An Objective Discussion About the Advantages and Disadvantages of Hiring an Independent Contractor
Last week, we provided a brief discussion on properly classifying your new hires, and the various factors the IRS will use to determine the status of your worker. This week, we’ll dig a little deeper into the pros and cons of hiring an independent contractor versus an employee.
Perhaps the most important benefit that results for most businesses is saving money. By classifying your new hire as an independent contractor your business will not have to pay the various expenses associated with hiring an “employee,” including employer-provided benefits, employer-provided equipment and work space, as well as the required insurance and wage taxes.
Freedom to Staff Your Business According to Your Business’ Needs
Hiring an independent contractor may offer you flexibility in staffing your business. There is, generally, greater freedom to hire and let go independent contractors. Depending on the nature of your business, this freedom may be especially advantageous (e.g. a seasonal business is able to increase and decrease staffing with great flexibility). The relationship will be dependent on the terms of the employment, but you are able to hire a worker for a particular task or a particular duration of time with great ease.
Eliminate the Time and Costs Associated With Training
Hiring an independent contractor may mean increased efficiency for your business since you’ll likely hire a worker who has specific skills to complete a particular task. In most cases, independent contractors have specialized expertise for the particular job or task, and you can, therefore, eliminate the time and costs associated with training the worker.
Reduce Your Business’ Exposure to Liability
Independent contractors do not enjoy the extensive range of rights under state and federal laws that employees currently do. Accordingly, there are fewer varieties of claims that independent contractors may bring against their employers. This translates to reduced exposure to employment-related lawsuits for your business. Among the rights that employees enjoy and independent contractors do not are: minimum wage rights and overtime compensation rates; protection from employment discrimination; the right to form unions; and the right to take sick leave to care for family members. In addition, independent contractors cannot sue their employers for wrongful termination. The right to terminate an independent contractor should be clearly spelled out in the independent contractor agreement, and any restrictions on the right to terminate (or termination dispute) will be governed by such agreement.
Less Control Over Your Workers
By definition, an independent contractor works independently, for himself or herself. To avoid re-classification of the independent contractor as an employee, you, as the employer, must relinquish control over the workers actions. While you are able to direct the overall outcome of the work, the independent contractor has control over how to complete the task, including the tools and processes used. You must be willing to give up this control, something some of us business owners have trouble doing, because failing to do so may mean the IRS re-classifies your worker as an employee and imposes penalties.
Increased Turnover May Lead to Inconsistency and a Lack of Loyalty
Typically employers use independent contractors for short-term projects, which means there’s a higher rate of turnover. Constantly rotating your staff may create disruptions within your business and ultimately, may lead to inconsistencies in the work product. In addition to inconsistencies, hiring independent contractors may lead to a lack of loyalty for your business and ultimately, your brand. Independent contractors, by nature, are loyal to their work product, not your business. Your business may depend on building a staff of loyal workers who are devoted to producing consistent work product designed specifically to promote your business and its brand. If this is the case, hiring independent contractors is probably not the best solution.
Everything Is Controlled By Your Written Agreement
While this may not sound like a downside initially, keep in mind that once you hire an independent contractor and sign the written agreement you have created a contract. This contract controls all aspects of the employment relationship, including your right to terminate the relationship. Depending on the terms of the agreement, you may be subject to certain restrictions that limit your ability to fire the independent contractor. Any violation of this agreement means you are exposed to liability for breach of contract.
You May Not Own the Work Product
Generally, work that is produced by an independent contractor is owned by the contractor. This means that any copyrighted work that you hire an independent contractor to create will be owned by them, not you. In order to avoid this, you’ll have to draft a written agreement that transfers copyright ownership of the particular work from the independent contractor to you. This creates a small wrinkle that is generally not present if the worker is an employee, since, in most cases, work created by an employee is automatically owned by the business, not the employee.
Increase Exposure to IRS Audit
It’s important to be aware that hiring an independent contractor will increase your chances of government audit, specifically a review of the relationship between you and the independent contractor. These audits may be intrusive, time-consuming, and disruptive to your business. Because there is no “safe-harbor” or magic wording to ensure you classify your worker accurately (in the eyes of the IRS), you take a risk to be audited every time you classify your worker as an independent contractor.
Ultimately, whether you choose to hire an employee or an independent contractor will depend largely on your business model, the particular task at hand, current financial status, and the particular product or service you sell. It’s important to consider all the advantages and disadvantages of hiring an independent contractor prior to making your hiring decision.