What is an Independent Contractor?

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Your business is thriving—growing at a steady pace, gaining customers—when you suddenly encounter a challenge you don’t have the expertise or staffing to solve. This is just the kind of situation where an independent contractor may be the answer to your problem.

But what is an independent contractor? And what rules do you need to follow to hire one?

Often referred to as 1099 workers (because employers need to furnish them with an IRS 1099 Form), contracted workers are hired on a temporary basis to complete a specific task or provide a service on an hourly or per-project basis. Be aware, however, that there are penalties for inappropriately using contracted workers to avoid paying government-required benefits such as unemployment and healthcare insurance.

A basic understanding of the laws and best practices regarding contract workers can help you make the most of this segment of the workforce while avoiding costly errors.

Contractor vs. Employee: When To Hire Each

So, what is an independent contractor as opposed to a “permanent” employee? Contractors typically work off site, saving you money on benefits and infrastructure. They can help you fill gaps or provide for short-term needs.

However, if you find yourself relying on gig workers on an ongoing basis, you may be in violation of state and federal labor regulations. When does it make sense to use freelance labor, and when do you need to consider increasing your permanent payroll instead? Consider using contractors under the following circumstances:

  • You’ve launched a new business and revenue is unpredictable. Sales can be volatile during the first years of a new venture. Hiring contractors during times of increased demand can make it easier to scale back your workforce when demand dips.
  • You don’t have a lot of hiring experience. Hiring a promising candidate on a contracted basis allows you to test their potential as an employee before committing to them full time.
  • You are hiring for a microbusiness. Very small businesses with 10 or fewer employees often have more flexibility using contracted workers.
  • You have short-term projects that require specific skills. Contracting self-employed professionals for projects allows you to engage top-level talent for less than it would cost to hire them on a permanent basis.

When shouldn’t you use contracted workers? If your only reason for hiring independent contractors (often referred to as freelancers) is to avoid paying them benefits, you run a high risk of incurring fines from the IRS and other federal and state agencies that monitor labor practices.

What Is an Independent Contractor? Legal Considerations

The Affordable Care Act (ACA) requires employers with 50 or more full-time employees to offer healthcare benefits to employees. Some employers use independent contractors to keep their head count under the ABA threshold, but this strategy can be illegal and may prompt an IRS audit.

The IRS looks at three main factors when determining if a worker has been correctly classified as an independent contractor:

  1. Behavioral control. Does your freelancer determine when and where they work?
  2. Financial control. Has compensation been agreed upon by both parties and can the worker market their services to other employers?
  3. Relationship to the parties. Have both parties entered into a contract that defines their relationship?

Some states use a stricter standard, called the ABC test, which consists of the following provisions:

  • Absence of control. Contracted workers should have autonomy when it comes to how and when they complete their work.
  • Business of the worker. The degree to which the contractor’s role deviates from the employer’s main business functions.
  • Customarily engaged. The worker should have the ability to engage in similar work for other employers.

Best Practices

The best way to avoid running into legal issues is to periodically audit your use of contracted workers, asking yourself questions like:

  • What is an independent contractor according to current law? Keep up with the federal and local laws pertaining to gig workers. Do your contracted workers adhere to these definitions?
  • Are you using contractors for core business functions? If what you originally anticipated would be a side project has become a central aspect of your business, then it’s time to make your temporary roles permanent.

To optimize the contributions of freelance workers, be sure to:

  • Pay a fair wage. Offer fair compensation for the work you want done by using a salary tool that calculates median salary by job title and geographic area.
  • Work with an employment agency. Using a staffing agency can offset possible liability since the agency will assume primary responsibility for compliance.
  • Document how you use contractors. Keep records of the number of hours contractors work, their pay rates, and schedules.
  • Avoid permanent placements. If you find yourself contracting a worker over an extended period of time, start budgeting to make a permanent hire.

Common Mistakes

It only takes one bad hire to disrupt a harmonious, productive team. This is as true for contracted workers as it is for staff hires. Avoid the following three errors to avoid bad outcomes.

1. Shortchanging the Hiring Process

The two biggest errors employers make when hiring independent contractors are:

  • Failing to invest in a comprehensive search to find the best qualified candidates.
  • Cutting corners when it comes to vetting candidates.

Use the same process to hire freelancers as you use to fill permanent roles. If you typically use an employment agency for permanent hires, use the same one for your short-term staffing. If you have a hiring process that works for you, use the same one to attract and vet contractors.

2. Inadequate or Excessive Training

Your independent contractors may need to interact with your clients or business partners on your behalf. If they don’t have the knowledge they need to undertake these interactions properly, it could be disastrous for your reputation and bottom line.

Before your contracted workers begin their contracted work, they should understand your core company mission and values, and how their work will contribute to other company initiatives.

  • You need them to start contributing to a project as soon as possible.
  • They will only be working with you for a short period, so you don’t need to invest in as much training as you would for a full-time worker, as all time spent on onboarding must be included in their billable hours.
  • You’ve hired them for their high level of expertise, so they shouldn’t require intensive training.

3. Treating Contractors Like Second-Class Employees

Your temporary employees will be more likely to contribute to the best of their ability if they feel valued. If you make clear that their labor and expertise is valuable to the health of your organization, then the rest of your team will treat them accordingly.

Now That You Know What an Independent Contactor Is, Learn More About Hiring Top Talent

You’ve answered the question, what is an independent contractor? Now learn more about how to hire and manage your permanent and contracted workers with the latest hiring news from Monster.

Legal Disclaimer: This article is not intended as a substitute for professional legal advice. Always seek the advice of an attorney regarding any legal questions you may have.

Coworkers participate in upskilling activities.