by: Cherylann Occhipinti Campbell

How do you know when to hire contractors or when to bite the bullet and hire employees?  When you do decide on contractors, how can you assure that contractors don’t eventually file for unemployment, demand overtime rates, and payroll tax payments—especially when you end their assignments?   Or, did you think that contractors couldn’t do that?  Think again.

Most growing small businesses are regularly faced with important human resources decisions within tight budget constraints. On the surface, we think a contractor is cheaper (e.g. not paying income taxes to IRS) and less risky (e.g. I can let them go any time I want) than employees.  Plus, it seems everyone else is doing it, so it must be OK. Unfortunately, national and state regulatory agencies are also paying close attention to small businesses decisions around this topic and it’s turning into a much more expensive option than expected.  I’m actually seeing clients forced to pay higher unemployment taxes to account for contractors who proved that they really were employees.  I’m reading that the Department of Labor is ruling in favor of contractors so they get paid time and half when working over forty hours in a week. 

Agencies are tightening the definition of employees so very few workers fit the contractor category.  It is time to revisit our thinking.  Here are a few key principles to keep in mind:

Use employees to perform duties that are your core business.  Use contractors to mow the lawn (unless you are a lawn maintenance company, of course!).

Put a good contract in place that establishes your relationship.  Use a lawyer or LegalZoom for help. Pay by the project or outcome – not by the hour.  Make accountability clear and establish terms to end the contract. Revisit it regularly.

Allow contractors to work for others so it is clear they are not dependent on you.  Do it in writing. Make sure their income and success is not dependent only on you.

Do not issue company equipment and materials, email addresses (your domain), server use, office space or other resources. Contractors should provide their own.

Expect contractors to gain their own expertise and manage their own time in order to get the job done.  If you have to train them to do YOUR business, YOUR way, all the time…they are employees! If you control them, you have to pay taxes and liable for unemployment, unemployment, etc.

Don’t call contractors “employees.” 

Create boundaries and revisit them to clarify and establish your relationship.

Hire contractors as employees if they are misclassified or as soon as you realize their role has changed—especially if you depend on them regularly.  Pay back wages if necessary.  Call the Texas Workforce Commission for help.

As the old saying goes…it’s pay it now, or pay it later.  Make the right choice.

About The Author:

Cherylann Occhipinti Campbell is the owner/advisor of C2HRSolutions LLC, a local human resources and training company serving small and mid-size businesses in Central Texas. Check out Cherylann’s HR101 series offered by SCORE and contact her for expertise to handle your challenging employee matters. or 512.517.7589.

Key Topics

The contractor vs. employee Decision