Considerations for Independent Contractors for Family Businesses | Davis Wright Tremaine LLP
Who is an independent contractor?
The “independent contractor” is a category of worker legally distinct from an employee. The distinction between the two is a substantive one, not a title or recital in an agreement.
In other words, just because an employer qualifies a worker as an independent contractor does not mean that the individual is in fact. Courts and agencies have the final say on a worker’s classification and, in making that determination, will look at the “economic reality” of the relationship, not the label assigned by the employer.
Typically, to be considered an independent contractor (i.e. not an employee), the worker:
- Has a commercial license;
- To several clients;
- Has the discretion to use assistants or substitutes;
- Is hired for a specific assignment with a defined duration / end point;
- Performs work that is different from the entity that hires them;
- Maintain control over how and how the work is done,
- is not subject to direction and control (outside the scope of the work) over how its work is performed, and
- Only responsible for the final product.
In contrast, a worker who is supervised by an employer and must follow the employer’s requirements as to how and how to perform the work is usually an employee.
Benefits of using bona fide independent contractors
Less exposure to liability for third party claims or labor law claims
Independent contractors expose their employers to less liability than employees in two ways: (1) third party claims and (2) direct claims.
A common theory of vicarious liability known as “superior respondeat” allows complainants to sue employers for certain wrongdoing by their employees. Such a lawsuit could result in the company paying a huge sum of money, either as a settlement or as a judgment.
However, “top meet” does not generally apply to independent contractors. As a result, hiring true independent contractors decreases the chances of a business being taken over by third party claims, although the business must still protect itself by demanding indemnity, exoneration and insurance coverage. of the independent contractor.
In addition, bona fide independent contractors are not covered by as many labor laws as employees. For example, independent contractors are not eligible for statutory overtime, unionization, or time off to care for a sick child or family member. Since independent contractors are not covered by most employment and labor laws, employers are less exposed to labor law claims when hiring independent contractors.
Potential reduction in labor costs
Companies that hire independent contractors do not include them in their group medical or other insurance plans, contribute to social security or health insurance on their behalf, and do not have to pay a number of similar expenses. These expenses can form a significant portion of a company’s total labor costs. Thus, companies can see a reduction in labor costs even if they pay a contractor more base compensation than they would pay an employee.
Disadvantages of hiring independent contractors
Independent contractors, unlike employees, own the rights to any intellectual property they develop while doing the work they were hired to do. This is the case, for example, of the copyright on a code written by a programmer, the trademark on a logo designed by an artist and the patent of a new manufacturing machine developed by an engineer.
These intellectual property rights can all be transferred to the employer through the performance of a properly prepared contract of employment for pay. However, such an assignment is another potential sticking point to consider when hiring an independent contractor.
Damages for termination
Often, independent contractors cannot be terminated at any time at the company’s sole discretion. An independent contract is a business-to-business agreement. This means that a business often cannot fire an independent contractor just because it wants to go in a different direction, as it might with an employee.
Instead, employers can only cancel a contract if the contractor violates a clause in the independent contractor agreement. Depending on the situation, this reduction in flexibility could be problematic for an employer. The terms of each independent contractor agreement vary widely, so employers will need to take a close look at the relevant agreement if they are considering terminating an independent contractor.
The decision whether or not to hire an independent contractor depends on the context and may depend on the terms that an employer can have the independent contractor agree to. But above all, the business must ensure that the person it classifies as an independent contractor clearly meets the applicable criteria.
The burden of proof is on the business to demonstrate that the individual is not, in fact, an employee who has been wrongly classified as an independent contractor. The damage caused by misclassification can be significant and many companies lose out when they hire someone who does not have a business license or other clients, and who works exclusively or almost exclusively for the company, in particular. as an independent entrepreneur.
Be sure to consult a qualified and experienced legal advisor before hiring or terminating an independent contractor.