Privacy, Business and Law

One way to avoid the expense and hassle of managing employees is not to hire any of them. Instead, use consultants to fill all labor needs. Use of consultants avoids the need to pay payroll taxes, overtime premiums, health insurance, and allows companies to avoid liability for employment discrimination, harassment and workers’ compensation.

Of course, this strategy is not a great as it sounds. If consultants qualify for “independent contractor” status under the law, then they will not be considered employees, with all of the expense and complication that employee status entails. However, consultants will be considered “independent contractors” under the law only if they are truly independent. The Internal Revenue Service uses a list of 20 factors to analyze whether a worker is an employee or independent contractor. (Other regulatory agencies use variations of the same factors.) It is beyond the scope of this article to go through all of these factors, but the most important factor is who controls the manner and means of the work. In other words, if a worker is closely supervised, and the way he or she performs the work is controlled by the company, the worker will most likely be considered an employee rather than an independent contractor. Other factors include who controls the hours of work, who supplies the tools or implements used to do the work, whether the work is done at the company’s place of business, and whether the worker has an ongoing business apart from his or her work for the company.

If a worker is misclassified as a consultant/independent contractor, the employer can be liable for its share of employment taxes, as well as overtime (assuming the employee is not exempt and has worked more than 40 hours in a week). In addition, if the employee is hurt on the job, the employer may be subject to penalties for failure to provide workers’ compensation coverage, and may be subject to a personal injury lawsuit by the employee.

As with the overtime issue, it is important for companies to do an audit early on in their development to determine which positions are appropriate for consultants/ independent contractors, and which are not.

by Dan Weisberg “10 Mistakes Technology Companies Make With Employees”