Small companies usually need to conserve cash, so they often turn to independent contractors rather than employees. This makes perfect sense – unless the company falls into what I call the independent contractor trap.
If there is not enough work to justify a regular employee, the company can use an independent contractor when needed. That way the company avoids making unemployment and social security contributions. Also, it does not pay benefits such as health and life insurance, retirement plan contributions and personal time off.
There can be problems, however. If the individual really is doing the work of an employee – is misclassified – the Internal Revenue Service or, in California, the Employment Development Department might reclassify the individual as an employee, erasing the presumed financial benefits.
So how can a company avoid mistakes in this area? Applicable laws are complex, and multiple government agencies are involved. As a result, one must look at the factors that the relevant agency applies. Here are some examples:
- If the company can tell the individual how to do the work, the individual looks more like an employee; an individual who decides how to do the work looks more like an independent contractor.
- An individual who already has the necessary skills and training looks more like an independent contractor; one who needs training looks more like an employee.
- An individual who is doing work for only one company looks more like an employee; an individual with multiple customers or clients looks more like an independent contractor.
- An individual who always works at the company’s location looks more like an employee; an individual who works elsewhere looks more like an independent contractor.
- An individual who works on the company’s normal day-to-day business looks more like an employee; an individual who works on occasional special projects looks more like an independent contractor.
- An individual who is paid a fixed fee for a defined scope of work looks more like an independent contractor; an individual who is paid based on time may look more like an employee.
- An individual who is working under an appropriately drafted agreement looks more like an independent contractor; an individual without an agreement looks more like an employee.
If you want to avoid the independent contractor trap, do your best structure the relationship in accordance with these guidelines.
- The “Independent Contractor” Trap Becomes More Dangerous
- NYT: U.S. Cracks Down on “Contractors” as a Tax Dodge
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.