If you’re a business owner, one of the most important choices you must make is whether to hire full-time employees or use independent contractors (IC). While the two classifications may seem quite similar, they both come with a wide array of unique advantages and disadvantages.
What’s more, if you make a mistake when classifying your workers, you can suffer serious penalties and even lawsuits. Here, we’ve broken down the pros and cons that come with hiring ICs, so you can better assess whether or not such workers are a good fit for your company.
Advantages of Independent Contractors
One of the biggest benefits of hiring ICs over employees is the money you can save on taxes and worker’s compensation insurance. While ICs may be paid more per hour than employees, you end up saving money in the long run due to the numerous expenses that come with hiring regular employees.
In addition to the cost of maintaining office space and providing employees with the equipment and materials they need to do their job, you’re also required to pay your share of your employees’ Social Security and Medicare taxes, as well as pay for state unemployment compensation insurance and workers’ compensation insurance.
And that’s not even considering any extra benefits you provide your staff, such as health insurance, paid time off, and/or retirement vehicles like 401Ks. Paying for all of these expenses can be a huge hit to your finances, especially if you own a small startup.
Less legal liability
Under state and federal laws, employees have an array of legal rights, which means they can bring a wide variety of employment-related lawsuits against you if they feel those rights were violated. While ICs do have some legal rights to sue you, they enjoy far less protection than employees.
Some of the rights employees have that are not afforded to ICs include the right to a minimum wage and overtime pay, employment discrimination protections, rights to sick and family leave, and the right to form unions.
What’s more, employees may also sue employers for wrongful termination. ICs cannot bring such a lawsuit, as their rights to termination disputes are spelled out in the independent contractor agreement created by you.
Increased staffing flexibility
By hiring ICs, you have much more freedom to staff your company however you see fit. This allows you increased flexibility to adjust your staff based on fluctuations in the market and your workload. This freedom can be especially valuable when you’re just starting your business and aren’t sure what kind of demand your products and services will see.
Additionally, you face far less headache, expense, and potential legal liability when it comes to firing or laying off employees. You can hire ICs for a specific task or project and then be free to walk away from the relationship with no hassles once the work is complete.
Disadvantages of Independent Contractors
One of the great advantages to ICs is the lack of oversight, training, and physical space they require. However, the tradeoff for this freedom is that you have little, if any, control over how they actually do the work you hired them to do.
Indeed, while you’re able to dictate the overall outcome of an IC’s work, they have total “independence” when it comes to how they choose to complete the task at hand, provided it meets the quality and deadline requirements listed in their contract.
Giving workers such total freedom can be difficult for some business owners, especially those that prefer that the work be done using specific processes and/or tools. But it’s vital you don’t interfere too much with an IC’s work, since doing so can result in the IRS re-classifying them as employees, which can result in hefty penalties and expenses.
Increased risk of audits
As mentioned earlier, hiring ICs automatically increases your chances of being audited by the IRS, as the tax agency has a vested interest (in terms of taxes and insurance payments) in ensuring that you maintain an appropriate relationship with independent contractors.
And it’s not just the IRS that can audit your business. A number of federal and state agencies, like the Department of Labor and your state’s unemployment compensation agency, can audit/investigate your company if they think you’re misclassifying employees as ICs.
The bottom line is, if you hire ICs, be sure you take the appropriate steps to ensure that your contractors are truly “independent,” or it can cost you big time.
While ICs cannot sue your company for wrongful termination, that doesn’t mean they have zero rights to bring suit. The written contract you both signed controls all aspects of the employment relationship, including your ability to terminate them.
Depending on the terms of the contact, you may not be able to fire an IC as easily as you would an employee. Moreover, if the IC feels you’ve violated the terms of the contract, they can sue you for breach of contract, which leaves you on the hook for attorney’s fees and potential damages.
Another area that can be at risk for dispute with ICs is ownership rights to intellectual property such as copyrights. Unlike employees, with whom you generally own automatic copyrights to what they produce while working for you, ICs typically own full rights to their work product, unless the contract contains a clause transferring ownership rights to you. Make sure you have a “work for hire” clause in all of your independent contractor agreements to ensure you own the rights to anything created by your ICs.
We’re your trusted advisor when it comes to employment law and worker classification. If you’re trying to decide whether to hire independent contractors versus employees, or you need to ensure your independent contractor agreements offer your company the best protection from liability, we’re here to help.
We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.