by Attorney Stephen Fishman

Learn the advantages and disadvantages of using independent contractors rather than employees.

There are many benefits to hiring independent contractors (ICs), but there are some disadvantages as well. Before you decide how to staff a particular job, you'll need to weigh these pros and cons -- and make sure that your decision will pass muster with state and federal auditors.

Benefits of Using Independent Contractors

There are several major advantages to using independent contractors rather than employees, with financial savings topping the list.

You will probably save money. Even though most employers pay ICs more per hour than they would pay employees to do the same work, it usually ends up costing employers more to hire employees. When you hire an employee, you will have to pay a number of expenses that you don't have to pay for ICs, including employer-provided benefits, office space, and equipment. You will also have to make required payments and contributions on behalf of your employees, including:

• your share of the employee's Social Security and Medicare taxes, which totals 7.65% of the employee's compensation
• state unemployment compensation insurance, and
• workers' compensation insurance.

All together, these payments can easily increase your payroll costs by 20% to 30% -- or more.

You have staffing flexibility. Working with ICs allows employers greater leeway in hiring and letting go of workers, which can be especially advantageous for employers with fluctuating workloads. You can hire an IC for a specific task or project, knowing that the worker will be gone when the job is finished. You won't have to face the trauma, expense, and potential legal trouble that often accompany firings and layoffs.

You may also enjoy greater efficiency when you use ICs. Because most ICs bring specialized expertise to the job, they are usually productive immediately, eliminating the time and cost of training.

You reduce your exposure to lawsuits. Employees have a wide array of rights under state and federal laws -- and therefore, a variety of legal claims they can potentially bring against their employers for violating those rights. Because ICs are independent businesspeople, they are not protected by many of these laws. Among the rights that are available to employees but not to ICs are:

• the right to receive at least the minimum wage and, for employees who qualify, overtime compensation at the rate of one-and-a-half times their regular hourly wage
• protection from discrimination on the basis of race, national origin, color, religion, gender, and so on
• the right to form a union, and
• the right to take time off to care for a sick family member or bond with a new child.

Employees may also be able to sue their employers for wrongful termination. ICs cannot bring this type of lawsuit (although there may be restrictions on your right to terminate an IC relationship, depending on what the written IC agreement says -- see Put Your Independent Contractor Agreement in Writing for more information on IC contracts).

Disadvantages of Using Independent Contractors

After reading about the possible benefits of hiring ICs, you may be thinking that you'll never hire an employee again. But there are also some significant drawbacks to using ICs -- and the risk that your classification decision may be questioned by government agencies.

You have less control over your workers. Unlike employees, whom you can closely supervise and monitor, independent contractors enjoy a certain autonomy to decide how best to do the task for which you hired them. If you interfere too much in an IC's work, you risk making the IC look like an employee -- for whom the law says you should be paying payroll taxes, workers' compensation insurance premiums, and more. If you want to exercise significant control over what your workers are doing and how they're doing it, classify them as employees.

Your workers will come and go. Many employers use ICs only as needed for relatively short-term projects. This means that workers are constantly coming and going, which can be inconvenient and disruptive. And the quality of work you get from various ICs may be uneven. Employers who want to rely on the same workers day after day are better off hiring employees rather than ICs.

Your right to fire an IC depends on your written agreement. You do not have an unrestricted right to fire an IC, as you might with your employees. Your right to terminate an IC's services is limited by the terms of your written IC agreement. If you fire an IC in violation of the agreement, you could be liable for damages.