Dangers of Hiring Independent Contractors

For a new business, money is almost always tight. The decision on how to best use company funds spills into all aspects of the business – from where to rent office space to the amount of legal services it can afford and whether to pay executives or not. Another area that companies must watch is its salaries to employees. Since hiring an employee is a big commitment which can carry extra costs, often the answer to this dilemma is to hire independent contractors. However, independent contractors can be risky and has led to many lawsuits.

Last year, we read articles where the entertainment industry was hiring unpaid interns, but using them as employees. Production studios ended up paying out large sums of money to these interns for misclassifying them and not paying them a wage. This year, we have the case of FedEx Ground being sued by seven drivers who were hired as independent contractors – but in reality should have been classified as employees. They just won a $5.8M settlement in Maine. The facts of the case explained that these drivers were incorrectly classified as independent contractors, and therefore denied overtime pay and other various benefits an hourly employee would have enjoyed.

For start-ups and small businesses, this is the risk of hiring contractors – incorrectly classifying them as contractors when in reality they are employees. The line between independent contractor and employee is thin, and engaging with an employment attorney on the matter is important. However, there are three risks that a new firm should be aware of when considering whether to hire independent contractors.

1) WORKERS COMPENSATION INSURANCE – The moment a business hires their first employee, that business is mandated by state and federal laws to provide workers compensation insurance for the employee. Executive officer/owners do not need to purchase this insurance on themselves. Also, a company generally does not need to purchase workers compensation insurance on independent contractors. However, if that contractor was wrongly classified and it was later discovered that the person was an employee, fines and penalties could be levied against the firm for their failure to purchase this mandatory coverage.

2) WAGE AND HOUR DISPUTES – Contractors are generally paid by the job, not by the hour. However, if a contractor can prove in court that they were actually an employee, the business may be on the hook for back-pay including overtime. Additional penalties may also apply for breaking wage and hour laws.

3) REGULATORY FINES – Employees are under the protection of many laws and governmental regulations. Failing to provide the appropriate documents, rights and other benefits to an employee could result in fines and penalties. Hiring an employee and incorrectly calling them a contractor could mean the business is going to be faced with these fines.

It is clear that the decision to hire independent contractors versus employees is not as cut and dry as it initially seems – and what businesses hope it would be. Contact us today to discuss how to best protect your start-up from these and other employment related risks.