Weighing the Benefits and Costs of Independent Contractors: Tips for Small Business Owners and Managers

Weighing the Benefits and Costs of Independent Contractors: Tips for Small Business Owners and Managers

The very concept of employment has changed drastically over the past decade. The days of most employees working 9:00 a.m. to 5:00 p.m. in an office under the watchful eye of a supervisor are over. Today savvy employers put together a mix of traditional employees and independent contractors to achieve the right balance of skillsets, flexibility, and cost.

Independent contractors are not on the company’s payroll, and they take care of their own benefits and taxation. The skills they provide to augment the company’s regular employee base can range from janitorial services to computer technical support. While the use of independent contractors is a wise and cost-effective employment strategy, the overuse or misuse of independent contractors can be detrimental to the company in many ways.

The Department of Labor (DOL) Wage and Hour Division (WHD) actively enforces the classification of employees based on guidelines for regular employment vs. independent contractor status. Misclassification can result in substantial fines. The rules have been in place for many years, and the DOL stresses the importance of correct classification so that overtime pay and other benefits are provided to workers who are doing the work of traditional employees. Therefore, it’s important that all employers understand the rules of the game for utilizing independent contractors to provide high-quality and low-cost products and services to customers.

In this article, we examine the rules for classifying workers as employees or independent contractors. We also look at some potential steps you could take to properly utilize independent contractors within your business.

 

Three things to know about using and classifying independent contractors:

  1. There are powerful benefits to using independent contractors.

It can can be a tremendous benefit for a company to utilize specialty skills from an independent contractor. This arrangement can be a very cost-effective way for the company to access the contractor’s expertise on an as-needed basis without taking on the risk and overhead of hiring an employee. Despite these benefits, classifying a worker who has a strong employment relationship with the company as an independent contractor in order to avoid the provision of employee benefits should be avoided at all costs.

  1. Independence also has drawbacks that need to be considered.

The flexibility of using independent contractors also represents some important drawbacks. Because they are independent and not part of your team, contractors are not available to help you all of the time and are not part of the core decision-making process of the company. If you find yourself more and more dependent on a contractor, it may be time to convert their status to regular employee so that you can have more control over their schedule.

  1. The DOL uses specific criteria to determine proper classification of contractors.

The Wage and Hour Division (WHD) of the DOL has published guidelines that lay out specific criteria that should be considered in conferring contractor status. These criteria include a number of factors related to the economic dependence of the worker, the extent to which the worker’s skills are an integral part of the business and the nature of the relationship between the employee and the employer. The WHD instructs that these factors are basically economic realities of the employer-employee relationship, but every situation is unique. There is no simple formula for determining whether a worker is an employee or a contractor; it depends on the specifics of the situation.

 

Action items for leveraging the benefits of independent contractors for your business:

It makes sense to conduct a periodic review of your organizational structure to see if independent contractors could make a contribution to the business. You should look for areas where efficiencies could be increased and costs could be reduced by using independent contractors rather than regular employees. If your company currently uses independent contractors, you should make sure that changes in the work environment and relationship have not resulted in misclassification of the worker’s status. With all of your workers, it is important to review their relationship with the company in the context of the WHD’s guidelines and ensure that you have not misclassified any of your workers.

If you have any questions about how to effectively use contractors in your business or how to make the employee/contractor classification according to WHD guidelines, please do not hesitate to contact me at fred.crandall@propartnerhr.com or 312.498.4979.

 

About ProPartnerHR: ProPartnerHR helps small businesses manage the full range of human resources matters. We assist our clients through the employment life cycle, beginning with hiring, through compensation and employee relations matters, to employee separations and termination. We also assist with regulatory matters and relationships with regulatory agencies.

 

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Managing Director

An internationally recognized expert in human resources matters, Fred has spoken at national and global forums and co-authored three books, including The Headcount Solution: How to Cut Compensation Costs and Keep Your Best People and Work and Rewards in the Virtual Workplace: A New Deal for Organizations and Employees (the 1999 SHRM Book of the Year).