Hiring Independent Contractors: Pros, Cons & Risks

By on July 25, 2018
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Hiring an independent contractor to tackle a project your employees do not have the expertise or time for can be a smart business decision. There are many pros to hiring contractors. They’re cheaper, and once the project is complete, you can send them on their way; no layoffs, no firing. While independent contractors often seem like the perfect solution, there are also cons and legal risks to consider. Before making a decision to bring in a contractor, learn what the legal risks are and how you can protect yourself and your business.

Pros of Hiring an Independent Contractor

Independent contractors are cheaper than employees.

Hiring an independent contractor is an attractive solution to business owners because of the cost savings. When you hire an employee, you are saddled with the costs associated with payroll, overtime, employee benefits, social security, Medicare, unemployment and worker’s compensation insurance, pensions, etc. Let’s not forget the costs of office space and equipment required for the employee to perform the job. While independent contractors usually demand a higher per-hour rate, it costs more in the long run to hire an employee.

You have greater flexibility when staffing projects.

You can hire an independent contractor for a specific task or project. When the task or project is completed, you can send them on their way. You now have a working relationship with this person. If you liked their work, you may choose to work with them again on future projects or not.

Independent contractors bring expertise.

Independent contractors typically produce results right out of the gate. They usually demonstrate some level of expertise and efficiency in their job. They do not require much training, if any at all. Ideally you get a good product in a timely manner.

Using independent contractors minimizes the risk of lawsuits.

Employees are protected under the Fair Labor Standards Act (FLSA) and have the right to minimum wage and overtime compensation, protection from discrimination, the right to form a union, and the right to family and medical leave. Employees can also sue you for wrongful termination under certain conditions. Independent contractors, however, are not protected by the same federal and state laws and cannot sue you for wrongful termination.

Cons of Hiring an Independent Contractor

You have less control over your workers.

Independent contractors are more autonomous and do not typically require close supervision. If you desire more control over your workers, classify them as employees, pay their payroll taxes, insurance premiums, etc.

Not exercising control over independent contractors can actually work to your advantage and prevent any questions regarding their classification as a contractor.

You create a revolving door.

Most companies hire independent contractors for specific, short-term projects. Contractors come and go and the quality of their work will vary. If you want to have people available day after day who produce consistent, quality work, then hire good employees.

Legal Risks

There are always risks associated with business transactions and hiring an independent contractor is no exception. Here are some of the common legal risks to consider when hiring an independent contractor.

You may not own copyrighted property.

If an employee of your company creates work that can be copyrighted, such as a book or an image, the company automatically owns the work. If an independent contractor creates work that can be copyrighted, you must transfer ownership from the contractor to the company via a written agreement.

You can be sued for negligence.

Employing a contractor to perform “hazardous” work is a risk. Work is deemed hazardous by the court if it is inherently risky or if a reasonable person performing the work would recognize a need for safety measures. If a contractor is inured performing dangerous work, you can be sued for the contractor’s negligent acts.

You may be liable for injuries.

Employees who are injured on the job are covered by worker’s compensation insurance. In exchange for worker’s comp benefits, employees forego the right to sue the employer for damages. Independent contractors, however, are not covered by worker’s comp. They can sue you if they are injured in a workplace that has become unsafe.

The non-delegable duty doctrine prevents companies from outsourcing dangerous tasks to avoid liability. It is the responsibility of the company to maintain a safe working environment and issue warnings about any unsafe conditions. If a company fails to do this, they may also be liable to the public for injuries that result from not implementing safety measures.

You may be liable for failing to properly screen independent contractors.

It is the responsibility of the company to conduct screening procedures and background checks, and to exercise reasonable care in hiring employees and contractors. The company may be liable for failing to anticipate and prevent injury if an independent contractor injures a person. This is referred to as blind hiring.

You can be liable for the independent contractor’s actions.

You can be held liable for an independent contractor’s actions if they are considered an “agent” of the company. Agency law states that an agency relationship may be formed if the company’s actions or words give the contractor or third-party reason to believe that the contractor is an agent of the company. Even if the contractor has not been paid or agrees to work without compensation, the contractor can still be considered an agent. If the contractor is injured on the job, the company is liable.

You can be audited for misclassifying a contractor.

Misclassifying an independent contractor, knowingly or unknowingly, is one of the biggest risks (and mistakes) of hiring a contract worker. In the past few years, the government has been cracking down on companies for not paying benefits, unemployment, and worker’s compensation insurance to workers they feel should be classified as employees. There have even been class action lawsuits seeking unpaid benefits and overtime.

Not every worker that signs a contractor agreement is considered an independent contractor. Whether or not a worker is classified as an independent contractor is determined by the amount of control the company has over their work and how they perform their work. The less control you exercise over the contractor, the better.

When you hire an independent contractor, you risk being audited by the government. State and federal agencies prefer workers to be classified as employees. The more workers classified as employees, the more tax and insurance money goes to the government.

Here are some actions you can take to minimize the risk of audits and scrutiny by the government.

  • Do not give contractors employee benefits, company handbooks or policy manuals, or business cards, or a title within the company.
  • Do not allow the contractor to work in the office unless their job function requires it.
  • Do not set the contractor’s schedule. Let the contractor establish their own working hours and come to an agreement.
  • Do not supervise the contractor. They should require little or no supervision.
  • Do not provide job instructions or training.
  • Do not provide company equipment unless absolutely necessary.
  • Do not pay their travel expenses.
  • Do not invite contractors to employee meetings or functions.
  • Do not pay contractors like you pay employees. Require them to submit an invoice and pay them as you would other vendors.
  • Do not give them so much work they are required to work full time.
  • Do not give the contractor additional tasks or projects without signing a new agreement.

Don’t let these risks intimidate you or prevent you from pursuing a contractual employment relationship. Hiring outside help can be a very wise, cost-effective business decision. The best thing you can do is ensure your contractors are classified properly. Seek the advice of a qualified attorney if you are unsure of the guidelines. You may also consider other options like employee leasing and staffing alternatives.

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