As a business owner there are many decisions that need to be made, and one is how to classify people that you hire for work. Employees are the most common type of worker, but independent contractors are popular for temporary projects. As an employer, you should understand what an independent contractor is and what that means for how you run your business. If you call someone an independent contractor, but they are legally defined as an employee, you can face legal and monetary consequences.
- How does an independent contractor differ from an employee?
An independent contractor (IC) is an individual who works for him or herself and is hired by an organization on a contract basis to perform a service or job. As the name implies, this individual works independently and is not directed or controlled by the employer. Some major differences in which ICs stand apart from employees are:
- They determine their own hours
- They operate under a separate business name
- They have a separate business checking account
- They may have more than one client
- They provide their own helpers, materials, and tools
- They invoice for completed work
- They are subject to self-employment tax
There are a number of reasons why employers choose to hire an independent contractor. One is flexibility. An IC can be hired for one specific project or job, and when it is completed, he or she continues on to the next job, and the company doesn’t have to worry about unemployment, severance, or health insurance continuation.
Hiring ICs also saves employers money. They don’t have to pay for training, salaries or overtime, insurance premiums, payroll taxes, or employee benefits. Another benefit is that businesses have reduced liability against lawsuits, such as wrongful termination or job discrimination.
Despite the advantages, some employers are hesitant to hire independent contractors because of certain drawbacks:
- Workers continually come and go, which is inconvenient and inconsistent.
- Employers have less control. They can’t supervise, direct, or interfere in the work of an IC.
- Liability for on-the-job injuries: while employers do not have to pay worker’s compensation insurance, they may be sued for damages if an IC is injured on the job.
- Risk of government audits: federal and state agencies may audit businesses to make sure workers are classified correctly. If employees are misclassified as independent contractors, there are unwanted consequences.
If you have misclassified an employee as an independent contractor and you are audited, you will face a number of costly consequences:
- Providing benefits such as health insurance, sick pay, retirement, PTO, and vacation time
- Paying back penalties for income taxes, unemployment, Medicare, and Social Security
- Reimbursing the employee for wages that should have been paid such as minimum wage, overtime, and bonuses
- Paying worker’s compensation benefits for past injuries
Employers should definitely have independent contractors sign an agreement. It should lay out what services will be performed and how much the organization will pay for the project. A written agreement also helps show regulatory agencies that the worker was hired in an IC capacity.
If an employer hires an independent contractor to create an original piece of work such as artwork, computer program, musical composition, written piece, multimedia work, or photographs, the question of copyright ownership is raised.
The independent contractor will own this right unless the hiring company attains a written assignment of copyright ownership, which transfers the ownership from the IC. This assignment should be obtained before the independent contract begins any work and should be included in the IC agreement.
Are you classifying your independent contractors appropriately? Get the most out of your ICs by doing your research and following the advice provided in these frequently asked questions.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.