In an attempt to avoid some of the headaches associated with having employees, many businesses will hire workers as “independent contractors.” The primary advantage to hiring an independent contractor is that the business does not have to pay or withhold for taxes, social security, or unemployment, or provide workers compensation coverage or fringe benefits. The problem with this approach is that simply calling a worker an independent contractor does not make it so. State and federal laws define the circumstances under which independent contractor status is available, and misclassification of workers can be extremely costly.
An independent contractor is the person or entity you hire to perform a service completely unrelated to your business. A classic example is the company you, a candy manufacturer, hire to put a new roof on your building. The roofer has an established independent business, multiple clients, its own workers, and the equipment needed to perform the work; it schedules the work at its convenience and it sends you a bill. Typically, you have no say in who the roofer hires as employees, what hours they work, or how the work is performed. You tell the roofer your desired result and (hopefully) it does what you ask and goes to the next job. In contrast to the roofer, if your worker does not own and operate an independent business through which he/she is providing services to you and others on a regular basis, the worker is probably not an independent contractor.
Misclassifying employees as independent contractors can bankrupt a business. Both federal and state laws require employers to pay employees minimum wages and overtime, and maintain accurate records of hours worked by non-exempt employees. Exempt employees must receive a minimum weekly salary. These compensation requirements cannot be satisfied by stock or other forms of non-cash compensation that may be paid to independent contractors. In addition to claims for unpaid wages, the failure to comply with minimum wage and overtime laws may subject a non-complying employer to claims for final pay violations and liability for non-payment of taxes, FICA, FUTA, benefit contributions, the value of lost benefits, plus penalties, interest, other damages, and/or attorney fees. If a worker is injured on the job, he/she is free to assert a negligence claim against the employer, whereas an employee would have to rely solely on workers compensation. An employee may also assert claims for harassment or discrimination, which are otherwise unavailable to an independent contractor. The failure to comply with statutory requirements applicable to employees could also invalidate post termination restrictions, such as non-compete and non-solicitation obligations.
Before classifying anyone who works for you as an independent contractor, check the law or call your lawyer. At Ater Wynne, we deal with this issue all the time and will be happy to help. For a more detailed overview on misclassification of independent contractors, go here.