There are many business reasons why one may be a better fit than the other for your business, but from a legal perspective, how you want to treat this person and their work should be the driving issue. Misclassifying an employee as a freelancer (or independent contractor) can result in a lawsuit from a worker and actions by federal and state government agencies that deal with workplace issues according to a business litigation lawyer.
How Much Control Do You Want?
Jurisdictions have different standards, so you must follow the law where you do business. There could also be conflicts within state laws over who is or isn’t an employee. What usually drives the tests is the degree of actual or potential control over this worker. This is decided on the facts of your situation and the applicable regulation or law.
Another common yardstick used is the ABC Test. This also looks at the degree of management control, whether the person is doing something your employees normally do or if they’re employed in a trade traditionally done by independent contractors.
Misclassifying Workers Can Get You In Trouble
If you treat someone who is considered an employee under the law as a freelancer, you may get in trouble because you didn’t:
- Cover them under your worker’s compensation insurance
- Pay your share into your state’s unemployment compensation fund
- Contribute to their Social Security and Medicare coverage
- Pay them at least the applicable minimum wage or give them the required breaks
- Provide them with a safe working environment as required by state and federal laws
One thing that’s generally irrelevant is if the worker signs a contract or agreement stating they’re an independent contractor. If the facts show they’re an employee, that agreement will be ignored by a court or government agency.
Which Type Of Worker Is Better For You?
If you can structure the job and manage it as either an independent contractor or employee, there are pros and cons to both as our friends at Focus Law LA are here to explain. The biggest pro to using a freelancer is usually lower cost. You need not pay several taxes, and many laws applicable to employees don’t apply to independent contractors.
Depending on what function you’re filling, what you’ll pay may or may not be lower. An independent contractor may demand a higher pay rate because they’re paying their Social Security taxes and health insurance, not you. But if you factor in the savings of not paying for benefits, this worker may be less expensive overall.
If you have a temporary increase in demand or a specific project that must be completed, a freelancer would be a good choice because it’s easier to use their labor when and as needed, and then end the relationship.
Another benefit of using independent contractors is that your cost in resources, time, and effort to recruit new employees may be lower. Using freelancers may provide you with a pipeline of future job applicants. You can get to know the person, their skills and experience, how well they work, and whether they’d be a good fit for your organization.
An employee may feel more loyal to your business and could be a “brand ambassador” to help your company. If you provide training, an employee may stick around longer, giving you a better return on your investment.
If you need help setting up your company for either employees or contractors, contact a lawyer near you.
