As I write this a contractor on a bobcat is repairing my gravel driveway from damage caused by heavy rain. This started me thinking about the role of independent contactors in the workplace. (Kind of scary how I made that transition, isn’t’ it?) The question is often asked by managers, do I have to hire this person as an employee, or can I just pay them through accounts payable as a contractor? As it is so often in HR, the answer is “it depends”.
We all know the deal with employees. Even at-will employees carry some baggage. You have to pay payroll taxes. You probably offer some benefits (even paid time off). You have some legal obligations to treat them fairly and consistently. You have to have Workers Compensation and Unemployment Insurance. You don’t like to fire them on a whim. Sometimes it just sounds easier if you could have everyone be a contractor and simply pay them when you needed them and be done with it.
On the flip side, employees tend to be more loyal than contractors. They have longer tenure so they understand the business better. You have more control over what they do and when and how they do it. Clearly there are some advantages, and disadvantages to each option. Let’s presume you did a cost analysis and decided that there was not economic difference between the two choices. Who would care which you choose? The IRS would – and their opinion matters.
A few years back there was a wave of large companies converting their employees to independent contractors. The companies avoided paying payroll taxes and workers compensation. They also escaped responsibility from the various employment laws. It was great! Until the IRS got wind of the practices and cracked down on the definition of Independent Contractor. Their definition says, “The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.” So, if the “contractor” is sitting in your offices, doing what you tell them to do, in the manner in which you tell them to do it, at the times you want it done, they are not a contractor – they are an employee.
Many companies can benefit from having a contingent workforce so they can flex their staffing levels based on the volume of business at the time. Particularly for small businesses there are three distinct ways to accomplish this, all with their own pros and cons.
Part-Time Employees – Truly part-time or on-call employees can give you all the benefits of employees (longer tenure, better training, more loyalty, etc.) but allow you to flex their hours when you need it. The downside is that these folks tend to be harder to attract and retain. It takes a special person to work long-term as a contingent worker and if you have to keep hiring a lot of part-time employees, you increase your unemployment and hiring costs, etc.
Temporary Employees through an Agency – Temps can be wonderful. You make a phone call and presto – “qualified” workers show up at your door. You don’t have to put them on payroll or workers comp. But, they’ll cost you more (the agency has to make a profit) and you’ll likely have even higher turnover because they are usually looking for a full-time job and just working temp jobs so they can afford to eat.
Independent Contractors (aka Freelancers) – If you can simply explain what needs to be accomplished and then allow them to use their own methods, procedures, hours of work, etc. to accomplish it, then ICs may be the way to go. The cost is usually fairly close to the fully loaded cost of an employee (taxes, benefits, etc.) and you have more flexibility in having them work only when you need them. But, you’ve got the downsides I talked about earlier.
So the moral of this story is; know what you’re getting yourself into as you make your choice. Independent Contractors must truly be independent. If not, the IRS will be angry with you. And trust me; you don’t want the IRS angry with you.
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