Dear Dan: We lost a couple of employees recently, but I’m reluctant to hire full time with the economy looking so bad. Is hiring people as independent contractors rather than employees a safe strategy? – Hiring Quandary
Dear Hiring Quandary: As the U.S. economy struggles, small businesses across America are using independent contractors more extensively. For the fifth consecutive month, an index of small business hiring practices conducted by SurePayroll shows an increased reliance on independent contractors.
The reason is clear. Business owners are wary of future sales, so they prefer not to add full-time employees to their payrolls right now. “Contract workers” – who are not employees of your business – can perform a variety of functions while saving you a bundle in payroll taxes, insurance, benefit costs and training. They also offer flexibility to stop and start more quickly.
If hiring full-time employees is like getting married, hiring a contractor is more like dating. There’s less risk compared to tying the knot. And during times of higher unemployment and a slowing economy, the supply of available contractors also goes up.
But using independent contractors properly remains a sticky issue for business owners. The IRS and equivalent state agencies are strict on worker classification issues. If independent contractors you’ve used are later re-classified as employees by the IRS you could be hit with paying back taxes and penalties.
If you are now or plan to use independent contractors, here are some quick tips on using them correctly:
• Contractors control when and where they work. While they might receive job specifications from a client, they are not given specific instruction on how to accomplish a task.
• Avoid setting a pattern of daily or weekly work hours dictated by your business.
• Contractors do not usually have a permanent or continuing relationship with your business and have time to pursue other clients. Compensate contractors on a per-job basis, rather than weekly or monthly.
• Contractors are paid to complete a set task and may bring in others to complete it, at their discretion and on their payroll.
• Contractors should use their own tools and technology and be responsible for their incremental expenses. They have an investment in their own “business” and should be able to perform their duties without your facilities.
• Contractors can’t be fired as long as they produce results that meet their contract specifications.
• Do not include them under any insurance or benefits coverage you have for employees. •
Daniel Kehrer can be reached at editor@business.com.
