Legal Issues With Use of Independent Contractors
Dan S. Cross, Attorney, The Overton Law Firm, PC
Although management needs should always be paramount in determining how to engage a workforce, there are significant legal issues that must be addressed when workers are not on the payroll but hired as independent contractors.
Management issues include: (1) the potential administrative costs of hiring, training, and paying a worker to be on the company payroll; (2) the need for company supervision of the work, i.e., for quality control; (3) the availability of candidates to fill positions; (4) whether the work to be done require skills that the company wants to retain; and (5) whether the work has to be done on company premises and under the supervision of the company.
Some advantages for use of independent contractors are: (1) overtime compensation is not owed to an independent contractor; (2) employee benefits do not have to be provided, nor do employment taxes have to be paid or withheld; (3) the work relationship is governed by contract and not by laws governing compensation; (4) and skills training is not usually necessary.
Some disadvantages to use of independent contractors include: (1) companies often regret situations where non-employees develop expertise about the company business, only to have the workers move on to a new customer when the contract expires; (2) misclassification of employees as independent contractors can result in severe legal penalties and/or legal liability; (3) independent contractors often charge a premium for their services; and (4) lack of contractor knowledge about the company's specific needs.
The proper classification of workers often becomes an issue because of a department of labor audit or because of an employee claim for unemployment or employee benefits.
Legal Issues with Independent Contractors
State statutes and Internal Revenue Service (IRS) regulationsidentify factors that are to be used when determining what workers are appropriately classified as independent contractors.