THE FINE PRINT — What should I be concerned about when hiring independent contractors?

December 1, 2013

By Jan Pierce

It used to be that independent contractors were people who were “between jobs.” Now it seems that many more people either have been, or are independent contractors. A true independent contractor controls the time and manner of his or her work. In other words, payment is based on the work product, whereas a traditional employee shows up at work at a specific time and gets paid to do specific work.

From an employer’s point of view, it’s great to avoid paying for employee benefits and expensive payroll accounting fees. But simply paying folks a flat hourly rate and handing them a 1099 form at the end of the year doesn’t get around the legal obligation to do so. From the government’s point of view, independent contractors are far less likely to report and pay income and payroll taxes. And because of the increase of the use of independent contractors, the underpayment of various taxes has become a huge problem for the government.

There are a number of moral and ethical problems with paying people as independent contractors who would otherwise be employees. But it’s also against the law. And because it often results in the government being deprived of various streams of revenue, government is becoming much more vigilant about policing it. Various agencies in the state and federal government have developed tests to determine whether someone is a “statutory employee.”

A statutory employee is someone for whom an employer is liable, by virtue of strict rules, for paying certain taxes, e.g. Social Security, Medicare, unemployment, worker’s compensation. Often years go by before the employer is audited and discovers this liability. Even if just one person is involved, this can be a lot of money. If it relates to a number of employees, it can be disastrous for the employer. This is why major corporations often hire their independent contractors from an intermediate company that takes all the responsibility and liability for the hires.

To make matters more complicated, the criteria for determining whether someone is a statutory employee sets a very high bar, one that the employer will unlikely be able to meet. In addition, the employer must satisfy more than just a handful of criteria, like seven out of 10, which is almost impossible. The simpler examples include being incorporated, having a separate office and equipment, and working for more than one employer. But the more elusive require services to be performed only under a contract on a commission or per-job or competitive-bid basis. Also, that the contractor takes losses, as well as profits, rather than just receiving a paycheck.

The independent contractor relationship can be beneficial for both the employer and contractor. But it’s overused, and carries huge risks for the employer. It is an important decision that should be discussed with the employer’s CPA or lawyer. If the employer has any doubt about its ability to hire someone as an independent contractor, it should err on the side of caution and hire that person as an employee.

Send your question to jan@janpiercelaw.com. To protect your privacy, your name will not be published.

Jan Pierce, S.C. is a law firm In Milwaukee that was founded with the belief that people can make a positive difference in the world and make a profit. The firm’s emphasis is on assisting small businesses and social entrepreneurs in all aspects of launching and managing their ventures. Disclaimer: Advice in this column is general legal information and does not constitute, nor is it intended to be, legal advice.

 

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