Employees or Independent Contractors?

Many of my smaller clients have asked about hiring short-term and part-time staff as independent contractors rather than employees. My law partner, Glianny Fagundo, outlines some of the risks of that practice:

Hiring staff members as independent contractors can create a legal risk for your operation. “Contractors” is a category reserved for specialists in an area that serve a company only in that capacity, usually for a relatively short period of time, and have a business through which they do this sort of work for other employers. For example, a handyman, a painter, landscape, or cleaning service would be bona fide independent contractors. Also, a contractor cannot perform a core function of your operation. For youth organizations, people who serve youth or their families perform a core function of the mission. Most important, you cannot control the performance of an independent contractor, so technically speaking you cannot subject your independent contractor staff to program policies, discipline, or Title VII policies for example.

Other associated risks include:

1. Workers’ Compensation – In most states, having to pay for someone’s workers’ compensation insurance is a GOOD thing because if they get hurt, your liability is limited by various caps. If the staff member is not subject to your workers’ compensation policy, they can sue you for regular liability. That can be a huge expense. At the very least, check with your workers’ compensation broker about adding these staff members.
2. External Liability – Your regular insurance may cover only you and your regular employees if, for example, a family sues over a child’s injury. Few independent contractor staff will have separate insurance policies; therefore, you may end up with claims not covered by insurance. Again, you should talk to your insurance broker about how to reduce or eliminate this risk.
3. Taxes – It is not unusual for contractors who do not have an official business entity to fail to pay taxes on 1099 earnings. In those situations, the IRS or Georgia Department of Labor can demand that you pay both the employer portion of the taxes and the employee portion you should have withheld. Unless your staff members have genuine businesses through which they provide services to various employers, you have very little chance of being able to establish that you classified them properly and therefore did not have to pay taxes on their compensation. The risk here depends on the staff member’s salary and how many of them you have hired.
4. Unemployment – If any of your independent contractors were to claim unemployment, and they were not to blame for their termination, you will likely lose the case. Again, this risk is simply a business decision after crunching the numbers.

Classifying someone as an independent contractor is a tempting choice because it offers simplified paperwork and cash flow. However, avoiding complications and forms on the front end can simply subject you to even more problems and costs on the back end.