How Safe Is It To Hire an Independent Contractor?
Are you considering whether or not to hire independent contractors to do work for your business?
This might allow your company to enjoy several benefits, including saving money and increased staffing flexibility. However, it also poses risks and drawbacks, such as reduced control, risk of misclassification, and more.
Read on to learn about some benefits and risks when considering working with an independent contractor.
What Is an Independent Contractor?
The definition of a contractor may vary depending on what country you are in, but “independent contractor” typically refers to a skilled worker who is paid to perform a specific job over a particular time period. To learn about how the IRS defines an independent contractor, click here.
An independent contractor will typically sign an agreed-upon contract with the contracting company, define their own schedule and working hours, and often use their own equipment.
What Are the Benefits of Using Independent Contractors?
So, why would a company choose to hire an independent contractor? Several benefits come with working with these professionals, and we’ll outline a few of them below:
You’ll Likely Save Money
While it’s true that, in most cases, independent contractors are given a higher hourly rate than employees doing the same work, it typically still ends up costing the company more to hire an employee. Employees come with costs, including employer-provided benefits, equipment, and office space. There are also required contributions and payments employers must make on their employee’s behalf, including:
- The employer’s share of the employee’s Medicare and Social Security taxes, totaling 7.65% of the employee’s compensation
- Workers’ compensation insurance
- State unemployment compensation insurance
Combined, these costs can increase the cost of your payroll by 20% to 30% — or even more.
Increased Staffing Flexibility
Working with independent contractors gives a business more leeway in letting go of and hiring workers; this is an excellent bonus for those whose workloads often fluctuate.
If you have a specific project or task to complete, you can hire an independent contractor for it, knowing that they will move on after completion. This spares you the cost, potential legal trouble, and trauma of layoffs and firings.
Reduce Lawsuit Exposure
State and federal laws give employees a lot of rights — which can lead to a whole host of legal claims they can potentially bring against a company if those rights are violated. Independent contractors, to contrast, are not protected by a number of these laws.
What Are the Risks of Hiring Independent Contractors?
With these benefits come some risks. If you are wondering, “How safe is it to hire an independent contractor?” you’ll certainly want to pay attention here.
Below, we’ll cover just some of the risks and drawbacks that are associated with the hiring of an independent contractor:
Employers are able to monitor and supervise their employees closely. With independent contractors, however, companies cannot. Instead, the worker decides on the best way to complete the job, task, or project you hired them to do.
Interfering too greatly with an independent contractor’s work runs the risk of making them look like an employee — which can spell trouble. The law dictates that you should pay workers’ compensation insurance premiums, payroll taxes, and more for employees.
Clients cannot greatly interfere with the work of independent contractors, or else they risk misclassification. Interference might look like trying to control how their work is done, permitting independent contractors to utilize company work facilities or equipment, and more.
If you are looking to exercise significant control over what a worker is doing and how it is getting done, you’ll need to classify them as employees.
Misclassification and Audits
Among the most significant risks you run by working with an independent contractor is misclassification. There are several things that could lead to misclassification, and the consequences are substantial.
Some consequences you may face include possibly needing to pay back taxes (and interest), sizable fines, or even class-action lawsuits.
For this reason, it’s imperative that you are aware of the relevant laws and guidance regarding worker classification — on a federal, state, and local level.
If you are suspected of having misclassified a worker, you may be audited. Other things that may trigger an audit include a contractor filing for unemployment, a worker filing an SS-8 form requesting classification determination, or a whistleblower reporting misclassification.
To reduce your audit risk, you can do things like create guidelines for engaging independent talent, conduct your own internal audit to assist you in determining if the classification practices you currently use comply, have a written contract for all independent contractors you engage, and have a team to address issues before they occur. These steps will ensure all independent contractors you work with are properly classified.
Insurance Requirements / You May Be Liable for Their Injuries
Your company’s workers’ compensation policy will not cover your independent contractors. As a result, you could end up liable if they suffer any injuries on the job.
To prevent this, work with independent contractors to build the needed insurance requirements into their contract before the work begins.
These are just a few examples of the drawbacks of working with an independent contractor. In addition, you may not own the copyright in works an independent contractor created, your workers will come and go, there is the risk of mismanagement, permanent establishment, or co-employment, and you may not have the right to fire them depending on your written agreement, and more.
Is An Independent Contractor Right for Your Business?
Whether or not an independent contractor is right for your business depends on various factors. What is the job you need them to do? Is the job better suited to a long-term employee, or is it a short-term project?
With the above factors in mind, consider whether or not an independent contractor is what you are looking for and if the job you envision them doing complies with the classification of an independent contractor.
Also, ask yourself if you are comfortable with the risks that come with this unique type of worker.
While there is no one-size-fits-all answer to whether or not an independent contractor is right for your business, you should be able to make an informed decision by understanding both the benefits and risks associated with the decision.
Thinking of hiring independent contractors to work with you in your business?
As we covered above, this comes with both advantages as well as drawbacks and risks. By being aware of those, you can decide what is best for your business.
Suppose you do decide to hire an independent contractor. In that case, it is absolutely imperative to ensure that you are in compliance with the laws and regulations surrounding this type of worker to avoid a wide range of consequences.
However, if the worker you choose to hire does fall within the classification of an independent contractor, it could end up being an ideal fit for your business.
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