to follow any instructions, and the only control the employer has over the work is the end result.
- Independent contractors decide how much their work is worth.
- An employer can’t count on any given contractor to be available when needed for a new project. Additionally, a qualified independent contractor may be difficult to find compared to regular job candidates.
3. Misclassifying Can Be Economically Devastating
- Any number of state and federal agencies might audit a business if it believes it has misclassified employees as independent contractors.
- If an independent contractor is misclassified the employer will be required to pay the IRS all back taxes owed, with interest plus a penalty of up to 35% of the tax bill.
- At the state level, an employer could attract the attention of its state’s unemployment compensation or workers’ compensation agency if a worker it classified as an independent contractor applies for benefits. An employer could also face an audit from its state’s tax agency.
Before deciding to hire an independent contractor for its business needs, an employer should find out about the legal differences between an independent contractor and an employee in the state where it’s located. If an employer doesn’t find out the rules before making the decision, it may find itself with heavy penalties down the road that far outweigh the benefits it received from hiring independent contractors. An employer should never hire someone as an independent contractor if it plans to treat them as an employee.
NOTE: The use of independent contractors is on the radar of Congress. On July 30, 2009, Rep. Jim McDermott (D-WA) introduced H.R. 3408 to amend the Internal Revenue Code of 1986 to modify the rules relating to the treatment of individuals as independent contractors or employees, and for other purposes.
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