All types of industries use independent contractors. This type of working relationship is mutually beneficial, allowing companies to pay for labor only as they need it and letting specialized workers set up as businesses themselves. You will find them involved with the building of a house, completing an analysis for a Fortune 500 company, or working special projects for the government.
No matter the industry or role of the contractor, there are specific guidelines to use during the hiring process that are important to understand. If you hire an independent contractor and end up treating them like an employee, you are likely to end up with a large tax liability that could be devastating to the health of your business.
By definition, an independent contractor is a person or business who performs services for another person or business under an express or implied agreement, and who is not subject to the other’s control, or right to control, the manner and means of performing the services. This means that while you have the right to direct or control the results of the work performed, the contractor has the right to choose the means and methods for reaching the desired results.
Other elements that are considered when differentiating an independent contractor from an employee include:
whether the worker was carrying on an independent business or whether they worked regularly in the hiring company’s general business. whether they advertised or generally offered their services to others. whether or not they used a business name in dealing with the hiring company. whether they listed themselves in business directories (e.g., telephone, community, online) whether they maintained their own offices. whether they obtained the necessary licenses for their type of work. whether they supplied their own tools or equipment; Another factor is the relationship between the company and the contractor. An independent contractor complete an agreed upon scope or work within a stipulated period of time, whereas an employee works continuously for an unspecified length of time.
Generally speaking, an independent contractor has the opportunity to make a profit as well as the risk of taking a loss, while an employee generally does not have that opportunity nor risk. An employee is generally paid on a time or piece-work or commission basis, whereas an independent contractor is paid an agreed-upon amount or fee for a specific job.
The bottom line is that an independent contractor versus employee comes down to evidence of control and independence. In other words, behavioral control, financial control, and relationship type are all factors. Behavior relates to you having any right to direct or control the way in which the contractor is working, which could be via training, direction, etc. Financial would be whether you have the right to direct or control any of the aspects of the contractor’s job from a financial standpoint such as payment method, un-reimbursed business expenses, etc. Then, relationship type is the perception of the business relationship.
If there is any question in your mind about whether an individual doing work for you is a contractor or an employee, consult your tax and legal advisors. After all, protecting your business while growing it is a primary focus and by understanding the rules of the road ahead of time, you do just that.
In the first installment of this series I talked about the legal obligation employers have to carry workers compensation insurance on their employees. I explored the severe consequences meted out on those employers that don't. Namely, employers who willfully choose not to carry workers comp on their employees are subject to both criminal and civil penalties. The employer also loses its immunity from employee initiated lawsuits. All in all, the downside of non-compliance is generally unpleasant enough to get most organizations to comply.
An Inncocent Mistake? But what about this situation? Paul the painter needs another painter to keep pace with all the work he's lined up. But Paul needs to keep his costs down to remain competitively priced. He's afraid that if he hires Pedro the painter the additional workers comp and employee benefits he'll have to pay will cause his costs to skyrocket. Paul tells Pedro that he just can't afford to hire him. "No problem," says Pedro. Just hire me as an independent contractor. I'll even sign a form stating unequivocally that I'm not your employee. "Great idea!" says Paul. "You're hired."
Several months go by and business is really booming. Pedro has proven to be a valuable asset. Each morning Paul and Pedro meet. Paul gives Pedro explicit instructions as to what hours to work, where to work, and how he should do the job. Paul also supplies Pedro with the paint, spray guns, and other equipment he'll need. With the amount of work Paul gives him, Pedro is now working only for Paul. The situation works so well that Paul does the same thing with 26 other "independent contractors."
Trouble in Paradise One day Pedro is working away high on some scaffolding. His foot slips on some spilled paint and before he can regain his balance, he goes hurtling towards the ground below. Fortunately, Pedro only landed on his back and not his head. And although his injuries are not life threatening, they are certainly life altering.
Upon admission to the hospital, Pedro is questioned as to how his injury occurred. He responds that he was injured on the job. Pedro's hospital bills add up quickly. He has no heath insurance. In addition to being in constant pain, he fears that he will also face financial ruin. He is very concerned about the well being of his wife and 3 children.
Meanwhile, Pedro's wife Jill contacts Paul. Paul is very sympathetic to Pedro's situation but explains to Jill that there is no workers compensation policy in force because Pedro is an independent contractor. He even offers to fax Jill the form Pedro signed.
Jill is absolutely outraged at Paul's attitude towards her husband. After seeing Larry the Litigator's splashy television commercial, she decides that she means business and calls him. After hearing of Pedro's plight, Larry goes on a 10 minute tirade full of righteous indignation. Jill now feels that not only does she have a case against Paul, she has a moral obligation to sue so as to protect the world from the other "Pauls" that are out there lurking.
Rough Justice So what do you think happens next? Well, given the facts of the case, here's what could end up being posted under "Failure to Insure" Prosecutions on the Pennsylvania Department of Labor and Industry's website: Paul the Painter, owner of Paul's Painting in Harrisburg, pled guilty to 27 misdemeanor counts of the third degree on June 1, 2008, in the Dauphin County Court of Common Pleas for failing to insure its workers' compensation liability. The judge sentenced Paul to pay the costs of prosecution and placed him on probation for a period of 27 years. Judge also ordered Paul to make restitution to the injured employee in the amount of $173,370. The Bureau's Compliance Unit reports that Paul's Painting is no longer in business.
So where did Paul go wrong? Pennsylvania case law is clear that whether an employee / employer relationship exists is a matter of law and is determined by the facts of each case. The perceptions of the parties involved (ie. Paul and Pedro) are completely irrelevant.
Although many factors have to be considered to determine the true nature of an employment relationship, the amount of control exercised by the employer is generally given a lot of weight. The facts here show that Paul closely monitored and controlled what Pedro did and how he did it. Therefore, Pedro was an employee and Paul was not in compliance with Pennsylvania law.
Both Andrew Brown & Eric Patrick are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Andrew Brown has sinced written about articles on various topics from Small Business, Marketing and Small Business. Andrew Brown and Small Business Guru provide Coaching, Inspiration and Practical Advice for Small Business Owners and Entrepreneurs. Subscribe to the free, weekly newsletter at www.small-business-guru.com. Andrew Brown's top article generates over 40500 views. to your Favourites.
Eric Patrick has sinced written about articles on various topics from Small Business, Legal Matters and Tax Deductions. Eric D. Patrick is an attorney and Chief Operating Officer of Consumers Insurance Agency Inc.