Employees vs. Independent Contractors

When there is a need for additional help beyond the capabilities or feasible workload of regular employees, often companies face a decision whom better to hire – an employee or an independent contractor. The choice between hiring regular employees or independent contractors may be a difficult one. There are substantial differences between employers’ obligations and liability in relation with each of those parties. The courts and the Internal Revenue Service (IRS) use certain criteria to determine whether an individual working for the company is an employee or an independent contractor; the employer’s liability will be determined accordingly. When deciding which route to go for professional services, employers should know the differences in responsibility, liability, and loyalty. 

 

Liability

 

The main concern of many business owners is the liability for the actions of their workers. In the employer/employee relationship, the employer has the right to control the manner of the employee’s performance. Accordingly, the company is vicariously liable for the actions of the employee that are committed within the scope of employment. Notice that the stress is on the right to control, not on actual control. In other words, the employer is liable whether he or she controls the employee’s actions or not. In the employer/independent contractor relationship, the employer does not control nor supervise the manner of the job performance; therefore, the employer is not liable for the independent contractor’s misconduct. The exception is when the independent contractor was engaged in ultra-hazardous activity, in which case the employer may be liable. Activity is deemed ultra-hazardous when it is likely to cause damage to third parties due to the lack of proper precautions (for example, work on the construction sites, gas stations, etc.). In this case, courts hold employers and their independent contractors liable, in an effort to ensure that public safety will be observed at all times.  

 

Termination of Relationships

 

The relationship between an employer and independent contractor is temporary in nature. Both parties negotiate their obligations and termination of their professional relationship before the start of the work. In the case of an employee, an employer may face claims for unlawful termination. The employee may claim he or she relied on company policy in relation to other employees, discrimination based on the membership in the protected class, retaliation, or wrongful termination in violation of other public policies. When courts hear wrongful termination claims, the standard of review is fairness. Would a jury, without any knowledge regarding the personalities involved, find that the termination was justified and the employee was treated fairly? Such litigation process can be very time consuming and costly.

 

Payment for Services

 

Independent contractors are paid an agreed-upon amount on a per-project basis, for work actually performed. If the job is not satisfactorily done, the employer is entitled to terminate their relationship. On the contrary, under certain circumstances, employees can have a lawful right to take a medical or family leave and will be entitled to return to his or her previous or equivalent position once the medical or family situation has changed. Also, the Equal Pay Act (EPA) requires that women and men receive equal pay for equal work and that the employer cannot discriminate between employees on the basis of sex. The Fair Labor Standards Act (FLSA) governs wage and hour requirements. State labor laws have similar provisions to the FLSA, establishing the minimum wage and number of work hours. Independent contractors are not covered by the various state and federal employment laws. Accordingly, they cannot claim their entitlement to something they have not bargained for. 

 

Taxes

 

Employers must withhold income tax and pay unemployment insurance, workers’ compensation insurance, Medicare, Social Security, and payroll taxes for every employee., They do not bear these obligations in the case of independent contractors. Sometimes, it is more beneficial for the employers to have a job done by an independent contractor rather than to hire an employee. This may be a way to cut labor costs without sacrificing productivity.

 

However, as I mentioned before, courts and the IRS utilize certain guidelines to determine whether a worker is an employee or an independent contractor. Improper classification of workers is risky. In past years employer misclassifications of independent contractors has cost the federal and state government billions of dollars in tax revenue. Thus, there is a renewed interest by government agencies in collecting payroll taxes and enforcing employment laws against companies that improperly classify their workers as independent contractors. To combat this problem, federal and state agencies have allotted much bigger budgets for auditing companies. Improper worker classification can lead to administrative audits, assessments, fines, penalties, and litigation.

 

There are no strict lines to differentiate employees from independent contractors, but in reviewing the employment status of a particular individual the following basic characteristics are applied:

 

·                    Generally, an individual is an employee if the employer controls the manner of his or her work and the means used to achieve results. With an independent contractor, an employer may only control or direct the final outcome of the work, not the way job is performed. For example, an employee works from the employer’s space using the employer’s technology; an independent contractor organizes the working conditions him- or herself and delivers the final product to the employer. The employer does not control the time, place, and method of independent contractor’s performance.

·                    The employer pays commissions or per-job fee to the independent contractor rather than an hourly wage or salary, such as are paid to employees. The contractor will be compensated for work completed rather than for hours worked. The employer also does not provide fringe benefits (medical and life insurance, participation in the pension plans, etc.) to contractors.

·                Independent contractors usually have some indicia of independent business, such as business cards, websites, their own support personnel, and consultants. 

·                        The employer cannot restrict the independent contractor from performing services for others while working for that employer. 

·                    The contractor must be able to make important business decisions by him- or herself (for example, whether to hire assistants, what equipment to use, where to do the job, etc.).

 

Just as employees so independent contractors can bind the company to certain liabilities if they act as agents of the company. Most contracts entered by the agents on behalf of the company are enforceable. Also, the company is responsible for the actions of its agents, as long as those actions fall within the scope of their employment relationship. A well-drafted written agreement with each party, stating a detailed job description and what one is authorized to do on behalf of the company in various situations is paramount in the successful management.

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