Independent Contractors: Is It Worth the Risk?

The title of this post is not intended to impugn the skill and knowledge of Independent Contractors, but to have you, a business owner, question the risk of misclassifying an employee as an Independent Contractor in an attempt to save some money.  It is true, you can save some money by using an Independent Contractor instead of an employee.  There are no payroll taxes, no Worker’s Comp/Disability and no overtime.  However, the risk you run could cost you a lot more than proceeding in a safe manner.

The first thing you must know is whether someone is an employee or an Independent Contractor.  There are different tests employed by different governmental agencies, but they all come down to basically the same thing, how much control you have over the individual. Guess what?  If you tell them when to be at your office, what to do and how to do it they are most likely an employee.  We discussed the advantages of misclassifying someone as an Independent Contractor now lets discuss the disadvantages.

Lets start with the IRS.  You will have to pay all of those back taxes.  The IRS will let New York State know.  So now you have to deal with the state that means Department of Labor and the Workers Comp Board, at least.  Department of Labor will investigate if you paid overtime.  Besides the actual overtime, the penalties could cripple your company’s bank accounts.  The Department of Labor will then talk to the Workers Comp Board.  The penalty for failure to have proper Workers Comp insurance is $2,000.00 for every 10 days per employee.  Many, if not all, of these penalties will attach to you personally not just to your company.

You may well ask, how will anyone ever find out?  Well your Independent Contractor may get hurt and file for Workers Comp.  They are not going to think twice about you if they need to pay medical bills.  You may fire the person and they try to file for unemployment.  This could trigger an investigation.  You may fire them and they contact every possible agency to get back at you. Before you know it trying to save a little bit of money may cost you your business.

If you are going to use an Independent Contractor consult with an attorney or HR Professional to be sure that person will be classified as an Independent Contractor.  Keep detailed records of what they are doing for you and how they are doing it and have an Independent Contractor Agreement.  Having an Independent Contractor Agreement does not help if the individual is actually an employee, but it is good to be used in conjunction with the other proof of what their employment actually is should it become necessary to prove they are actually an Independent Contractor.

Remember, what may be considered the easier and cheaper option may not be so in the long run.  At Sobel Law Offices, P.C. we believe in preventative lawyering. The best way to mitigate legal costs over the life span of your company is to make sure you do everything right in the beginning.

A Business Owner’s Legal Primer: What Should the Business Owner Know

Our firm is having a seminar on May 11, 2011, that will cover highlights of what business owners should know about their legal issues.  It seemed like a good time to write an article that covers the same topic.   Quite often in my practice I get a new client when they are already in trouble because there legal infrastructure was not set up properly.  It is not necessarily that they did not care about the laws or issues they were ignoring, but they just did not know.  This is the issue that the upcoming seminar and this article will begin to address.

Your infrastructure begins when your business is first formed.  Was it formed properly?  If you have an LLC and you never published the required legal notices you may find yourself being sued with no LLC liability protection.  If you have partners, do you have the proper agreements between you and your partners? These issues are best dealt with when the company is first being created, but can be addressed at a later date if you did not take care of it originally.  Next you must make sure all of your assets are properly protected.  This includes the appropriate insurance policies and registering any intellectual property you may have.  In todays day and age of branding even if your company does not deal with intellectual property you most likely have intellectual property to protect.

So you are doing well and have employees.  Not having the appropriate policies and procedures in place may be the quickest way to lose your company.  By the way there are certain liabilities when dealing with your employees that may not only affect your company’s assets, but your personal assets as well. Did you know that in New York there is a legal requirement to provide to your employees in writing when they will be paid, how much they are being paid an hour and what their rate of overtime is?  It is the little stuff, not the big stuff that will be your downfall.  Also, you are in business sometimes you cannot be the good guy to your employees.  Our client who was trying to be nice and pay an employee of the books got received gratitude and a huge liability.  If a government agency finds out the employee will have to pay back taxes.  What will be your liability?  Well you will have to pay the payroll taxes you were supposed to be paying in the first place.  In New York that will trigger an investigation by the Department of Labor and Workers Comp/Disability.  Workers Comp and Disability will fine you for every 10 days you did not have the appropriate policy in place.  Department of Labor will investigate to make sure you paid your employees properly including overtime.  You were such a  nice boss you no longer have a business.

I know attorneys are an expense and a non-revenue generating one at that.  Look at the expense as protecting the revenue you are generating as opposed to just throwing money away.  Benjamin Franklin once said “An ounce of prevention is worth a pound of cure.”  There is no way to keep legal issues from occurring, but if you build your legal infrastructure properly to begin with you will help mitigate those legal costs when they do arise.  For more information about our upcoming FREE lunch and seminar or to schedule a FREE consultation email us at contact@sobellawpc.com or call 631-264-1070.