How to Decide Between an Independent Contractor or Employee when Growing your Business

Updated: Jul 30


How to Decide Between an Independent Contractor or Employee when Growing your Business

Are you looking at growing your team? This article walks you through five items to consider when deciding whether to grow your team with independent contractors or employees. These five steps not only help you process the “why” of growing your team, but also talk about human resources compliance issues.


You may have heard about a new case out of California that created a new test. This case made it a lot harder for businesses in California to consider workers as independent contractors. Also, more and more states are following California's lead and using this test.


The test is called the ABC test and a worker must meet all three of the below in order to be considered an independent contractor:


  1. Free from the control and direction of the employer with regard to the performance of the work;

  2. Outside the usual course of the hiring entity’s business; and

  3. Customarily engaged in an independently established trade, occupation, or business.





You do not want to make a mistake and call someone an independent contractor when they are an employee. I know that growing your team, especially with employees, is hard and scary. After all, there are so many laws and rules, and let’s not even start talking about payroll. But, just take it step by step. This article will help you with the preliminary step of what type of individual you should grow your team with. You got this!


Before we talk about the items to consider, let’s dive deeper into why it matters. There are several laws and governing bodies that define employees and prescribe mandated employee benefits. These include tax law, worker’s compensation rules, and wage laws. These bodies, especially the Department of Labor, do not care what you call your team member. They care about whether the team member meets their definition of employee. It is not so bad if you hire an employee when you could have hired an independent contractor, but it can get very messy if you treat your team member as an independent contractor when the regulatory body considers him or her an employee. If you make this mistake then you could be on the hook for unpaid wages, unpaid overtime, and worker’s compensation insurance to name just a few.





5 Items to Consider When Choosing Between Independent Contractors or Employees


Duration


Duration refers to how long you expect to need the team member. If you have a specific project or a short term surge in work and need help with some administrative tasks then an independent contractor might be best. However, if you have a more permanent need to grow your team than you may want to consider an employee.


Exclusive Nature of Relationship


You will need to consider what type of relationship you want to have with the team member. Do you want to be the only client or do you need specific times when the team member can only work on your items? If so, then you may want to consider an employee. For example, if you have an independent contractor and for the last 2 years you have been her only client then a regulatory body may consider her to be an employee. On the contrary, if your only focus is on the individual delivering the requested service then an independent contractor might work for you.


Control


When you consider control you are thinking about what level of oversight you want to have on the individual. If you do not give a second thought to what systems and processes the individual uses to deliver the service then you may want an independent contractor. However if you care about when, where, and how the job is done then you should hire an employee.


Type of Services


Some services lend themselves more to independent contractors or employees. Technical fields such as accounting or technology lend themselves to independent contractors. An example would be a wedding venue needing help filling taxes. Personal services also lend themselves to independent contractors. This could be bringing in spa professionals during a coaching retreat. On the flip side, if the individual is going to do the same work as you or your current employees then you should hire him or her as an employee. For example, if you are a VA and are thinking about hiring a VA to help with your smaller projects then you should consider an employee.


Business Items


Lastly, think about who is going to supply the business items. These are the things the individual needs to get the job done, and include computers, paper, software, internet, and an office. If you are going to supply these then you should consider an employees. Otherwise, you should think about an independent contractor.


Wow, that was a lot! If you need more inform then get more contractor v. employee resources in the free HR Toolkit. My fav thing is the checklist that helps you keep your contractor listed as a contractor.



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