You are here:

Employment Law/Hiring Decision

Advertisement


Question
My question centers around hiring independent contractors vs. employees. My current situation is I am developing a new product for the consumer marketplace. I currently have a team of freelance contractors in various locations around the world. I see will need to decided to hire either independent contractors or employees. I am leaning toward independent contractors because my project is not a company. We have yet to develop a prototype so there will be sometime between prototyping, testing, and turning into a company. The main positions I would like to consider contracting out are Electrical Engineer, Mechanical Engineer, Software Engineer, Production Engineer, Executive Chef. All of these positions tend to be contracted position but I have one important issue, they all would need to work onsite in our lab, and test kitchen to develop products. So my question can I still hire these positions as independent contractors they work on site in our lab and test kitchen to develop products and they still be classified as a independent contractor by the IRS? I just want to make sure I make the right call here.

Answer
Quinn:

This is a very topical question, as the IRS has recently stepped up its enforcement efforts on the issue of classification of workers as employees or independent contractors.  It is also a very complex question, with numerous factors to be considered, and every situation has to be evaluated on its own facts and circumstances.  First, in answer to your basic question, yes, it's possible to properly classify workers as independent contractors even if they are working on site, as long as the other relevant factors generally weigh in favor of that classification.

There are three general categories of facts to be considered.  I think it's best to go straight to the source here, so I have copied and pasted the following directly from the IRS website:

   "Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
   Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
   Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination."

Here is the link to the page where this appears:

http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Independent-Con

I would encourage you to spend the time it will take to wade through this site, exploring what the IRS has to say about each of the three categories, as you think about how your business will be structured.  As you'll note from the site, the consequences of mis-classifying workers can be very expensive and harmful to your business.

Now, all of that being said, here are some other considerations I would advise any business owner to think about.  You've probably already thought about most of them, but just in case:

1.  How much control do you want to have over how work is assigned and performed?  The more control you need, the more likely your workers will be properly classified as employees.

2.  If you have employees, you are responsible for properly withholding federal, state and local taxes.  If they are contractors, they are responsible for their own tax compliance.  Are you prepared to pay staff or outside firms to handle the record keeping and accounting needed for these tasks?  

3.  If you want to pursue an independent contractor model, you need legal advice to draft appropriate agreements for each worker to sign. Those agreements will need to cover all the basic issues--what work is to be performed, specifications for the results you expect, provision of equipment, tools and facilities, compensation, whether and to what extent you will provide expense reimbursement, time off, termination of the agreement for cause or otherwise, and behavioral expectations to avoid possible liability for workplace actions among your team members, such as sexual harassment, ethical conduct, use of facilities owned or leased by you vs. brought to the job by the workers, etc.  Similarly, if you decide to go with employees, you'll want to think about writing up a set of policies or rules for handling these issues so everyone knows what is expected, and so you can take action to correct problems, up to and including dismissing employees.  You will be well advised to seek counsel from an experienced employment lawyer for this, as well.

Obviously this topic is larger than I can do real justice to in this forum, but I hope I've given you at least a good road map for getting started.  The earlier you get working with an employment attorney, the better your chances of getting everything right, to avoid problems down the road with the IRS and other government agencies. I wish you great success in your venture!

Employment Law

All Answers


Answers by Expert:


Ask Experts

Volunteer


Frank C. Magill

Expertise

I can answer questions about any U.S. labor or employment law question. I cannot answer questions about non-US law. I am not a specialist in employee benefit law (ERISA and HIPAA) or Workers' Compensation law, but will do my best to point questioners toward good resources availabe online. Expertise includes, without limitation, EEO/Affirmative Action/Employment discrimination (Title VII, Age Discrimination in Employment Act, Americans With Disabilities Act, GINA, Fair Credit Reporting Act as applied to employment); Fair Labor Standards Act; Texas labor code; Family Medical Leave Act; employee compensation; discipline and dismissal; force reductions, severance pay programs and administration; collective bargaining, union representation, grievances and arbitration, National Labor Relations Act and National Labor Relations Board; employee handbooks; staffing; dispute resolution outside of traditional labor agreements; employee communications; employment policies and compliance programs; codes of ethics; employment or labor litigation.

Experience

30+ years experience as corporate counsel for a Fortune 100 telecom company, specializing in labor and employment law issues. In addition to providing day-to-day advice to my company's internal HR leadership and staff, I've represented the company in numerous labor arbitration cases and at the bargaining table.

Organizations
Texas, Illinois and Missouri state bars

Education/Credentials
J.D. 1979, Harvard Law School. B.A., Summa Cum Laude, 1976, Illinois Wesleyan University.

©2016 About.com. All rights reserved.