What is an independent contractor? An independent contractor is a person or business that provides services to others and largely directs their own work. In other words, an independent contractor may be the web developer, graphic designer, or social media marketing person you hire with a specific project in mind. But like most things in law, it’s not always that simple.
The main benefit of hiring an independent contractor rather than an employee is the financial savings. Your business does not need to pay or withhold taxes on an independent contractor. You may simply pay them for their work without worrying about the tax withholdings or paperwork associated with an employee. Further, there’s no need to calculate overtime or minimum wage — independent contractors are simply paid as businesses.
“Great!” you think. “Let’s just hire everyone as independent contractors rather than as employees.” Not so fast. Federal law won’t let you classify just anyone as an independent contractor and the penalties for misclassification can be quite high. If your new worker is actually an employee (rather than an independent contractor) you must pay and withhold taxes and must follow the Fair Labor Standards Act, which requires minimum wage and overtime for non-exempt employees. The Department of Labor (and most courts) usually look a combination of factors to determine whether a worker is an independent contractor or employee, including:
- The extent to which the work performed is an integral part of the employer’s business. Generally, independent contractors are not used for work that is integral to the business. They may work on sporadic projects. If the person’s job is crucial to the business, it’s more likely that they’re an employee.
- Whether the worker’s managerial skills affect his or her opportunity for profit and loss.
- The relative investments in facilities and equipment by the worker and the employer. Generally, an independent contractor will spend more of his or her own money on facilities and equipment to perform the work. For example, an independent contractor web developer may run his or her own office.
- The worker’s skill and initiative. Independent contractors tend to have skills and business practices that indicate independence. For example, a handyman has a portable set of skills that enables him to work for multiple companies at once. If the handyman has shown the initiative to pursue multiple jobs, it’s more likely to be considered an independent contractor relationship.
- The permanency of the worker’s relationship with the employer.
- The nature and degree of control by the employer. This is a complex factor to weigh. You can’t control the day-to-day tasks of an independent contractor. Of course, you can control the ultimate work products and goals of any project, but if you create a set schedule for a worker, expect them to come to your office to perform all of the work, and generally micromanage their work, they are more likely to be considered employees rather than contractors.
This factors can be difficult to weigh. When in doubt, contact a lawyer. I also suggest documenting any independent contractor relationship through a written Independent Contractor Agreement.