What Business Owners Should Know About Independent Contractors

Business owners often have to choose between hiring an employee or an independent contractor. Since independent contractors do not incur the same costs to the employer, such as benefits or insurance coverage, government agencies will want to be sure you’re classifying your workers properly, so there are several things you should take into account when classifying a worker as an employee or an IC. These points will help keep away any unwanted scrutiny from a federal or state agency.

First, an independent contractor works for a fixed amount of time, while an employee’s stint is longer term. An IC’s tenure is limited to the job they are hired to do. If your IC has a strong and long-term relationship with you, that worker should be classified as an employee.

A more concrete difference between an employee and an IC is the amount of control you have over the work done. With an employee, you can closely monitor their work. You can supply their tools or come around for routine inspections. Independent contractors, however, tend to work off-site and autonomously from your supervision, using their own equipment and setting their own time. So if you exert tight control over your worker’s performance, it is more likely that you’ve hired an employee.

An easy way to distinguish independent contractors is by their independence. An IC operates under their own business name, has their invoices for work completed, works for additional clients, sets their own hours, advertises their own business and may have their own logo, keeps business records, and maintains their own business checking account. On the other hand, employees participate in a strict hierarchy where higher-ups can dictate tasks directly to them. Employees are also more likely to require training for their assigned tasks, and they work for just one employer.

There is also a substantial difference between firing employees and firing an independent contractor. It is generally harder to fire an employee, and under the right circumstances they may sue for wrongful termination. Since ICs are hired for fixed terms, they leave in short order, but they can still be fired. An IC generally cannot bring a wrongful termination suit. However, if the employer violates the agreement with the IC, the contractor would have grounds for a lawsuit.

Understanding the differences between employees and independent contractors can be valuable in choosing how to classify your workers. Not only can it save you legal problems, it can help your business run more efficiently.