Independent Contractors v. Employees

In the early stages of running a business, many entrepreneurs are concerned mainly with earning enough income to cover their expenses. After a while, business owners may find their workload is too much for one person to handle – that’s what’s known as a good problem, and the solution is to hire either an employee or an independent contractor. If you’re trying to decide which option is best for you, the following information may be helpful.

Understanding the Difference

Before deciding whether you want to hire an employee or a contractor, it’s a good idea to review how those roles differ. The Social Security Administration defines a Common Law Control Test that explains the differences between an employee and independent contractor, some of which are:

  • Autonomy: When you hire an employee, you have the ability to dictate when and where that person works, how the work is to be performed, and what the outcome of that work should be. An independent contractor performs work on a project basis and cannot be held to a certain schedule or required to work from a specific location. Contractors devote to a task as much or as little time necessary instead of working a set number of hours.
  • Tools: When a business provides workers with tools – such as a computer or company cellphone – that is indicative of an employee-employer relationship. Independent contractors use their own tools and equipment.
  • Training: An independent contractor may require some basic information about a task to be performed, but formal training – especially if it’s ongoing or required – is exclusive to an employer-employee relationship.
  • Payment: New business owners may inadvertently make the mistake of misclassifying employees as contractors, because of the way they issue payment. Paying someone a fixed amount by the hour, week, or month indicates that person is an employee, and therefore entitled to certain associated rights. Contractors are paid by the job, or on straight commission.

Many other factors distinguish employees from contractors, but, generally, the employee-employer relationship gives you greater control over how work is performed. An employer can require an employee to sign a non-disclosure or non-compete agreement, which helps protect trade secrets or confidential client data. Independent contractors, however, cannot be prevented from working for other businesses.

Employers can require background checks for employees, but in order to do the same for independent contractors, a business may need to review state laws, industry guidelines, Equal Employment Opportunity Commission rules, and Federal Trade Commission rules. Because of the potential complications of performing a background check on contractors, businesses may wish to hire only employees for jobs that involve cash-handling tasks or a great degree of responsibility.

Long-Term v. Short-Term Needs

Using contractors or temporary workers gives businesses the ability to scale their staff based on demand. Companies with unpredictable long-term growth or increased seasonal revenue might want to consider hiring a contractor to help with immediate needs, rather than bringing someone on-board as a full-time employee.

Hiring a contractor is also helpful when you need specialized expertise for a specific project. Graphic designers, public relations professionals, and website designers may be essential when you’re ready to ramp-up your marketing efforts, but the cost of hiring three full-time employees can be prohibitive.

Legal Obligations of Employers

If you’re planning to hire an employee, you’ll need to set up tax withholding, verify that person’s eligibility to work in the United States, enroll in workers’ compensation, and contribute to Social Security and Medicare. If you don’t have an accountant or a good legal adviser, putting all these provisions in place can be a challenge.

When you hire a worker through an agency, the agency handles all the tax issues, payroll duties, and employment verification. And if you hire an individual as a independent contractor, that person is solely responsible for paying taxes and contributions to Medicare and Social Security.

Business owners must be cautious about misclassifying employees. The U.S. Department of Labor has slapped businesses with hefty fines and required them to issue back-pay for employees wrongly classified as independent contractors. Some employers intentionally misclassify workers in an attempt to avoid paying their share of contributions. However, employers sometimes mistakenly classify employees as contractors, simply because they aren’t aware of how those roles are defined.

The decision about whether to hire an employee or contractor requires some careful thought and planning, because a mistake at this stage of business development could create complicated and costly legal problems.

If a conflict does arise concerning an employee or independent contractor, Lusk Law, LLC is ready to assist entrepreneurs who are facing formal complaints or questions regarding small business laws. Business owners in Frederick County, Howard County, Baltimore County, Baltimore City, Carroll County, Washington County, Anne Arundel County, and throughout Maryland can rely on us for advice about legal issues entrepreneurs encounter. With over a decade of experience in representing small businesses, we’re ready to offer a consultation concerning your rights. Please call us at 443-535-9715 or fill out our contact form if you have any questions about this topic.

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