So why are the startups hiring independent contractors as opposed to employees? Here are some of the benefits:
- Independent contractors cost less- Although generally paid a higher hourly salary than employees, businesses save money because they don't have to pay benefits, Social Security and Medicare taxes, unemployment compensation insurance, and worker's compensation insurance.
- Decreased lawsuit liability- In certain circumstances, businesses can be found liable for the actions of their employees. However, as independent contractors are not employees, a business is protected from being sued for the contractors actions. Also, independent contractors are not protected by the totality of employee protection laws, thus protecting the business from getting sued by the contractor themselves.
- Hiring and firing- Independent contractors can be hired for specific tasks, as well as for a duration of time. This allows a business to staff itself on an as-needed basis, and allows for flexibility.
Due to these benefits, some businesses abuse the label of 'independent contractor.' For that reason, New York courts have employed two different tests to determine whether a worker is an independent contractor or employee.
The Economic Realities Test is as follows:
- The degree of control exercised by the employer over the workers
- The workers' opportunity for profit or loss and their investment in the business
- The degree of skill and independent initiative that is required to perform the work
- The permanence or duration of the working relationship
- The extent to which the work is an integral part of the employer's business
This test looks at the totality of the answers to the above questions to determine whether an employee/employer relationship exists.
The Common Law Test is as follows:
- Whether the worker works at his/her convenience
- Whether the worker was free to engage in other employment
- Whether the worker received fringe benefits
- Whether the worker was on the employer's payroll
- Whether the worker was on a fixed schedule
The factors of the Common Law Test are not exhaustive, and the Court will explore additional inquiries if it feels necessary. An example of an additional factor that could be considered is whether the worker is required to wear a uniform. In the Common Law Test as well, no single factor itself is dispositive of an employee/employer relationship.
Effectively, this means that workers who are classified by a business as being an independent contractor may not be classified as independent contractors by the Court. Should the Court find that an employee/employer relationship exists, then a business loses all benefits of hiring the independent contractor (with respect to that person only) and is subject to the totality of laws involving employee/employer relations. Therefore, the business incurs increased costs and liability.
If your business decides to use independent contractors, ensure that the written agreement with the worker incorporates the factors the Courts could use in determining whether an employer/employee relationship exists.