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  • Writer's pictureKarleen L.

Hiring a Contractor Versus an Employee 101

We are living in a gig economy more than ever. According to the ADP Research institute, “the share of gig workers at U.S. businesses rose 15% since 2010.” A growing number of individuals freelance and are hired to do all sort of tasks for companies. More businesses are turning to gig workers with increased regularity.

So what does this mean for you? It means you can get a great workforce at a fraction of the cost by saving on benefits. However, if you are not careful, you may be putting your business in jeopardy. A number of companies have classified employees as contractors and are getting fined significantly for doing so. Although each state and their requirements are different, here are three basic tests to determine if you are skewing the line between contractor and employee.

A contractor can choose when and how they work. An employee has to be somewhere at an assigned time. When you hire a contractor, you are essentially hiring them for their expertise. Even though you will have a contract with a contractor to deliver a project, how and where they execute their work is at their discretion. If you determine that you want a contractor to report at a destination to execute work or a particular time regularly, then you are designating them as an employee. To manage the contractor, set clear goals and timelines in the contract and use that as a benchmark to monitor your contractor. However, if that is not possible, consider designating them as a temporary employee.

A contractor must provide all their own equipment, tools, and supplies. If you provide any of these items, you are changing their designation to an employee. Consultants are hired to offer a service and as such should have all the necessities to do it. However, if you provide the materials, then essentially, you are expecting them to execute the project in a manner proficient with such materials. This means you are telling them how to do the work and with what.

A contractor should be fully prepared and ready to do the work they are hired for. This means that they do not need to be trained to execute the project. If they do need to be trained, you are changing their designation to employee. There may be some exceptions because the line is very fine. To be safe, enlist a labor lawyer or human resources specialist to identify how to classify them and what constitutes training.

Exclusivity is a factor. A contractor can have more than one client. If you require them to work exclusively for you, you are definitely changing the dynamic of the relationship. If security and the protection of proprietary information is vital to you, consider including a confidentiality or non-disclosure agreement to the contract. Also, make sure to vet any potential contractors to ensure that they are professional and discreet.

This is not a definitive list of ways to delineate a contractor or an employee, but these are often the mistakes that companies tend to make. To learn more information on the classifications, check federal regulations, your local labor department, or consider engaging a human resources specialist.

As a leader, knowing this sort of information can spare you potential fines and penalties in the long run. The good news is – if you are thinking about hiring, then you are in a good place!

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