Staffing problems can be a constant struggle for executive teams. With them comes concerns about being overstaffed during certain seasons and understaffed in others, as well as the often exorbitant costs that come from having to offer employee benefit packages on top of your regular payroll expenses. If your company shares these same concerns, perhaps it’s time you learned a lesson from others. More and more organizations are dropping the standard employee structure and instead migrating toward an independent contractor model.
The Benefits of Contracted Labor
Why? There are actually a number of advantages that hiring independent contractors has over relying solely upon regular salaried employees. Chief among these is the fact that independent contractors are not entitled to regular employee benefits such as paid sick leave, vacation days, and overtime or holiday pay. You also don’t have to worry about paying employment taxes on your independent contractor’s behalf. All of this can add up to significant costs savings on your part, all while still reaping the benefit of a dedicated workforce.
The Challenge in Staying Compliant
Yet the financial advantages this staffing philosophy offers aren’t the only reason you may want to seriously consider relying more on contracted labor. As independent contractors are not standard employees, they do not qualify for standard protections such as worker’s compensation. Thus, if an independent contractor gets injured while on the job, you don’t have to worry about facing litigation over him or her being denied such benefits.
However, while it may seem as though switching to an independent contractor workforce presents only positives for your company, you should know that a potentially great risk could come with hiring such workers. If it’s determined by an external organization that your independent contractors are actually misclassified employees, then you could be on the hook for any and all benefits that you withheld while your contractors were working with you.
Those external entities with a vested interest in whether or not you have misclassified your workforce include agencies such as the IRS and the Department of Labor. Three principle reasons exist as to why such organization are concerned about employee misclassification:
- Cases of misclassification can result in significant losses to federal programs such as Medicare and Social Security. Worker’s compensation funds can also face big expenses in cases where it’s determined such benefits should have been extended to your contractors.
- Your contractors themselves will often face financial struggles due to having to pay for things such as health and dental insurance out of their own pockets.
- Not having to pay employee benefits could potentially be viewed as a competitive imbalance between your company and competitors who rely on a salaried workforce.
Thus, your decision to switch to a contracted labor force will almost certainly bring with it added scrutiny from regulatory agencies.
Avoiding the Appearance of Misclassification
However, this risk should not deter you if your organization is determined to rely on independent contractors to perform a significant portion of your labor. There are certain steps you can take to help safeguard your company from accusations of misclassification. These include:
- Clearly stating in all employment contracts that you consider the worker to be an independent contractor.
- Defining the beginning and end dates of your contractual agreement.
- Staying away from setting standard work hours, hourly pay, and reimbursing for work-related expenses.
- Allowing your contractors the freedom to provide similar services to other parties.
- Providing all contracted workers with an annual 1099-MISC for tax purposes.
The decision to make independent contractors a significant portion of your labor pool is one that can bring in several dividends to your company. However, choosing to only consider the benefits that independent contractors offer when adopting this philosophy could get you and your organization into trouble. You must have a strong understanding of the compliance requirements that come with working with independent contractors to truly enjoy all of the benefits that this segment of workers has to offer. Do your due diligence in this regard, and a healthier bottom line may just be your ultimate reward.
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