Running a one woman (or man) show is no easy task: it’s a constant juggle of the hats of CEO, CFO, COO, Marketing Director…. We all know that hiring someone can be one of the best decisions you can make for your growing business. But what kind of hire should that be? A temporary hire, or someone more permanent? Legal considerations inevitably factor into that decision.
How To Classify Your Hire
The federal government has a clear opinion on the matter: a hire is either an independent contractor or an employee. An independent contractor is someone who is in an independent trade, business, or profession offering services to the public. For example, a lawyer does not become your employee when you hire them to perform a service. On the other hand, an employee is someone who performs services for an employer, and the employer controls both what is done, and how it’s done.
The difference between the two carries very different “implications”. In short, if your hire is an employee, you must adhere to overtime, minimum wage, and tax laws for that person. If you accidentally misclassify your employee as an independent contractor, you could be liable for wages, back pay, unpaid overtime, and possibly court costs and attorney’s fees. More importantly, misclassification means you’re susceptible to enhanced scrutinization by the government going forward. So now that you know you need to do it right, how do you do it?
The difference between independent contractors and employees comes down to the degree of “control” you have over the hire. “Control” is defined by certain factors:
- How integral is the hire to your business? For example, say you are a copywriter and you hire a virtual assistant to help calendar events or clean out your inbox. The VA isn’t playing a central role to your core business of providing copywriting services for clients, and you can still produce your copywriting services absent their help. The less integral a person is, the higher the chances are that they are an independent contractor.
- Whether the worker’s managerial skills affect his or her opportunity for profit or loss. Although wordy, this factor examines the employer’s supervision of the hire’s schedule. If you have defined a specific schedule for their work, such as telling your hire that they must work on your project from 8:00-3:00 every day, they are likely an employee.
- Permanency of the relationship. If you have a defined end date to their services, they are probably an independent contractor.
- Nature and degree of control over their work. If you have only defined the outcome you expect from their work, they are likely an independent contractor. If, on the other hand, you’ve defined the hours that they work on the project and the tools they use to do it, there is a higher chance that they are an employee.
- The relative investments in facilities and equipment by the worker and the employer. Have you provided the tools for the hire to do their job, such as giving them a computer to use? If so, they’re probably an employee.
- The worker’s skills and initiative. Is the employee still free to pursue work from other employers? They are probably an independent contractor. The most common example is a VA. Although they may work for you to handle your inbox, they are free to do the same job for other employers during the same time.
Depending on your business’ needs, hiring either an independent contractor or an employee carry different benefits or disadvantages for your business, so it’s important to define your business goals before making any hires. Always check with your state labor website to see how your state defines an independent contractor versus an employee. Also, always have a clear independent contractor or employee contract in place. Having sound hiring practices in place can save you from a big headache and financial surprise in the future. So, if you don’t have a clear contract or have doubts about your classification, be sure to consult an attorney who can guide you through the process.