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Advantages and Disadvantages of Utilizing Independent Contractors in Your Business

The language used in establishing a true independent contractor relationship is important. The distinction between forming an employer/employee relationship and an independent contractor/principal relationship is as much found in the performance of the work as it is in the language that initially forms the relationship.
So, what are we really talking about when it comes to independent contractors?

Definitions:

Independent Contractor – Whether called independent contractor, contractor, or consultant such individuals are defined under the law as an individual who has contracted for work to be performed for a principal. Specifically, “Independent contractor” means any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.” (Cal. Lab. Code §3300)

Employer – Defined broadly under California law as “[t]he State and every State agency, each county, city, district, and all public and quasi-public corporations and public agencies therein; every person including any public service corporation, which has any natural person in service; and the legal representative of any deceased employer. (Cal. Lab. Code §3353) The word “employer” is not a word used to describe you or your business in an independent contractor relationship.

Employee – Defined under California law as “every person in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed” (Cal. Lab. Code §3351) The word “employee” is not a word used to describe the individual hired to perform work as an independent contractor.

Other useful terms to keep in mind:

  • Company or business – Neutral terms best used to describe your business in terms of any independent contractor relationship.
  • Contract or retain – Words better used in an independent contractor relationship as opposed to the word “hire” as they suggest a contractual relationship and not an employer/employee relationship.
  • Principal, customer, client – Best way to refer to yourself or your business as the user of the services provided by an independent contractor.

Initial considerations

  • Does the individual meet established legal criteria for being classified as an independent contractor?
  • Are there any special laws, regulations, or guidelines that apply to your specific industry when it comes to the use of independent contractors?

Advantages of retaining an Independent Contractor

Potential advantages include, but are not limited to:

Greater flexibility:
Potential to expand or explore new lines of business with limited risk. Flexibility of being able to hire individuals with highly specialized skills without the cost of adding highly compensated employees to your workforce.

Potential Cost Savings:
The usual employer contributions for state and federal unemployment taxes can be avoided as can employer contributions to social security. The costs of traditional employee benefits such as insurance, vacation, sick pay, pregnancy leave, and retirement plan offerings can also be avoided.

Reduced Risk:
Fewer employees means fewer risks stemming from employee claims made pursuant to various antidiscrimination and wrongful termination laws or unemployment benefit claims. Also, the fact that the National Labor Relations Act and the Fair Labor Standards Act do not apply to independent contractors reduces the likelihood of running afoul of any wage and hour or labor laws.

Disadvantages of retaining an Independent Contractor

Potential disadvantages include, but are not limited to:

No Continuity in the Working Relationship:
A true independent contractor relationship is one that is intermittent and subject to the contractor’s schedule. Ongoing or long-term independent contractor relationships look more like an employer/employee situation than an independent contractual arrangement and as such are less defensible if challenged.

Termination only “For Cause”
Because an independent contractor relationship is contractual in nature, it can only be terminated in accordance with the terms of the contract that formed the relationship. Liability for breach of contract is a real risk when the agreement is unilaterally terminated outside the parameters of the agreement within which it was formed.

No Control
One of the hallmarks of an independent contractor relationship is the independent nature of the contracted party. The principal cannot have control over how the contractor performs the services. The contractor is “independent” of such supervision and has supposedly been retained for their expertise. Beyond the guidelines for completion of the job for which they were retained, the contractor must be left to perform the work independent of the principal.

Risk of Misclassification
Independent contractor relationships must be monitored by the principal to assure that the classification is at all times justifiable. This means monitoring the length and number of projects and a constant reassessment of the overall nature of the relationship.  The principal bears significant risk in the form of harsh penalties for misclassification.*

* No Legal Advice Intended: This website includes information about legal issues and legal developments. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. You should contact an attorney for advice on your specific legal problems.

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