You need some work done, but don’t want more employees. Hiring independent contractors may seem like a smart move. You get help only when you need it, and contractors come with fewer regulatory demands than having salaried employees. Hiring contractors can be cheaper because you only pay people when you need them. You can also avoid expenses like payroll taxes, unemployment taxes and workers comp.
It can be a good strategy, but there are some significant challenges. Government agencies at the federal and state level investigate companies which claim to use contractors but, under the law, treat those workers as employees. The result can be legal trouble, significant defense expenses, and the potential for back wages, overtime, large fines and other sanctions. Hire contractors, but make sure you do it right. Here are some ways to protect yourself.
Keep contractors at arm’s length
It’s important to distinguish contractors from employees. According to the Equal Opportunity Employment Commission there are legal guidelines used to determine if a worker is a contractor or an employee. Generally, you can’t control when, where and how contractors do their work. It’s best if they conduct business out of their own location when possible. They should always use their own tools, materials, and equipment to do so. Pay them by the project or job, not by the hour or week or month. The more you seem to control the work environment and how people undertake tasks, or the larger portion of the person’s income you provide, the more you look like an employer.
Pick and choose where to use contract help
One of the big flags to regulators is the type of work the contractor does. The less skill the task requires, or the lower the pay it offers, the more likely a person may be seen as an employee. The work performed should not be part of your regular business. There should also not be an ongoing regular relationship. If, for example, you own a retail store, clerks would likely be considered employees, not contractors, even if you bring someone on as seasonal help. But you could hire a contractor to set up your POS computer sales system.
Consider legal structures to insulate you
For contractor use outside of one-time employment, the American Bar Association recommends having a written contract. The contract alone isn’t sufficient to establish the right relationship. It’s usually necessary and can include clauses that specify the person is independent, managing their own taxes, and gets no employee benefits. You might also consider other legal structures. Perhaps the contractor has his or her own established business, with a license from their city or town or even incorporation. You also might hire individuals through a temp agency or other organization independent of yours.