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As the federal government and the state governments look for more ways to bring in money, the independent contractor status is a likely place for them to look. After all, by using independent contractors rather than employees, employers don’t have to withhold taxes, provide workers’ compensation, contribute to unemployment compensation, or provide any benefits such as 401-k programs, health insurance or other benefits. Plus you can use and discontinue independent contractors as needed.
Certainly, in this age of home-based businesses, the use of outside sources makes a lot of sense. Outsourcing a lot of business needs has been done for years and will only increase with growth of small business. Most one-person and small businesses don’t need full-time employees. Many requirements can be outsourced to independent contractors who in turn outsource many of their requirements.
It is the use of workers who are classified as independent contractors, but are really employees that can cause legal issues. FedEx Ground has been in the middle of this type of legal dispute for several years. FedEx claimed that their drivers were franchisees and therefore independent contractors; several drivers (and later the IRS) challenged that status, claiming that the drivers were really employees.
Here are some basic distinctions between independent contractors and employees:
Lack of employers’ direction is one major difference. In other words, the worker is left to his or her devices and does what the particular job requires without direction from the employer.
Is the worker working primarily for one employer or working for several employers on an as needed basis?
The worker is not in the same general business as the employer. A full-time consultant in the same line of business as the employer might be considered an employee. If the employee has his or her own business and also works for other companies, he probably would be considered an independent contractor.
Just because the worker creates an LLC or even an S-corporation doesn’t necessarily protect both sides from being classified as an independent contractor.
The federal government and the states are narrowing the definition of an independent contractor. One must definitely be truly independent to be considered an independent contractor. FedEx franchises (for lack of another term) wear FedEx garb, have FedEx logos on their trucks, and deliver FedEx packages on defined routes. However, we understand that they buy their own trucks and can sell their FedEx routes. But, consider the old saying: If it looks like a duck, acts like a duck and makes duck-like noises, there is a very good chance it is a duck. The battle goes on, but the penalties for violating the status of your people can be very expensive.