Before getting into the pros and cons of independent contractors, listen to your client’s reasons for wanting to use them. It may be that your client perceives benefits that aren’t real or that can be achieved through alternate means that don’t involve a risk of misclassification. For example, if a client’s main reason for using an independent contractor is to avoid paying benefits, the client can achieve this result by instead using a temporary employee.
But if your client is still interested in going ahead, cover the following points.
Advantages of using independent contractors:
- Client doesn’t pay the usual employer contributions to Federal Unemployment Tax Act (FUTA) (IRC §3301), Federal Insurance Contributions Act (FICA) (IRC §3111), or state unemployment insurance (Un Ins C §§675, 976).
- Client doesn’t provide employee benefits, such as medical insurance, vacation, sick time, and pension plan.
- Client doesn’t provide employee workers’ compensation coverage.
- Client can avoid labor laws because laws designed to protect employees are generally inapplicable to independent contractors, e.g., wage and hour laws and leave laws.
- Client can reduce the risks of discrimination claims because most antidiscrimination statutes protect only employees. (However, the Fair Employment and Housing Act extends its protections against harassment to employees and contractors, and antidiscrimination statutes for general business contracts prohibit discrimination based on sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, or business location (Bus & P C §16721).)
- Client can use an independent contractor for individual projects without liability for unlawful employment termination suits or unemployment claims.
- Client can expand into new lines of business without having the necessary knowledge and talent in-house.
- Client can use workers with specialized skills who are willing to work only as independent contractors, e.g., specialists in high-tech industries.
- Client can save administrative time and costs by paying on a gross basis and not setting up a payroll system.
Disadvantages of using independent contractors:
- Client can’t control how the contractor performs the services.
- Client can terminate the contractor’s services only as permitted under the terms of the agreement.
- Client loses continuity and ongoing relationship.
- Client must monitor the relationship to ensure its defensibility, e.g., client must regularly review the time a contractor spends on projects and the number of completed projects.
- Client must bear the risks of misclassification, which can be financially significant.
- Client will have to accept the challenges of understanding the complexities of workers having different statuses for different purposes, e.g., a temporary employee can be a “special employee” for FEHA purposes, but not for benefit purposes.
The so-called “gig economy” is reliant on independent contractors (although that classification has certainly been questioned), but some companies are facing pushback to provide better working conditions. Once an employer decides to go with independent contractors, it’s a decision that should be reviewed periodically as the legal landscape changes.
For guidance on this complicated area, turn to CEB’s Working With Independent Contractors, Leased Workers, and Outsourcing (Action Guide) and Advising California Employers and Employees, chap 3. Learn how to avoid the legal and tax consequences of misclassification and draft independent contractor agreements to minimize exposure to misclassification claims in CEB’s program Employee or Independent Contractor: Misclassification Can Be Costly, available On Demand.
Other CEBblog™ posts you may find useful:
- What CA Employers Need to Know About Using Foreign Labor Contractors
- Employees on Lease
- Yes, California Employers, It Really Is Time to Update Your NDAs
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