How do you decide whether to bring on a full-time employee versus hiring a contractor, and what implications can that decision have on your business?
Let’s start by acknowledging that the differences between full-time employees and contractors are significant, so they impact employers here in Ohio in far-reaching ways. By understanding the distinctions, you can steer clear of potentially costly legal consequences. Here’s a quick breakdown of each one.
Many small businesses rely on independent contractors for their staffing needs, whether it’s because they’re just starting out, or they want to ramp up during busy periods of the year. Roofing, painting, cleaning and landscaping businesses are good examples of this. For companies like these, using independent contractors over hiring employees provides several key benefits, including labor cost savings, reduced liability and greater flexibility when it comes to hiring and firing.
An independent contractor is different than an employee is a number of ways. Some of these include:
- Operates under a specific business name
- Has his/her own employees
- Advertises his/her business’ services
- Maintains a business checking account
- Services more than one client
- Has their own tools and sets their own hours
- Invoices for work completed
- Keeps business records
Despite the advantages that independent contractors offer, companies may find that it makes more sense to hire an employee. The key characteristics that set an employee apart from a contractor include:
- Performs duties dictated or controlled by others
- Is given training for work to be done
- Works for only one employer
Note that employees are covered under the Fair Labor Standards Act (FLSA) and are therefore entitled to Social Security, Medicare, the Family and Medical Leave Act or healthcare under the Affordable Care Act. Independent contractors are not entitled to these benefits.
Making the Right Choice is Essential
Employers take on significant risk when they classify an individual who performs services for them as an independent contractor instead of as an employee. If a court determines that a misclassification occurred with respect to a worker’s engagement with an employee, the potential legal consequences include unpaid overtime, unpaid taxes, un-provided benefits, and potentially a discrimination claim (or claims under other laws that protect employees but not contractors).
Specifically, if an independent contractor is discovered to meet the legal definition of an employee, the employer may be required to:
- Reimburse them for wages they should have paid them under the Fair Labor Standards Act (FLSA), including overtime and minimum wage
- Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment
- Pay any misclassified injured employees workers’ compensation benefits
- Provide employee benefits, including health insurance, retirement, etc.
There is no single test for determining if an individual is an independent contractor or an employee under the FLSA. In making its own determinations, the IRS compares the degree of control exerted by a given company to the degree of independence retained by the individual. Specifically, the IRS considers this relationship in three distinct ways:
Behavioral: Does the company in question control – or have the right to control – what the worker does, and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (e.g., in what way the worker gets paid, whether expenses are reimbursed)?
Type of Relationship: Do written contracts or employee benefits (e.g., pension plan, insurance, vacation pay, etc.) exist? Also, will the working relationship continue over time, and is the work performed a key aspect of the business?
When attempting to answer these questions as they relate to a specific worker of yours, we believe it’s prudent to err on the side of caution. The risks associated with misclassification – both legal and financial – are just too high to take. Making the right call is a good decision for your business – and for our collective well-being.
Finally, a quick resource share: The Ohio Department of Jobs and Family Services offers 20 questions that can help you determine whether or not an employer-employee relationship exists. Read the questions here.
If you have questions regarding workers’ compensation, the attorneys at Nager, Romaine & Schneiberg Co., L.P.A. are here to help. In the event you are hurt at work, or terminated after reporting a workers’ compensation injury, you need to seek immediate legal advice. Contact the Ohio workers’ compensation lawyers at NRS Injury Law by filling out our No-Risk Consultation form, or call (855)GOT-HURT and speak with one of our trained staff members.