How to Avoid the Pitfalls of Hiring Independent Contractors

The explosive growth of the so-called gig economy has many employers eager to explore the use of independent contractors.

Although many companies – especially small to medium-sized businesses – may derive benefits from using independent specialists in some roles, this arrangement does have some potential downsides.

Before you decide to contract with anyone to perform work that you might otherwise hire an employee to do, it’s important that you learn the rules. Otherwise you could find yourself in a bind with the IRS, your state’s unemployment agency and other regulatory bodies.

Understanding the differences between independent contractors and employees

What Is an Independent Contractor?

The essence of defining independent contractors, sometimes called independent specialists, lies with the fact that they are truly independent.

In other words, you would typically enter into a contractual relationship with someone who agrees, for a set fee, to provide you with a work product. For example, you might contract with a graphic designer to produce marketing collateral materials for your business or with a web designer to build your company’s website. These obligations tend to be short-term, finite and outside the ongoing, core operations of your business.

To accomplish his or her objectives, the contractor can use whatever tools and resources they see fit, including subcontractors. They typically perform their work outside of your facility, on their own time schedule. Contractors also typically work for other clients, in addition to your company and, often, they have their own established entity. To be compensated, contractors submit an invoice for the set fee stipulated in the independent contractor agreement you negotiated and signed with them.

Where Does the Line Blur Between Contractors & Employees?

Although there is an ongoing legal debate about this subject, some actions will put you at risk.

You cannot dictate certain conditions to an independent specialist, such as when, where or how they must perform their duties. You should not provide them with any tools to carry out their obligations or supervise their work. You typically cannot pay a contractor by the hour, week or month, nor can you provide them with any benefits. You should never have them perform the same job duties as any of your employees.

At best, you invite a plethora of audits, from the IRS, the Department of Labor, OSHA or any number of other compliance-oriented agencies if you cross any of these lines. At worst, you could find yourself subject to harsh fines and penalties and, in a worst-case scenario, you may have to give the contractor back pay and benefits for the time they worked for you.

These are only some of the red flags that might indicate that a contractor actually fits the legal definition of an employee. Behaviors that cross the line for some businesses may not be a problem for others. The challenge is knowing the difference.

How Can You Use Independent Contractors Legally?

Unfortunately, the independent contractor definition established by the IRS is not black-and-white.

You could engage the services of an attorney to advise you on these matters. You could also utilize the services of a professional employer organization (PEO). A PEO has regulatory and compliance experts to guide you through the legal aspects of issues relating to employment and benefits, risk management, workers compensation and liability management.

In Utah and Nevada, contact WTA Inc. for assistance with all your human resources, payroll administration and related matters. Our recruitment and hiring services provide a variety of benefits and, when you use our services, you can reduce your overall costs while improving your company’s performance. Contact us today to schedule your complimentary consultation to learn more about how our services can benefit you.