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The Pros And Cons Of Hiring Independent Contractors
There are many benefits to hiring independent contractors (ICs), but there are some disadvantages as well. Before you decide how to staff a particular job, you'll need to weigh these pros and cons--and make sure that your
classification decision will pass muster with state and federal auditors.
BENEFITS OF USING INDEPENDENT CONTRACTORS
There are several major advantages to using ICs rather than employees, with financial savings topping the list.
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You will probably save money.
Even though most employers pay ICs more per hour than they would pay employees to do the same work, it usually ends up costing employers more to hire employees.
When you hire an employee, you will have to pay a number of expenses that you don't have to pay with ICs, including the cost of employer-provided benefits, office space and equipment. You will also have to make required payments and
contributions on behalf of your employees, including: your share of the employees' Social Security and Medicare taxes, which comes to 7.65% of employees' total compensation; state unemployment compensation insurance; and workers'
compensation insurance.
All together, these payments can easily increase your payroll costs by 20% to 30%--or more.
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You have more flexibility in staffing projects.
Working with ICs allows employers greater leeway in hiring and letting go of workers, which can be especially advantageous for employers with fluctuating workloads. You can hire an IC for a specific task or project, knowing that the worker
will be gone when the job is finished. You won't have to face the trauma, expense and potential legal trouble that often accompany firings and layoffs.
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You may also enjoy greater efficiency when you use ICs.
Because most ICs bring specialized expertise to the job, they can usually be productive immediately, which eliminates the time and cost of training.
By using ICs, you can expand and contract your workforce as needed, without taking on unnecessary expenses.
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You reduce your exposure to lawsuits.
Employees have a wide array of rights under state and federal law--and therefore a variety of legal claims they can potentially bring against their employers for violating those rights. Because ICs are considered independent
businesspeople, they are not protected by many of these laws.
Among the rights that are available to employees but not to ICs are:
The right to receive at least the minimum wage and, for employees who qualify, overtime compensation at the rate of one-and-a-half times their regular hourly wage.
Protection from discrimination on the basis of race, national origin, color, religion, gender and so on.
The right to form a union.
The right to take time off to care for a sick family member or bond with a new child.
Employees may also be able to sue their employers for wrongful termination, in circumstances that vary from state to state. ICs cannot bring this type of lawsuit (although there may be restrictions on your right to terminate an IC
relationship, depending on what the written IC agreement says).
DISADVANTAGES OF USING INDEPENDENT CONTRACTORS
After reading about the possible benefits of hiring ICs, you may be thinking that you'll never hire an employee again. But there are also some important drawbacks to using ICs and the significant risk that your classification decision may
be questioned by government agencies.
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You have less control over your workers.
Unlike employees, whom you can closely supervise and micromanage to your heart's content, independent contractors enjoy a certain autonomy to decide how best to do the job for which you hired them.
If you interfere too much in an IC's work, you risk making the IC look like an employee--for whom you should be paying payroll taxes, workers' compensation insurance premiums and more. If you want to exercise ultimate control over your
workers, classify them as employees.
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Your workers will come and go.
Many employers use ICs only as needed for relatively short-term projects. This means that workers will be constantly coming and going, which can be inconvenient and disruptive. And the quality of work you get from various ICs may be
uneven.
Employers who want to be able to depend on having the same workers available day after day would be better off hiring employees rather than ICs.
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Your right to fire an IC depends on your written agreement.
You do not have an unrestricted right to fire an IC, as you might with your employees. Your right to terminate an IC's services is limited by the terms of your written IC agreement. If you fire an IC in violation of the agreement, you
could be liable for damages.
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You may be liable for injuries an IC suffers on the job.
Employees who are injured on the job are generally covered by workers' compensation insurance. In exchange for the benefits they receive for their injuries, these employees give up the right to sue their employer for damages.
ICs are not covered by workers' compensation, which means that they can sue you for damages if they are injured on the job because of your carelessness.
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You may not own copyright in works created by an IC.
If you hire an IC to create a work that can be copyrighted--such as an article, book, or photograph--you might not be considered the owner of the work unless you use a written agreement transferring copyright ownership from the IC to you.
In contrast, if an employee creates such a work, you will automatically own copyright of the work in most circumstances.
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You face a risk of government audits.
State and federal agencies--particularly the IRS--want to see as many workers as possible classified as employees, not ICs. The reason for this preference is financial: The more workers classified as employees, the more tax and insurance
money flows into government coffers and the harder it is for workers to underreport or hide their income from the tax man.
Any number of state and federal agencies might audit your business if it believes you have misclassified employees as ICs. At the federal level, you might face an audit from the IRS; the Department of Labor, which enforces federal minimum
wage and hour laws; the National Labor Relations Board, which enforces employees' rights to form a union; or the Occupational Safety and Health Administration, which enforces workplace safety laws.
At the state level, you could attract the attention of your state's unemployment compensation or workers' compensation agency if a worker you classified as an IC applies for benefits. You could also face an audit from your state's tax
agency.
Send your comments and questions to
newsletters@forbes.com.
If you're unsure about the classification of your current workers,
contact us. We have tools and expertise to assist you in determining whether an IC or an employee is the right path to follow for your business needs.
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